Courts Must Follow S. 11(6A) A&C Act & Their Scrutiny Must Be Confined To Examination Of Existence Of Arbitration Agreement
The Supreme Court emphasised that the Courts must follow the mandate of Section 11(6A) of the Arbitration and Conciliation Act, 1996 (A&C Act) and their scrutiny must be confined to the examination of the existence of arbitration agreement.
The Court was deciding a batch of various Civil Appeals arising out of the Judgment of the Patna High Court which allowed the Applications under Section 11 of A&C Act and appointed Arbitrators in several cases.
The two-Judge Bench comprising Justice P.S. Narasimha and Justice hands misre observed“The curtains have fallen. Courts exercising jurisdictions under Section 11(6) and Section 8 must follow the mandate of sub-section (6A), as interpreted and mandated by the decisions of this Court and their scrutiny must be “confine(d) to the examination of the existence of the arbitration agreement.”
Senior Advocate Ranjit Kumar appeared for the Appellant while Senior Advocate Amit Sibal appeared for the Respondents.
Case Background
The Appellant i.e., Bihar State Food and Civil Supplies Corporation undertook the work of procurement of paddy from the farmers in the State of Bihar under a scheme evolved by the Food Corporation of India (FCI). The said scheme provided that the paddy procured by the Corporation from the farmers has to be converted into rice and the rice shall in turn be purchased by the FCI for distribution under PDS schemes. The Appellant entered into agreements with various rice millers across the State for custom milling of paddy procured from the farmers. As per the agreement, various quantities of paddy were allotted to the rice millers and they were to deliver rice quantified at 67% of the paddy supplied to them. Under Clause 15, the agreement contemplated recovery of dues as land revenue under the Bihar and Orissa Public Demands Recovery Act, 1914. Further, under Clause 16, if an attempt to settle disputes through mutual discussions fails, then dispute will be referred to arbitration. Within a year of entering into the contracts, the Corporation realised that the Respondents have failed to supply the agreed amount of milled rice and, therefore, initiated proceedings under the Recovery Act as contemplated under Clause 15 of the agreement.
Challenging the legality and validity of initiation of the recovery proceedings, the Respondents filed Writ Petitions, challenging the Demand Notices. The High Court’s Single Judge held that there is a parallel remedy of arbitration provided under the agreement. The Division Bench affirmed the said decision against which Review Petitions were filed by the Respondents. Subsequently, the Enforcement Directorate (ED) also initiated proceedings against the Respondents under the Prevention of Money Laundering Act, 2002 (PMLA). In the meanwhile, it was alleged by the Appellants that a massive fraud by rice millers leading to a huge loss of more than a thousand crores to the public exchequer came to light. The Corporation initiated criminal proceedings by filing almost 1200 FIRs against the rice millers situated across the State. The Respondents were charged for committing offences under Sections 420 and 409 of the Indian Penal Code, 1860 (IPC). After several round of litigations, the case was before the Apex Court.
Court’s Observations
The Supreme Court in the above context of the case, restated the following principles –
I. Access to justice for enforcement of rights and obligations is assured by the usual proceedings in the ordinary tribunals. It is for this reason that Section 28 of the Indian Contract Act, 1872 while prohibiting agreements in restraint of legal proceedings saves resolution of disputes through contract, i.e., by arbitration. The conduct of arbitration is governed by the Arbitration and Conciliation Act, 1996.
II. The limits of dispute resolution through arbitration are statutorily incorporated in the Arbitration Act itself. Section 2(3) provides that, “This part shall not affect any other law for the time being in force by virtue of which certain disputes may not be submitted to arbitration.”
III. Same set of facts may lead to civil and criminal proceedings. A civil dispute could involve questions of coercion (section 15 of Contract Act), undue influence (section 16 of Contract Act), fraud (section 17 of Contract Act), misrepresentation (section 18 of Contract Act) for example, and such disputes can be adjudicated as civil proceedings for determination of civil or contractual liabilities between the parties. The same set of facts could have their co-relatives in criminal law. The mere fact that criminal proceedings can or have been instituted in respect of the same incident(s) would not per se lead to the conclusion that the dispute which is otherwise arbitrable ceases to be so.
