Arbitration Clause Doesn't Automatically Bar Criminal Proceedings

Case title:

Cr.M.P. No. 1241 of 2016 and its analogous cases

Date of Order:

Bench:

Justice Sanjay Kumar Dwivedi

Parties:

1. Asit C. Mehta Investment Intermediates Ltd.,

2. Deena Asit Mehta 

3. Kirit Himatlal Vora, Kriti H. Vora

4. Mangalam Securities. 

5. Hari Shankar Modi vs

1. The State of Jharkhand. 

2. Rajendra Prasad 

SUBJECT

The case was pending in the arbitration centre, the interference of High Court was analyzed. Consequences of concealing material facts and if a breach o contract is a criminal breach or bot was read into. 

IMPORTANT PROVISIONS

Indian Penal Code, 1860

Section 120-B: Punishment for Criminal conspiracy

Section 405: Criminal breach of trust.

Section 409: Criminal breach of trust by public, servant, or by banker, merchant or agent.

Section 415: Cheating

Section 418:  Cheating with knowledge that wrongful loss may ensue to a person whose interest the offender is bound to protect

Section 420: Cheating and dishonestly inducing delivery of property

Arbitration & Conciliation Act, 1996

Section 34: Application for setting aside arbitral awards

Criminal Procedure Code,

Section 482: Saving of inherent power of High Court.

BRIEF FACTS

• In the first petition, the complainant lodged a case where the accused persons are a Stock Broker and a Depository participant, sub stock broker respectively. 
• The accused persons entered into a tripartite agreement with the complainant for which they obtained signatures on too many printed papers in a booklet including the power of attorney. 
• The accused fraudulently and dishonestly violated the terms and conditions of the agreement and caused immense loss to the complainant.
• The complainant sent a notice to the accused which they received and the complainant subsequently revoked the power which was originally given to them. 
• It is further stated that the accused, by suppressing so many important facts, filed an arbitration application before the National Stock Exchange of India Limited who on its turn without applying its mind, mechanically started the arbitration proceeding and illegally appointed the arbitrator.
• The complainant challenged the power and jurisdiction of the arbitrator.
• In the second petition, one of the accused is the sub broker and the associate of franchise of one of the other accused. 
• In order to promote their broking business, the accused persons induced the complainant to invest money in the future segment of theirs. 
• One of the accused, in criminal conspiracy with other two accused deceived the complainant and fraudulently and dishonestly induced the complainant to deliver shares of cash segment as security.  

ISSUES RAISED

To quash the criminal proceedings and the order taking cognizance.

ARGUMENTS ADVANCED BY THE APPELLANT

1. The complaint does not disclose any criminal offence under section 420 or 120-B of IPC. The case in question is a purely civil dispute, the remedy for which lies before a civil court. In that circumstance, allowing the police to continue their investigation would subsequently amount to abuse of process of court. A mere breach of contract does not attract criminal liability and gives rise to only civil offences. 
2. But as held by this hon’ble court in Hridaya Ranjan Prasad Verma vs. State of Bihar [2000 4 SCC 168], there is a fine line of difference between a mere breach of contract, which is a civil offence and cheating, which attracts criminal liability. In the present case, no dishonest or fraudulent intention could be made out. 
3. After examining the FIR, it was held that the allegations did not match up to the offences constituted under section 405 and 420 of IPC, 1860. Thus, even if allegations are made where the accused has failed to keep his promise and with the intention of cheating others, if there was no culpable intention at the time of making the promise then no offence under Section 420 IPC can be said to have been made out. In the instant case, there is nothing in the material available to suggest that the appellants had any mala fide intention against the respondent which could be inferred from the MoU entered into between the parties.
4. There is no debate with reference to the legal proposition that in case of breach of trust or cheating are both a civil wrong and a criminal offence, but under some circumstances where the act alleged would predominantly be a civil such an act does not qualify as criminal offence.

ARGUMENTS ADVANCED BY THE RESPONDENT

1. They contend that the facts mentioned before the court are wrong and material facts were suppressed. 
2. The previous case of arbitration was already disposed of by the Bombay High Court whereas the present case arbitration proceeding is pending. This ground itself is sufficient for the present petition to stand rejected. 
3. Relying on several landmark cases, the counsel for respondents put their point across that frivolous allegations made infront of the court should be rejected.  The courts should be willing to distinguish between the parties who have come with clean hands and who have suppressed material facts to attain some unscrupulous design. 
4. With regard to the arbitration, he submits that if the criminality is made out even if the arbitration clause is there, the criminal case can be maintained.

JUDGEMENT ANALYSIS

The court analysed every document presented by both sides. From the facts and circumstances, it was beyond doubt that the intention of the petitioner company was not proper and it is the clear case of entrustment and cheating; however, this can be decided in the court of law where trial is still under process.

The cognizance/ proceeding was quashed. commercial transaction and imitation of arbitral proceedings: Not a material fact. Merely because the law provides for remedy for breach of contract for arbitral proceeding initiated at the instance of the petitioner that by per se overlay the court to come to the conclusion that the civil remedy is only the remedy and the initiation of the criminal proceeding is abuse of the process of the court for exercising inherent power to quash such proceedings. This aspect has been recently covered by the Hon’ble Supreme Court in the case of Priti Saraf & Anr. 

The court concluded that if the case is of civil nature, then High Court is required to interfere. The manner which the suppression is done in filing the Cr. M. Ps. this court was further restrained considering that the truth served as one of the essential links in the judicial delivery system which was used in the pre-Independence period and the people used to maintain the said truth into the courts regardless of the outcome.

Any other petitions stand dismissed. 

It is clarified that trial court shall continue in the exercise its functions in relation to the matter in accordance with the law without prejudice arising from the present order as this order has been passed bearing in mind the factors of Section 482 Cr.P.C.