Mere Pendency Of Criminal Cases Alleging Simple Fraud No Bar To Arbitration : Supreme Court

The Supreme Court has allowed the arbitration proceedings to continue in multi-crore Bihar Public Distribution System (“PDS”) Scam, stating that mere pendency of the criminal proceedings in offences involving simple fraud like cheating, criminal breach of trust doesn't bar a dispute from being referred to an arbitration. “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.”, the court said. The bench comprising Justices PS Narasimha and Manoj Misra dismissed the batch of petitions filed by Bihar State Food and Supply Corporation (“BSFSC”) against the High Court's decision to allow application for appointment of an arbitrator in 1,500-crore Bihar Public Distribution System (PDS) scam. Relying on a seven-judge bench decision in In Re: Interplay, the judgment authored by Justice Narasimha approved the arbitration, noting that since there existed a valid arbitration agreement, it would be impermissible at the referral stage to dive deeper into the dispute; instead referred the same to the arbitration for its adjudication. “We have examined the matter in detail. There is an arbitration agreement. The matter must end here.”, the Court told the Petitioner's Counsel Sr. Adv. Ranjit Kumar to let all his contentions be raised before the arbitral tribunal as there existed an arbitration agreement limiting the referral court's jurisdiction to only see whether there existed a valid arbitration agreement. However, the Court discussed in detail the argument of arbitrability of fraud made by the Petitioner-BSFSC. It was argued that since the FIR was pending for the offences under Section 420 (cheating) and 409 (criminal breach of trust), it would be impermissible for the High Court to refer the dispute to the arbitration. Dismissing the Petitioner's argument, the Court distinguished between the arbitrability of two types of fraud, i.e., 'serious fraud' and 'fraud simpliciter' or 'simple fraud'. It said that the cases involving serious fraud (e.g., forgery, fabrication of documents, or scams affecting public welfare) are non-arbitrable. Whereas cases involving ordinary fraud (e.g., contractual misrepresentation, breach of trust, cheating) can be referred to arbitration. The Court drew reference from Avitel Post Studioz Limited v. HSBC PI Holdings (Mauritius) Limited (2021), where the judgment penned by Justice RF Nariman outlined two key tests of non-arbitrability, where a dispute need not be referred to arbitration, these are: Firstly, does the fraud allegation nullify the arbitration clause itself (e.g., forgery of the agreement)?, and Secondly, does the fraud involve public law implications (e.g., scams involving government funds, corruption)? “The first test is satisfied only when it can be said that the arbitration clause or agreement itself cannot be said to exist in a clear case in which the court finds that the party against whom breach is alleged cannot be said to have entered into the agreement relating to arbitration at all. The second test can be said to have been met in cases in which allegations are made against the State or its instrumentalities of arbitrary, fraudulent, or mala fide conduct, thus necessitating the hearing of the case by a writ court in which questions are raised which are not predominantly questions arising from the contract itself or breach thereof, but questions arising in the public law domain.”, the Court said in Avitel Post Studioz' case.Applying the law, the Court held that the test for non-arbitrability was not met in the present case, as the allegations of fraud neither vitiated the arbitration clause nor involved any element of public law, the dispute being purely contractual in nature.The Court added that the allegations of fraud with respect to the arbitration agreement itself stand on a different footing and stands on the realm of non-arbitrability. However, clarified that “in such cases, the arbitral tribunal will not examine the allegation of fraud but will consider the submission only for the purpose of examining exclusion of jurisdiction.” Accordingly, the appeals failed and were hereby dismissed. Cause Title: THE MANAGING DIRECTOR BIHAR STATE FOOD AND CIVIL SUPPLY CORPORATION LIMITED & ANR. VERSUS SANJAY KUMARCitation : 2025 LiveLaw (SC) 778Click here to read/download the judgmentAppearance: For Petitioner(s) :Mr. Ranjit Kumar, Sr. Adv.(Arguing counsel) Mr. Manish Kumar, AOR For Respondent(s) :Mr. Amit Sibal, Sr. Adv.(Arguing counsel) Mr. Rudreshwar Singh, Sr. Adv. Mr. Sumeet Singh, Adv. Mr. Abhiprav Singh, Adv. Ms. Shatakshi Sahay, Adv. Mr. Shivam Singh, Adv. Mr. Kumar Avinahs, Adv. Ms. Deepali Singh, Adv. Ms. Alka Singh, Adv. Mr. Kaushik Poddar, AOR Mr. Kumar Vikram, Adv. Ms. Arpita Mishra, Adv. Ms. Tanishka, Adv. Ms. Ishita Singh, Adv. Mr. Durga Dutt, AOR Mr. Upendra Narayan Mishra, Adv. Mr. Rohit...

Mere Pendency Of Criminal Cases Alleging Simple Fraud No Bar To Arbitration : Supreme Court

Yash Mittal

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