Cheque issued u/s 8 of Indian Contract Act

 Read Section 138 the language is unambiguous that cheque issued or presented to discharge a liability or debt:-

The Supreme Court has ruled that criminal proceedings for issuing a cheque without sufficient balance in the account would be valid only if it is drawn for discharging a debt or liability. If it is issued to satisfy the terms of a compromise or settlement, Section 138 of the Negotiable Instruments Act could not be used to proceed against the drawer of the cheque.

The court stated so in the case, Lalit Kumar vs State of Uttar Pradesh. Earlier, two cheques were issued by the directors of a company and they were prosecuted. Meanwhile, there was a settlement under which Rs 5 lakh was to be paid to the creditor. However, this cheque also bounced, leading to another prosecution.

The Allahabad High Court rejected their plea to quash the proceedings. But on appeal, the Supreme Court stated that the latter cheque was issued in terms of a compromise agreement and not to satisfy any debt or payment due. Therefore, the second instance would not invite prosecution under Section 138. The high court judgment was set aside. 

 So Section 138 is not attracted and infact Section 8 of contract act is not satisfied

I don't agree with the above opinion.  If a cheque has been issued for any liability (In your case as a considertation of a proposal) and if it is dishonoured then it attracts the provisions of section 138 NI Act. 

It is not as a security but against consideration of proposal, if he did not fullfill proposal only then you can take plea of security. Else it attracts 138

Regards

adv.kamal.grover@gmail.com

section - 8 of the Indian Contract Act mentions one of the ingredients of a valid contract ...... when one files a case u/s - 138 of the N.I. Act, one doesn't mention that the cheque was issued u/s - 8 of the Indian Contract Act ....  but mentions against what transaction the said cheque was issued.

U mention that cheque was issued against a proposal ....... if the said proposal stands satisfied ...... then only the legal liability of paying for the same gets justified.

Dharmeshji,

In this case it is the defense of the accused that the cheque was not issued in discharge of any debt or liability but was issued as a consideration along with the proposal. Since the proposal becomes a contract on the acceptance of the proposal, theliability will come into existence only after the contract is concluded by acceptance of the proposal. Since in this case the cheque was drawn before the contract was concluded by acceptance, it is the defense of the accused that the cheque was not drawn in discharge of debt.  As per s.8 of contract act a contract can be brought into exitence by acceptance of consideration. Since the consideration did not materalise on account of dishonor the accused claims that the proposal was revoked before acceptance. Hence according to the accused since the cheque having been drawn along with the offer before acceptance there is no existing debt or liability. hence s.138 is not applicable.

Anilji pls. mention transaction/what was the proposal/facts of the case so as to have a clearer picture as to why the cheque was issued .... this looks as if we are going only theoritical without any practical reasonings .... 

Dharmeshji,

Facts of the case was, Accused was a service provider. Complainant availed of his services and paid him 90% of the contractual amount. Thereafter the Complainant started to have grievance with regard to the services rendered by the Accused and was tarnishing the image of the Accused in the industry. Therefore the Accused in order to have an amicable settelement with the complainant was ready to accept the offer of cancelation of the original contract. As a counter proposal to the offer the accused issued the dishonored cheque with certain terms and conditions for the acceptance of the counter proposal. One of the condition of the counte proposal for cancellation of the original contract was that the complainant has to accept the counter proposal by acknowledging it under his signature and the rubber stamp. The Complainant did not do so.  In fact during the trial the complainant under cross examination took the stand he had not accepted the counter proposal for cancellation of the original contract.

Therefore the accused pleaded that since the contract for cancellation has not come into existence there is no existing debt or liability.  Whereas the trial court took the view that since it is a criminal trial the court is not concerned with the law of contract.  It was pointed out to the trial court that u/s 138 one is concerned with liability and therefore the liability can be either statutory or contractual. Yet the trial court did not bother with the law of contract.

In Appeal  the Appellate court took the view that the complainant by  depositing the cheque has accepted the counter proposal of cancellation and therefore contractual liability has come into exitence and therefore accused is liable u/s 138. This view was held by the Appellate court despite overwhelming evidence  by the  Complainant that  he has not accepted the porposal of cancellation.

My contention is if at all the accused is liable he would be liable only if the contract of cancellation has come into existence.  Merely because the complainant is not satisfied with the service rendered under the original contract the accused would not be liable to refund the amount under the original contract.

Since in this case admittedly the offer of cancellation of the original contract has not be accepted by the Complainant no liability has come into existence against the accused.  Even if the Appellate courts reliance on s. 8 is correct and that a contract of cancellation has come into existence, yet the accused would not be liable u/s 138 because cheque was drawn and accepted before the liability has come into existence by formation of contract of cancellation. Looked at from a different angle, it can also be argued as the cheque was drawn as consideration for counter proposal, the dishonour of the cheque would only mean that the proposal of cancellation of original contract  was withdrawn before acceptance by the Complainant.

Therefore my contention in either case the accused cannot be fastened with a liability u/s 138.

Mr.Menon,

As I understand from your facts of the case is that the Complainant has entered in to an agreement with the accused for rendering certain services with an advance payment of 90% of the Contracted value.Now that the Complainant has found the services of the Accused not to his satisfaction he might have blacklisted the accused instead of claiming liquidated damages from the accused. The accused has intelligently sidetracked the whole of the contract and counter offered for disposing off the original contract. This how it happens in the business parlance.Here the original contract is alive on the dishonour of the cheque offered by the accused.In tendering processes if the Tender is submitted with a cheque as EMd and up on dishonou,the tender submitted is disqualified.Similar is the case.Therefore the accused is not liable u/s 138.   Regards,                  amanoranjan@rediffmail.com. 

Sir,

You are right.  I also hold the same view as yours.  However Sessions Judge has rejected the said view. The matter is in High Court now.

Interesting facts n views. pl let us also know final order on this query.

INTERESTING  WAIT FOR FINAL ORDER  OF HIGH COURT I THINK IT WILL BEST RULLING IN N.I.ACT

Was looking for this. Thank you ma'am for such an excellent answer!