Simultaneous Proceedings Permissible Under Arbitration Act And Negotiable Instruments Act: Karnataka High Court

Brief Facts:

The matter pertained to M/s. Durga Projects Inc. (“Appellant”), a registered partnership firm, which entered into a joint development agreement with B.G. Babu Reddy (“Respondent”). As per the agreement, a refundable security deposit of Rs. 27,00,000/- was deposited by the Appellant, to be refunded upon completion of the construction/project and delivery of the owner's share. Subsequently, the Appellant issued cheques for the refund of the respective share, which were dishonored upon presentation, leading the Petitioner to file a complaint under Section 138 of the Negotiable Instruments Act, 1881 (N.I. Act).

Following the trial, in which both parties presented their arguments and evidence, the Trial Court acquitted Respondent. The Appellant, dissatisfied with the acquittal, appealed the judgment in the High Court, contending that the Trial Court's finding was erroneous stating that the dispute fell within the realm of civil action due to the joint development agreement.

Conversely, the Respondent argued that the presence of an arbitration clause in the joint development agreement mandated that any dispute should be raised before an arbitrator, and criminal action under Section 138 of the N.I. Act is not maintainable. It contended that the liability of the accused to pay the amount covered by the cheque, constituting a security refundable deposit, only arises upon issuance of the completion certificate and delivery of possession to the accused.

Observations by the High Court:

The High Court held that parallel proceedings under both the Arbitration Act and criminal action under Section 138 of the N.I. Act are permissible. It held that any award resulting from arbitration proceedings could, at most, serve as a defense for the accused and cannot invalidate the maintenance of a complaint under Section 138 of the N.I. Act. Likewise, if a civil suit is decreed on the same cause of action covered by the cheque, the deposit made in the criminal case must be adjusted accordingly.

Regarding the Trial Court's decision to acquit the accused solely on the basis of the joint development agreement stipulating arbitration for dispute resolution, the High Court found this reasoning legally untenable.

Consequently, the High Court allowed the appeals filed by the Appellant-complainant and setting aside the Trial Court's judgment.

Case Title: M/S Durga Projects Inc Vs Sri. B.G. Babu Reddy

Case Number: Criminal Appeal No.434 Of 2014 (A) C/W Criminal Appeal No.433 Of 2014 (A)

Advocate for the Appellant: K. M. Archana and H. S. Dwarakanath

Advocate for the Respondent: N Kiran

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