IV. The reason for permitting submission of such disputes to arbitration is well explained in Swiss Timing as, “To shut out arbitration at the initial stage would destroy the very purpose for which the parties had entered into arbitration. Furthermore, there is no inherent risk of prejudice to any of the parties in permitting arbitration to proceed simultaneously to the criminal proceedings.
V. For an important policy consideration, Court has drawn a distinction between “serious fraud” and “fraud simpliciter” to segregate and exclude disputes involving serious fraud from arbitrability.
VI. “Serious allegations of fraud” is to be understood in the context of facts.
VII. Disputes involving allegations of serious fraud need more clarity so that there is certainty about the availability of the remedy.
VIII. Arbitral Tribunal will be within its jurisdiction to consider allegations of fraud even with respect to the specific terms or clauses in the contract as an arbitration agreement stands independent of the contract and continue to bind and govern the parties even if the contract is terminated or challenged and this question is no more res integra. There is however an exception, the following is its articulation.
IX. However, the allegations of fraud with respect to the arbitration agreement itself stand on a different footing. This position is generally recognized as a dispute which is in the realm of non-arbitrability.
X. The burden of proof is on the party who raises the plea.
XI. When a plea of non-arbitrability is raised, the Court will examine it as a jurisdictional issue only to enquire if the dispute has become non-arbitrable due to one or the other reason as indicated hereinabove.
Conclusion
The Court said that there is an arbitration agreement and the matter must end here.
“The matter must end here. While we agree with Mr. Ranjit Kumar submissions that his client has much to say, let all that be said before the arbitral tribunal. It is, as we have said elsewhere, just as necessary to follow a precedent as it is to make one”it added.
The Court kept open all the issues raised by senior counsel for the Appellants for being raised and contested before the Arbitral Tribunal.
“The issues that we have not taken up and left it to the arbitral tribunal are jurisdictional issues, involving barring of the arbitral proceedings due to limitation or for the reason that they are non-arbitrable. These issues shall be taken up as preliminary issues and the arbitral tribunal will consider them after giving opportunity to all the parties”it concluded.
Accordingly, the Apex Court dismissed the Appeals.
Cause Title- The Managing Director Bihar State Food and Civil Supply Corporation Limited & Anr. v. Sanjay Kumar (Neutral Citation: 2025 INSC 933)
Appearance:
Appellant: Senior Advocate Ranjit Kumar, Aor Manish Kumar, Advocates Divyansh Mishra, and Kumar Saurav.
Respondents: Senior Advocates Amit Sibal, Rudreshwar Singh, Aors Kaushik Poddar, Durga Dutt, NIRMAL Chopra, Rachitta Rai, Brajesh Kumar, Rajeev Singh, Shantanu Sagar, Vaiibhav Sagar, Vaiibhav Niti, Neeraj Shikhar, Santosh Kumar, Samir Ali Khan, Ashok Anand, Advocates Sumeet Singh, Abhiprav Singh, Shatakshi Sahay, Shivam Singh, Deepali Singh, Alka Singh, Kumar Vikram, Arpita Mishra, Tanishra, Tanishka, Abhishhek GRover, Darpan Sachdeva, Vinay P Tripathi, Upendra Narayan Mishra, Rohit Priyadarshi, Santosh Kumar Yadav, Pradeep Yadav, Ravleen Kaur Kalsi, Sameresh Chandra Jha, Sameresh Chandra Jha, Sameresh Chandra Jha, Shashibhushan Kumar, Vivek Kumar Arjun Prasad Sinha, Prakash Kumar Singh, Anil Kumar, Gunjesh Ranjan, Divya Mishra, Niharika Rai, Mukul Dev Mishra, Bipin Bihari Singh, Rajesh Kumar, Madhavi Agrawal, Divyanshu Agrawal, Divyanshu Agrawal, Madhrawal Mahajan, Jairaj Singh, B Srinivas, Ramendra Vikram Singh, Ujjwal Ashutosh, Kshama Sharma, Pranjal Sharma, and Kashif Irshad Khan.