In a significant ruling in The Managing Director, Bihar State Food & Civil Supply Corporation Ltd. v. Sanjay Kumar (2025), the Supreme Court has reaffirmed a critical principle: mere pendency of criminal proceedings involving allegations of ‘simple fraud’ like cheating or breach of trust does not bar a dispute from being referred to arbitration.
This judgment is not just a technical clarification—it strengthens contractual dispute resolution and prevents parties from misusing pending criminal cases to stall arbitration.
Case Background
The dispute arose from contracts between Bihar State Food and Civil Supply Corporation (BSFSC) and various rice millers under the Public Distribution System (PDS) paddy milling scheme. Allegations emerged of massive defaults, leading to recovery proceedings under the Bihar & Orissa Public Demands Recovery Act and multiple FIRs under Sections 420 (cheating) and 409 (criminal breach of trust) IPC.
The Corporation argued before the Supreme Court that the seriousness of the fraud and pending criminal proceedings made the dispute non-arbitrable.
Supreme Court’s Findings
The Court:
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Distinguished between ‘serious fraud’ (non-arbitrable) and ‘simple fraud’ (arbitrable), reaffirming the position in Ayyasamy, Rashid Raza, and Avitel Post Studioz.
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Applied the Avitel tests:
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Does the alleged fraud nullify the arbitration clause itself?
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Does it involve public law elements requiring a writ court’s intervention?
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Held that neither test was satisfied — the dispute remained purely contractual.
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Stressed that under Section 11(6A) of the Arbitration & Conciliation Act, referral courts must only examine the existence of a valid arbitration agreement, leaving all other objections for the arbitral tribunal.
Why This Judgment Matters
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Prevents Abuse of Criminal Process – Parties can no longer use pending FIRs as a shield to derail arbitration.
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Strengthens Party Autonomy – Arbitration agreements will be honoured unless they themselves are tainted.
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Judicial Economy – Keeps courts from delving into merits at the referral stage.
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Certainty in Law – Brings clarity on the long-debated ‘fraud exception’ to arbitrability.
My Take as a Practitioner
This ruling is a much-needed affirmation of our arbitration-friendly jurisprudence. It aligns with global best practices and the 7-Judge Bench decision in Interplay, ensuring that arbitration remains a robust, efficient, and enforceable mechanism for contractual disputes.
By distinguishing between public law fraud and private contractual fraud, the Supreme Court has struck the right balance between protecting public interest and respecting contractual commitments.
Author: Advocate Tarun Gaur – Best Advocate in Dwarka, practising in Delhi High Court, specialising in arbitration, commercial disputes, and white-collar crime.