Failure Of Joint Real Estate Deal Due To Non-Performance Of Contract Is Civil Wrong, Not Criminal Offence: Calcutta High Court

Holding that the collapse of a joint real estate development arrangement cannot automatically attract criminal prosecution, the Calcutta High Court has ruled that disputes arising out of non-performance of contractual obligations are essentially civil in nature and cannot be given a “criminal colour” in the absence of dishonest intention from the very inception. Observing that “to constitute cheating, there must be deception coupled with fraudulent or dishonest inducement at the inception of the transaction,” the Court cautioned that criminal law must not be used as a pressure tactic to settle commercial claims.Justice Ajay Kumar Gupta passed the ruling while allowing a criminal revision petition filed by landowners seeking quashing of proceedings under Sections 420, 406, 120B and 34 of the IPC pending before a Kolkata Magistrate.The case arose from a 2014 Memorandum of Understanding (MOU) executed between the complainant's company and the petitioners for development of over 113 decimals of land at New Town, North 24-Parganas. Pursuant to the agreement, the complainant paid approximately ₹2.01 crore through cheques as part of a refundable security deposit and development arrangement. The understanding was that the project would be undertaken jointly and revenue shared.However, the project did not materialise. According to the complainant, the petitioners later transferred or exchanged portions of the land and failed to refund the money, allegedly cheating the developer. A criminal complaint was therefore filed alleging offences of cheating and criminal breach of trust. Cognizance was taken and process issued against the accused.Challenging the proceedings, the petitioners argued that the dispute was purely contractual, that there was no dishonest intention at the time of execution of the MOU, and that a commercial civil suit had already been instituted for recovery of the same money. They contended that the criminal case was filed only to harass and pressurise them into settlement.Examining the MOU and the complaint, the High Court found that the payments were made pursuant to a commercial development arrangement and not by way of “entrustment” in a fiduciary capacity. It held that one of the essential ingredients of criminal breach of trust under Section 406 IPC — entrustment of property — was absent. Even assuming the amount had not been refunded, the same would at best give rise to civil liability.On the charge of cheating, the Court emphasised that fraudulent or dishonest intention must exist at the very beginning of the transaction. The complaint, it noted, contained no specific averments demonstrating that, at the time of entering into the MOU, the petitioners never intended to honour their obligations. On the contrary, subsequent steps such as exchanging part of the land with HIDCO to facilitate development indicated an intention to proceed with the project rather than to defraud.The Court observed that the “substance of the grievance pertains to alleged non-performance of contractual terms” and that the complainant had already availed civil remedies. Terming the prosecution an attempt to “paint a civil suit in a criminal colour,” the Court held that continuation of the criminal proceedings would amount to abuse of process of law.Accordingly, the Court quashed the criminal case and set aside the Magistrate's order issuing process against the petitioners.Case Title: Siddharth Sethia & Ors. v. State of West Bengal & Anr.Case No.: CRR 3637 of 2022Click here to read order

Failure Of Joint Real Estate Deal Due To Non-Performance Of Contract Is Civil Wrong, Not Criminal Offence: Calcutta High Court

Srinjoy Das

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