Arbitration and Allegations of Criminality: The Indian Conundrum

“The balance of convenience is tilted more in favour of permitting the arbitration proceedings to continue rather than to bring the same to a grinding halt.” 

Introduction

One of the recurring challenges in Indian arbitration law concerns disputes where allegations of criminality or public fraud are involved and it is claimed that the contract is void ab initio. Many a times, the courts have decided whether such disputes can still be referred to arbitration under Section 11, Arbitration and Conciliation Act, 1996 (the 1996 Act).

The 1996 Act itself does not define what types of disputes are arbitrable or non-arbitrable, therefore, judicial interpretation has had to fill this gap. But it is our opinion that under the law the question of deciding arbitrability has been left to the arbitrator. Even if the courts laid down the interpretation of what disputes are triable by arbitration, that interpretation is for the arbitrator to decide and not for the court which is only tasked with appointing the arbitrator.

This issue has been peculiar at the stage of a Section 11 petition the courts have frequently gone beyond their limited mandate, engaging in preliminary assessments of fraud or public interest. This approach, while well-intentioned, runs contrary to the statutory framework and the consistent line of authoritative case law which has finally culminated in Bihar State Food & Civil Supply Corpn. Ltd. v. Sanjay Kumar¹.

In Bihar State Food case², the Supreme Court reaffirmed that even in cases involving serious criminal allegations, such as over 1200 first information reports (FIRs) alleging a largescale misuse of public funds, the existence of an arbitration clause obligates the court to appoint an arbitrator.

As per the 2025 ruling, the Referral Court’s jurisdiction is confined to verifying whether a valid arbitration agreement exists between the parties. Questions relating to arbitrability, fraud, or the impact of pending criminal proceedings are to be addressed by the Arbitral Tribunal as under Section 16.

Evolution of judicial approach

The pre-1996 era

Under the Arbitration Act, 1940, courts exercised significant control over arbitration proceedings and awards. Judicial interference was the norm, often justified on grounds of equity or public policy.

Contrary to the 1996 Act that was modelled on the UNCITRAL Model Law envisioning a framework where Court’s role as a supervisor is limited, ensuring minimal judicial intervention and greater party autonomy.

The N. Radhakrishnan Legacy (2010)

In N. Radhakrishnan v. Maestro Engineers³, the Supreme Court held that disputes involving serious allegations of fraud or malpractice should be decided by civil courts and not arbitrators. The Court held that despite the existence of an arbitration agreement between the parties, and the dispute in question falling requires detailed investigations and the production and presentation of elaborate evidence then the matter must be relegated from the arbitration mechanism to the courts.

In Radhakrishnan case⁴, the Court was dealing with serious allegations as to fraud and malpractices committed in the books of account and manipulation of finances of a partnership firm. It was thus held that the case cannot be tried and decided by arbitrator, it was observed that for furtherance of justice, it should be tried in a court of law which would be more competent and have the means to decide such a complicated matter.

Swiss timing: The first corrective step (2014)

A major shift began with Swiss Timing Ltd. v. Commonwealth Games 2010 Organising Committee⁵, the case arose from the Commonwealth Games public procurement controversy involving serious allegations of fraud and misappropriation of public funds.

The Court, however, took a pragmatic view, holding that the mere existence of criminal proceedings or allegations of large scale public fraud does not make a dispute non-arbitrable. Unless the arbitration agreement itself is vitiated by fraud, the arbitral process must proceed.

The Supreme Court rightly observed that rather than declaring the dispute non-arbitrable “The balance of convenience is tilted more in favour of permitting the arbitration proceedings to continue rather than to bring the same to a grinding halt.”

Thus, the Court in Swiss Timing case⁶ rejected the blanket exclusion of disputes involving fraud and became an important precursor to the competence-competence principle later recognised through Section 11(6-A). It reflected the Court’s growing recognition that arbitrators, rather than Referral Courts, should decide on issues touching the scope and validity of the arbitration clause.

Section 11(6-A) and the competence-competence principle

Before the 2015 Amendment, the question whether allegations of fraud could be referred to arbitration generated conflicting judicial approaches. The 246th Law Commission Report examined this inconsistency in detail. It noted that the Radhakrishnan case⁷, had been interpreted to mean that issues involving fraud were not arbitrable, even though earlier authorities such as Abdul Kadir Shamsuddin Bubere v. Madhav Prabhakar Oak⁸, merely emphasised a party’s right to defend themselves in a public forum when serious allegations were made.

