The Managing Director, Bihar state food and civil supply corporation limited & anr. (Appellant) vs. Sanjay Kumar (Respondent), 2025

Petition(s) for Special Leave to Appeal (C) No(s). 10455/2020

(Mr. PAMIDIGHANTAM SRI NARASIMHA and Mr. MANOJ MISRA, JJ, delivered by Mr. PAMIDIGHANTAM SRI NARASIMHA, J)

The Bihar State Food and Civil Supply Corporation is responsible for procuring paddy from farmers and getting it milled into rice for the Public Distribution System (PDS). For this, they hire private rice millers. Respondent Sanjay Kumar was one of them. Under the contracts, each miller was given paddy and had to return a fixed percentage (67%) as milled rice within a deadline. The Corporation alleged that many millers, including the Respondent, did not return the full quantity of rice, causing large financial losses.

The Corporation filed criminal cases against these millers under Criminal Breach of Trust (Section 409 IPC) and Cheating (Section 420 IPC). It also started recovery proceedings under a state law to get back the value of the missing rice. Meanwhile, the millers pointed to the arbitration clause in their contracts and filed petitions under Section 11 of the Arbitration and Conciliation Act, 1996, asking the court to appoint an arbitrator. The Patna High Court allowed the request for arbitration.

The Corporation appealed to the Supreme Court, arguing that the arbitration should not be allowed because the dispute involves fraud and criminal allegations, and such cases should be decided in court, not by an arbitrator. The fraud here affects public funds and is too serious for arbitration.

The Supreme Court had to decide:

• If there’s already a valid arbitration clause, can the dispute still go to arbitration even when criminal fraud cases are pending?
• Does the seriousness of the fraud make the dispute “non-arbitrable”?

The Supreme Court reasoned that Section 11(6A) of the Arbitration Act says that at the stage of appointing an arbitrator, courts only check if a valid arbitration agreement exists, nothing more. The court explained that Simple or contractual fraud (fraud linked to breach of a contract) can be arbitrated.

In the above case, the arbitration clause was genuine, and the dispute, though involving big money and criminal charges, was still about failure to deliver rice under a contract is a contractual matter. The pending criminal cases do not automatically block arbitration.

The Supreme Court dismissed the Corporation’s appeal and allowed arbitration. The Court also said that criminal cases can run separately in the criminal courts.