At Section 11 Stage, Only Existence of Arbitration Agreement to Be Seen—Fraud Allegations and Criminal Proceedings No Bar to Arbitration: Supreme Court

“Let All Objections Be Decided by the Arbitral Tribunal”, Supreme Court of India (Bench: Justice Pamidighantam Sri Narasimha & Justice Manoj Misra) delivered a landmark decision addressing the scope of court intervention at the Section 11 stage of the Arbitration and Conciliation Act, 1996, even amidst allegations of massive fraud and ongoing criminal proceedings. The Court dismissed a batch of appeals against the Patna High Court’s order appointing arbitrators in rice milling contract disputes, firmly reiterating that “the scope of examination under Section 11(6A) should be confined to the existence of an arbitration agreement.”

 “Misappropriation to a Huge Extent”—Massive Public Distribution System Scam

The case emerges from the infamous PDS scam in Bihar, where rice millers—entrusted under government procurement contracts—were accused of large-scale misappropriation running into “more than a thousand crores.” As the Supreme Court recorded:

“There is public element involved in the conduct of trial efficiently and with integrity… The PDS scam in the State of Bihar involves misappropriation of more than a thousand crores by the accused rice-millers, against whom some 600 FIRs have been filed.” (Order in State of Bihar v. Divesh Kumar Chaudhry)

Contracts between the Bihar State Food and Civil Supplies Corporation and rice millers provided two parallel remedies: recovery of dues as land revenue under the Bihar & Orissa Public Demands Recovery Act, 1914 (Clause 15), and arbitration before the District Collector (Clause 16).

Following the discovery of short supply and alleged misappropriation, the Corporation launched recovery proceedings and nearly 1200 criminal FIRs, while rice millers invoked arbitration, challenging recovery notices before the High Court.

Parallel Criminal, Recovery & Arbitration Proceedings

Despite the gravity of the allegations and pendency of criminal trials, the Patna High Court appointed arbitrators, holding that:

“There is a parallel remedy of arbitration provided under the agreement… Courts should not be hasty in concluding that remedy under one law operates in derogation of a remedy under another.”

Objections by the Corporation—including claims that fraud and the Recovery Act ousted arbitration, and that arbitration was time-barred—were rejected, the High Court concluding that all such issues must be left to the arbitral tribunal.

 “Court’s Scrutiny Confined to Existence of Arbitration Agreement”

Upholding the High Court’s approach, the Supreme Court stressed the limited scope of enquiry at the Section 11 stage:

“Courts exercising jurisdiction 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 confined to the examination of the existence of the arbitration agreement.”

Further, the Court clarified: “The legislature confined the scope of reference under Section 11(6A) to the examination of the existence of an arbitration agreement… the scope of examination… should be confined to the existence of an arbitration agreement on the basis of Section 7.” (Para 25)

Accordingly, all other objections—arbitrability, limitation, fraud, pendency of criminal or recovery proceedings—must be decided by the arbitral tribunal, not by the referral court.

“Fraud and Criminality—Not a Bar to Arbitration Unless Contract Itself in Doubt”

Addressing the heart of the appellants’ argument, the Supreme Court restated established 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.”

And further:

“Disputes involving allegations having criminal law implications transcend inter se disputes between the contracting parties and attain public implications… shall ‘not be submitted to arbitration’. But only when the fraud goes to the root of the contract or public law implications are dominant.”

Here, the Court found no such exceptional circumstance:

“There is an arbitration agreement. The matter must end here. While we agree… that his client has much to say, let all that be said before the arbitral tribunal.”

 “No Mini-Trial at Section 11 Stage—Let the Tribunal Decide Preliminary Issues”

The Supreme Court invoked its seven-judge bench ruling (Interplay Between Arbitration Agreements under Arbitration and Conciliation Act, 1996 and Stamp Act, 1899, In Re, 2024), underscoring:

“The Referral Court is not the appropriate forum to conduct a mini-trial… The determination of the existence and validity of an arbitration agreement on the basis of evidence ought to be left to the Arbitral Tribunal.” (Para 25)

All issues, including “jurisdiction, limitation, bar by earlier proceedings, res judicata, etc.,” are kept open to be decided as preliminary issues by the arbitral tribunal after hearing all parties (Paras 28-29).

Appeals Dismissed, No Costs—All Objections Open for Arbitral Tribunal

In closing, the Supreme Court dismissed the Corporation’s appeals:

“There is an arbitration agreement. The matter must end here… All the issues raised… are kept open for being raised and contested before the arbitral tribunal… These issues shall be taken up as preliminary issues and the arbitral tribunal will consider them after giving opportunity to all the parties.” (Paras 28-30)

Date of Decision: 5 August 2025