The Report also recorded that several High Courts had drawn a distinction between serious fraud and ordinary commercial fraud, and that in the case of Swiss Timing⁹, the Supreme Court held Radhakrishnan to be per incuriam.

The Commission recommended that this uncertainty be removed by expressly providing in Section 16 that Arbitral Tribunals may decide issues involving allegations of fraud. Parliament, however, did not adopt this recommendation in its suggested form. Instead of amending Section 16 substantively, the legislature chose a procedural mechanism to achieve a similar outcome: It introduced Section 11(6-A), which confines the court’s inquiry at the referral stage to the existence of an arbitration agreement.

Although Section 11(6-A) did not expressly state that fraud is arbitrable, its effect was to shift objections relating to fraud away from the Referral Court and into the arbitral forum under Section 16.

Thus, while Parliament did not accept the Law Commission’s recommendation verbatim, the statutory scheme and subsequent judicial interpretation have substantially achieved what the Commission envisaged: That the Arbitral Tribunal, and not the Referral Court, should address objections based on fraud.

Post-2015 Amendment jurisprudence

The position in Radhakrishnan case¹⁰ was revisited in A. Ayyasamy v. A. Paramasivam¹¹, the Supreme Court introduced a critical distinction between:

1. fraud simpliciter, which arises within the contractual matrix (such as falsification of accounts or misrepresentation) and remains arbitrable; and

2. serious fraud, which involves criminal conspiracy, public law implications, or matters impacting the integrity of State functions, and is therefore non-arbitrable.

While the Ayyasamy case¹² represented an attempt to balance public policy with party autonomy and it clarified that mere allegations of fraud should be adjudged by the Arbitral Tribunal, it did not clarify whether the existence of “serious fraud” should be determined by the court or the Arbitral Tribunal, rather, the judgment acted as a bar for the courts to refer the dispute to arbitration. It was held that the courts may refuse to refer the matter to arbitration in cases:

1. where court finds very serious allegations of fraud that make a virtual case of criminal offence, or

2. where allegations of fraud are so complicated that it becomes essential that such complex issues can be decided only by civil court on appreciation of voluminous evidence, or

3. where serious allegations of forgery/fabrication of documents in support of the plea of fraud, or

4. where fraud is alleged against arbitration provision itself, or

5. where fraud alleged permeates the entire contract, including agreement to arbitrate where fraud goes to the validity of contract itself or contract that contains arbitration clause or validity of arbitration clause itself.

In Duro Felguera, S.A. v. Gangavaram Port Ltd.¹³, the Supreme Court confirmed that once the existence of an arbitration agreement is established, the court should not engage in examining issues of arbitrability or merits.

Refinement through Rashid Raza and Avitel

In Rashid Raza v. Sadaf Akhtar¹⁴, the Supreme Court provided further analytical structure by setting out two tests:

1. whether the arbitration clause itself is vitiated by fraud; and

2. whether the alleged fraud has wider public implications or affects rights of third parties.

This framework was endorsed and applied in Avitel Post Studioz Ltd. v. HSBC PI Holdings (Mauritius) Ltd.¹⁵, where the Court clarified that commercial frauds between private parties remain arbitrable, and only frauds affecting public funds or involving elements of public law are not. However, it was also held that any finding that the contract itself is either null and void or voidable as a result of fraud or misrepresentation does not entail the invalidity of an arbitration clause.

The seven-Judge Bench in Interplay (2023)

In Interplay Between arbitration agreements under the Arbitration and Conciliation Act, 1996 and the Indian Stamp Act, 1899, In re¹⁶, a seven-Judge Bench clarified that under Section 11, the court’s scrutiny is limited to confirming the existence of an arbitration agreement. All other objections, including those concerning fraud, limitation, or validity, fall within the Arbitral Tribunal’s jurisdiction under Section 16. The judgment firmly established a policy of judicial restraint and reinforced the autonomy of the arbitral process.

SBI General Insurance v. Krish Spinning Mills (2024)

In SBI General Insurance Co. Ltd. v. Krish Spg.¹⁷, it was held that:

117. In view of the observations made by this Court in Interplay Between Arbitration Agreements under the Arbitration Act, 1996 & the Stamp Act, 1899, In re, it is clear that the scope of enquiry at the stage of appointment of arbitrator is limited to the scrutiny of prima facie existence of the arbitration agreement, and nothing else. For this reason, we find it difficult to hold that the observations made in Vidya Drolia v. Durga Trading Corpn., and adopted in NTPC Ltd. v. SPML Infra Ltd. that the jurisdiction of the Referral Court when dealing with the issue of “accord and satisfaction” under Section 11 extends to weeding out ex facie non-arbitrable and frivolous disputes would continue to apply despite the subsequent decision in Interplay Between Arbitration Agreements under the Arbitration Act, 1996 & the Stamp Act, 1899, In re.

