Summary
Appeals by the Bihar State Food and Civil Supplies Corporation against the Patna High Court's orders appointing arbitrators under Section 11 of the Arbitration and Conciliation Act, 1996 in disputes with rice millers accused in the PDS paddy-milling scam were dismissed. After restating the principles on arbitrability where serious fraud is alleged, the Court held that under Section 11(6A), as construed by the seven-Judge Bench in In Re: Interplay, a referral court must confine itself to the existence of an arbitration agreement; since one existed, every other objection (criminal proceedings, the Public Demands Recovery Act, limitation, res judicata) was left to the arbitral tribunal as preliminary issues.
Issues
- Whether disputes under custom-milling agreements became non-arbitrable because of the initiation and pendency of criminal cases alleging large-scale misappropriation of public money.
- Whether invocation of the Bihar and Orissa Public Demands Recovery Act, 1914 under clause 15 of the agreement barred proceedings under the Arbitration Act.
- Whether the applications under Section 11(6) were barred by limitation.
- Whether the High Court's earlier decision in Sadhna Kumari, against which the SLP was dismissed, conclusively decided the validity of invoking arbitration, and whether the order of the Bihar Public Works Contracts Disputes Arbitration Tribunal operated as res judicata.
- Whether, in view of Section 11(6A), all these questions should be left to the arbitral tribunal.
Provisions considered
- Section 11(6A), Arbitration and Conciliation Act, 1996A referral court considering an application under Section 11(4), (5) or (6) must confine itself to examining the existence of an arbitration agreement. Following the seven-Judge Bench in In Re: Interplay Between Arbitration Agreements and the Stamp Act, and the later decisions in SBI General Insurance v. Krish Spinning, Aslam Ismail Khan Deshmukh and Office for Alternative Architecture, this is a prima facie examination on the basis of Section 7, not a mini-trial; substantive existence and validity are for the tribunal under Section 16. (¶¶ 19, 23, 24, 25, 26, 27, 28)
- Section 11(6), Arbitration and Conciliation Act, 1996The High Court had allowed the rice millers' applications and appointed arbitrators under clause 16 of the agreements naming the District Collector as arbitrator; since an arbitration agreement existed, the appointments were not interfered with and the Corporation's objections were reserved for the tribunal. (¶¶ 2, 16, 28, 29)
- Section 2(3), Arbitration and Conciliation Act, 1996The statutory limit on arbitrability: Part I does not affect any other law by virtue of which certain disputes may not be submitted to arbitration. The Court noted that the categories of non-arbitrable disputes are not enumerated in the section but have been carved out by the courts, including disputes excluded by the operation of criminal law. (¶ 21)
- Section 16, Arbitration and Conciliation Act, 1996The arbitral tribunal rules on its own jurisdiction, including the existence and validity of the arbitration agreement; objections of limitation and non-arbitrability were accordingly left to be decided by the tribunal as preliminary issues. (¶¶ 25, 29)
- Section 8, Arbitration and Conciliation Act, 1996The High Court had held that the millers' failure to apply under Section 8 during the certificate proceedings was no waiver of the arbitration clause, Section 11 operating independently; the Supreme Court observed that courts under both Sections 8 and 11(6) must follow the mandate of sub-section (6A). (¶¶ 18, 27)
- Section 28, Indian Contract Act, 1872While prohibiting agreements in restraint of legal proceedings, the section saves the resolution of disputes by arbitration; this is the basis on which contractual arbitration, governed by the Arbitration Act, coexists with access to ordinary tribunals. (¶ 21)
- Recovery of contractual dues as land revenue (clause 15 of the agreement), Bihar and Orissa Public Demands Recovery Act, 1914The Corporation had initiated certificate proceedings for the shortfall in milled rice; the High Court held the Recovery Act and arbitration operate in independent fields and that a demand notice does not make the claim exclusively a public debt. Whether invocation of the Recovery Act bars arbitration was left open for the tribunal. (¶¶ 3, 4, 5, 17, 19, 29)
Held
- Restating the law on arbitrability where fraud is alleged: the same facts may give rise to civil and criminal proceedings, and the mere institution of criminal proceedings does not make an otherwise arbitrable dispute non-arbitrable (Swiss Timing); only 'serious fraud', as distinguished from fraud simpliciter, is excluded, judged by the two Rashid Raza/Avitel tests (the arbitration agreement itself cannot be said to exist, or allegations of arbitrary, fraudulent or mala fide conduct against the State raise public-law questions for a writ court). (¶ 21)
- At least one instance of serious fraud is where allegations with criminal-law implications transcend the inter se dispute and attain public implications, affecting non-parties, integrity in governance, accountability in public service, distribution of essential commodities or national security; such disputes have public-law implications and shall not be submitted to arbitration. (¶ 21)
- An arbitral tribunal may consider allegations of fraud concerning the terms of the contract, the arbitration agreement being independent of the contract; allegations of fraud directed at the arbitration agreement itself stand differently and are treated as non-arbitrable, the tribunal considering them only to examine exclusion of its jurisdiction. The burden lies on the party raising non-arbitrability, and the court examines the plea only as a jurisdictional issue. (¶ 21)
- Section 11(6A), as interpreted by the seven-Judge Bench in In Re: Interplay, confines courts acting under Sections 11(6) and 8 to a prima facie examination of the existence of an arbitration agreement under Section 7; the referral court is not to conduct a mini-trial, and the substantive existence and validity of the agreement are for the tribunal under Section 16. Courts must follow that mandate. (¶¶ 23, 24, 25, 26, 27)
- Since an arbitration agreement existed, the enquiry ended there; the Corporation's contentions on non-arbitrability owing to the criminal cases, the bar of the Recovery Act, limitation and res judicata were all kept open to be raised before the arbitral tribunal, which is to decide the jurisdictional issues of limitation and non-arbitrability as preliminary issues after hearing all parties. (¶¶ 22, 28, 29)
Result
Appeals dismissed; no order as to costs. All issues raised by the appellant-Corporation kept open before the arbitral tribunal, which shall decide limitation and non-arbitrability as preliminary issues after giving an opportunity to all parties.