Proceedings Under Section 138 of Negotiable Instruments Act And Arbitration Are Parallel In Nature Rather Overlapping: Madhya Pradesh High Court

Brief Facts:

The Applicant approached the Madhya Pradesh High Court (“High Court”) under Section 11 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) seeking several reliefs. These included the filing of certified copies, the appointment of an independent arbitrator(s) as per arbitration agreement clause 14.7, asserting territorial jurisdiction for appointing an independent sole arbitrator, and any further orders deemed fit by the High Court.

The agreement was executed between the Petitioner and Respondent, with the Petitioner as the Supplier of Electricity and the Respondent as the Purchaser. The agreement involved the supply of electricity through a tripartite agreement among the Supplier, The Madhya Pradesh Power Management Company Ltd. (M.P.P.M.C.L.), Jabalpur, and Madhya Pradesh Paschim Kshetra Vidhyut Vitaran Company Ltd. (M.P.P.K.V.V.C.L.), Indore, with the Purchaser being the recipient. Disputes arose regarding payment, leading to the issuance of a demand notice and a subsequent legal notice invoking arbitration. The Applicant prayed for arbitration due to the Respondent's lack of response to the notices, citing Clause 14.7 of the agreement.

The Respondent opposed the prayer, citing payments made via cheques totaling Rs. 21,25,244/. The Respondent argued that since these cheques were issued and later dishonored, leading to proceedings under Section 138 of the Negotiable Instruments Act, the Applicant lacked locus standi to file under Section 11 of the Arbitration Act.

Observations by the High Court:

The High Court noted that the agreement, primarily a Power Purchase Agreement, outlined a dispute resolution mechanism in Clause 14.7, stipulating arbitration for resolving disputes between the parties. Despite the Applicant's initiation of the dispute through notices, the Respondent did not respond. The High Court held that the quantum of the amount in dispute, the nature of the dispute, and its resolution could only be determined through arbitration, as agreed upon by the parties.

Regarding the maintainability of the application under Section 11 of the Arbitration Act concerning pending proceedings under Section 138 of the N.I. Act, the High Court held that there were distinct jurisdictional realms of these proceedings. It noted that the two proceedings are parallel rather than overlapping, with Section 138 of the N.I. Act being limited to dishonored cheques. The High Court highlighted that arbitration serves as a remedy for breach of agreement and cannot substitute criminal prosecution. The High Court emphasized that the arbitrator cannot conduct a trial for offenses, but rather, arbitration allows parties to present their case fully. Thus, the High Court concluded that the appointment of an arbitrator was imperative for resolving the dispute, as the dispute extended beyond the dishonored cheques.

Consequently, the High Court allowed the application and granted the prayer for the appointment of an arbitrator. Subsequently, both parties suggested the name of Justice M.K. Mudgal, a former Judge of the Madhya Pradesh High Court, as the arbitrator.

Case Title: M/S Banco Construction Pvt Ltd Vs Narmada Extrusions Ltd

Case Number: ARBITRATION CASE No. 40 of 2022.

Advocate for the Applicant: Arun Dudhawat

Advocate for the Respondent: T.C. Narwariya.

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