This decision bridged in Interplay Between Arbitration Agreements under the Arbitration Act, 1996 & the Stamp Act, 1899, In re and Bihar State Food¹⁸ by confirming that the doctrine of competence-competence applies uniformly, even when criminal proceedings are pending. The presence of an FIR or criminal investigation cannot by itself render a dispute non-arbitrable at the referral stage.

Lata Yadav v. Shivakriti Agro (P) Ltd. (2025)

A significant High Court development reinforcing this approach is Lata Yadav v. Shivakriti Agro (P) Ltd.¹⁹ In that case, arbitral proceedings were sought to be stayed on the ground of ongoing investigations by the Enforcement Directorate under the Prevention of Money Laundering Act (PMLA). The Delhi High Court declined to interfere, observing that arbitral proceedings and Enforcement Directorate (ED) investigations operate in distinct spheres, the former concerns private contractual rights, while the latter addresses criminal culpability. The Court held that the pendency of enforcement proceedings cannot, by itself, suspend or defeat arbitration under the 1996 Act.

Lata Yadav, thus, reflects the practical implementation of the competence-competence doctrine at the High Court level and underscores the judiciary’s consistent policy of allowing arbitration to proceed parallel to criminal or regulatory proceedings.

Bihar State Food & Civil Supplies Corpn. Ltd. v. Sanjay Kumar (2025)

In Bihar State Food case²⁰, the Supreme Court faced extensive criminal proceedings involving the alleged misappropriation of public funds under the State’s public distribution system. Despite the gravity of the allegations, the Court upheld the High Court’s appointment of arbitrators under Section 11, holding that the existence of an arbitration agreement was decisive. It was observed: “There is an arbitration agreement. The matter must end here.”

The Court clarified that questions regarding the arbitrability of disputes involving criminality or fraud fall squarely within the Arbitral Tribunal’s competence under Section 16. The Referral Court’s role is procedural and limited.

Analytical overview

The consistent thread through these judgments, from Swiss Timing case²¹ and Ayyasamy case²² to Bihar State Food case²³, is the principle that the arbitral process must not be stifled at the referral stage. The judiciary has progressively narrowed its intervention, recognising that arbitration and criminal proceedings can proceed concurrently, each within its domain.

This evolution reflects a structured procedural hierarchy:

1. Stage one — Section 11: The court determines only the existence of the arbitration agreement.

2. Stage two — Section 16: The Arbitral Tribunal decides on arbitrability, fraud, or limitation.

3. Stage three — Section 34: Post-award judicial review addresses errors of jurisdiction.

This framework preserves party autonomy while retaining judicial oversight at a later stage, ensuring that the arbitral process remains both effective and accountable.

Comparative perspective

Under English law, as established in Fiona Trust & Holding Corp. v. Privalov²⁴, allegations of fraud do not preclude arbitration; the Tribunal proceeds with the matter, and the award is later open to challenge. Indian law follows a balanced approach: While private commercial frauds are arbitrable, those with public law implications remain within the court’s purview. This “middle path” reflects India’s attempt to harmonise international arbitration standards with domestic concerns of public accountability.

Conclusion

The position of law is now settled. Even where serious criminal allegations or large scale public frauds are involved, the existence of a valid arbitration agreement requires the court to appoint an arbitrator under Section 11 of the 1996 Act. Section 11(6-A) confines the Referral Court’s jurisdiction strictly to verifying the existence of such an agreement. Allegations of fraud, criminal proceedings, or public law implications do not displace this statutory mandate.

As reaffirmed in Swiss Timing case²⁵, SBI General Insurance case²⁶, Lata Yadav case²⁷, and Bihar State Food case²⁸, the principle is clear: The existence of an arbitration agreement is decisive at the Section 11 stage. The Arbitral Tribunal must determine all other questions, including arbitrability and overlap with criminal investigations. This interpretation gives full effect to the legislative intent behind Section 11(6-A) and represents a mature synthesis of arbitral autonomy and judicial restraint in Indian arbitration law.