The Supreme Court has recently held that the existence of an arbitration clause in an agreement does not bar criminal proceedings. It further observed that courts must first examine whether the allegations disclose the essential ingredients of the offence.
A bench of Justice Vikram Nath and Justice Sandeep Mehta observed so while hearing an appeal against a Gauhati High Court order refusing to quash a cheating case against the CEO of a tea company arising from an unsuccessful tea estate deal.
The appellant was the CEO of Darjeeling Organic Tea Estates Private Limited. The proprietor of CR Traders (Respondent 1/R1), negotiated with the appellant's company about a tea estate. In 2021, before the agreement, she wrote to UCO Bank about the tea estate and its mortgage with the Bank. A Memorandum of Understanding (MoU) was signed between the Company and CR Traders, which the appellant signed as the Company's authorised signatory. In June, 2021, R1 transferred Rs 40,00,000 to the Company's account in two transactions (Rs 39,95,000 and Rs 5,000).
The dispute concerns the performance of the MoU, which the Company terminated on the ground that R1 had failed to comply with its terms and conditions. In 2022, R1 filed a criminal complaint, alleging that the appellant induced her to part with Rs 40,00,000 by representing that the tea estate belonged to the Company, whereas it was owned by some other company and was the subject of proceedings involving UCO Bank, pursuant to which summons was issued.
Subsequent to this, the appellant approached the High Court under Section 482 of the Code of Criminal Procedure, 1973 (CrPC, now Section 528 of the Bharatiya Nagarik Suraksha Sanhita, 2023/BNSS), arguing that the dispute was purely contractual. He also contended that the MoU was entered into by the Company and not by him personally, and that the money went to the Company's account. He also pointed out that the Company had not been made an accused.
Holding that a prima facie case under Sections 417 and 420 of the Indian Penal Code, 1860 (IPC/now Sections 318(2) and 318(4) of the Bharatiya Nyaya Sanhita, 2023/BNS) was made out and that the arbitration clause in the MoU was no ground for quashing, the High Court, dismissed the plea.
Aggrieved by the High Court's dismissal, the appellant approached the Supreme Court.
The Supreme Court agreed with the High Court's view but did not find it decisive. It observed as follows:
“The High Court was correct in observing that the existence of an arbitration clause does not, by itself, bar criminal proceedings. That proposition, however, does not answer the real question. The Court must first determine whether the allegations disclose the essential ingredients of the criminal offence alleged. In the present case, the material does not disclose sufficient factual foundation to infer that the appellant, at the inception of the transaction, acted with the dishonest intention necessary to constitute cheating.”
Referring to G Saminathan and Another v State, represented by the Sub-Inspector of Police and Another, the Court reiterated that “for establishing the offence of cheating, the complainant must show fraudulent or dishonest intention at the time when the promise or representation was made.” It stated the legal position as under:
“The distinction between a breach of contract and the offence of cheating is well settled. For an offence under Sections 417 and 420 of IPC, the fraudulent or dishonest intention must exist at the inception of the transaction and must have induced the complainant to part with property. A subsequent failure to perform a contractual obligation cannot, by itself, give rise to an inference of such intention.”
The bench held that the complaint did not disclose the necessary ingredients of cheating against the appellant, that the MoU was between R1 and the Company, and the appellant signed it only in the capacity as the CEO and authorised signatory of the Company. “More importantly, the amount of Rs. 40,00,000/- (Rupees Forty Lakh only) was transferred directly to the account of the Company and there is no allegation that the appellant received or appropriated any part thereof for his personal benefit,” it added.
The bench also noted that as per the complaint, the appellant was well aware of the fact that the tea estate and tea factory did not belong to the company, which ought to be considered in the context of the transaction as a whole. It also noted that R1 knew that the tea estate was mortgaged with UCO Bank, that the MoU itself contemplated clearing UCO Bank's dues and encumbrances and eventually acquiring the tea estate, and that the material on record also indicated that the Company was in possession of and operating the tea estate and had substantial claims concerning the same. “In these circumstances, a bare assertion that the appellant knew the representation to be false does not, without more, establish dishonest intention at the inception of the transaction,” the Court held.
Further, the bench observed that whether the termination was valid and whether R1 was entitled to refund of the amount paid or any other relief are civil matters, and such issues cannot assume a criminal character merely because the contractual relationship failed later.
In the light of aforesaid, the Supreme Court set aside the High Court's judgment and quashed criminal proceedings against the appellant.
“We are, therefore, of the considered view that continuation of the criminal proceedings against the appellant would amount to giving a predominantly contractual dispute the colour of a criminal prosecution. The ingredients of the offences under Sections 417 and 420 IPC are not made out against the appellant and continuation of the proceedings would amount to an abuse of the process of law,” it observed.
“12. Accordingly, the appeal is allowed. The impugned judgment and order dated 13.05.2025 passed by the High Court in Criminal Petition No. 32 of 2022 is set aside. 13. Consequently, C.R. Case No. 17 of 2022 pending before the Court of the Judicial Magistrate First Class, Dimapur, Nagaland, along with all proceedings arising therefrom, stands quashed insofar as the appellant is concerned. It is clarified that this order shall not preclude respondent No. 1 from pursuing any remedy available in law in respect of her civil or contractual claims,” the bench concluded.
Appearance:
For Appellant: Mr Sudip Sanyal, Sr. Adv.; Mr. Arun K. Sinha, AOR; Mr. Rakesh Singh, Adv.; Mr. Jayanta Kumar Sanyal, Adv.
For Respondents: Mr. Praveen Kumar Jha, AOR; Mr. Harpreet Singh, Adv.; Mr. Jitin Singhal, Adv.; Mr. Pravesh Bahuguna, Adv.; Mr. Rudraksh Pandey, Adv.; Ms. K. Enatoli Sema, AOR; Mr. Amit Kumar Singh, Adv.; Ms. Chubalemla Chang, Adv.; Mr. Prang Newmai, Adv.; Ms. Yanmi Phazang, Adv.