Supreme Court: Allegations Of Fraud are Arbitrable When They Relate To Civil Dispute

 A recent judgment of this Court in Avitel Post Studioz Limited and Ors. v. HSBC PI Holdings (Mauritius) Limited18 has examined the law on invocation of 'fraud exception' in great detail and holds that N. Radhakrishnan as a precedent has no legs to stand on. We respectfully concur with the said view and also the observations made in paragraph 14 of the judgment in Avitel Post Studioz Limited, which quotes observations in Rashid Raza v. Sadaf Akhthar MANU/SC/1249/2019 : (2019) 8 SCC 710:

4. The principles of law laid down in this appeal make a distinction between serious allegations of forgery/fabrication in support of the plea of fraud as opposed to "simple allegations". Two working tests laid down in para 25 are: (1) does this plea permeate the entire contract and above all, the agreement of arbitration, rendering it void, or (2) whether the allegations of fraud touch upon the internal affairs of the parties inter se having no implication in the public domain."

to observe in Avitel Post Studioz Limited:

it is clear that serious allegations of fraud arise only if either of the two tests laid down are satisfied and not otherwise. The first test is satisfied only when it can be said that the arbitration Clause or agreement itself cannot be said to exist in a clear case in which the court finds that the party against whom breach is alleged cannot be said to have entered into the agreement relating to arbitration at all. The second test can be said to have been met in cases in which allegations are made against the State or its instrumentalities of arbitrary, fraudulent, or mala fide conduct, thus, necessitating the hearing of the case by a writ court in which questions are raised which are not predominantly questions arising from the contract itself or breach thereof but questions arising in the public law domain.

The judgment in Avitel Post Studioz Limited interprets Section 17 of the Contract Act to hold that Section 17 would apply if the contract itself is obtained by fraud or cheating. Thereby, a distinction is made between a contract obtained by fraud, and post-contract fraud and cheating. The latter would fall outside Section 17 of the Contract Act and, therefore, the remedy for damages would be available and not the remedy for treating the contract itself as void.

47. In view of the aforesaid discussions, we overrule the ratio in N. Radhakrishnan inter alia observing that allegations of fraud can be made a subject matter of arbitration when they relate to a civil dispute. This is subject to the caveat that fraud, which would vitiate and invalidate the arbitration clause, is an aspect relating to non-arbitrability. 

IN THE SUPREME COURT OF INDIA

Civil Appeal No. 2402 of 2019, 

Decided On: 14.12.2020

 Vidya Drolia and Ors. Vs.  Durga Trading Corporation and Ors.

Hon'ble Judges/Coram:

N.V. Ramana, Sanjiv Khanna and Krishna Murari, JJ.

Citation: MANU/SC/0939/2020

Read full judgment here: Click here

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Whether failure to pay Mobile postpaid user charges amounts to offence of cheating U/S 420 of IPC?

 The prosecution case as against the petitioner as per Annexure 1 report is that, he, after having obtained a mobile postpaid connection in his name, failed to discharge his liability for user charges for a period of 5 months from 21.7.2006 to 21.11.2006. The allegation is that the petitioner incurred a gross monetary liability of ` 97,678.5/- for the period and after making a part payment of ` 10,580/-, he kept the balance in arrears. The default on the part of the petitioner, according to the prosecution, amounts to an offence of cheating punishable under Section 420 of IPC.

3. The petitioner's case is that the transaction in question is based on an agreement between the parties and therefore the alleged liability under the transaction is purely of civil nature. In as much as what is made out is only a civil liability out of the transaction in question, the petitioner seeks the consequential criminal proceedings in C.C. No. 1518/2008 pursuant to the Annexure 1 final report, to be quashed.

5. On marshaling the materials on record, I find that the transaction involved as between the parties is one arising out of a civil dispute. The purported liability of the petitioner seems to have arisen from breach of promise or agreement other than a breach followed by any dishonest intention to cheat the de facto complainant. Mere breach of trust or agreement will not by itself amount to a criminal offence under Section 420 IPC. In order to make out an offence under Section 420, the prosecution has to show that the dishonest intention to cheat existed at the time when the alleged promise in question was made. That legal proposition does not match the materials on record as well as the allegations made out through the Annexure 1 report. Consequently being satisfied that what is involved in the present case is one of civil dispute between parties, I hold that this seems to be a fit case where the criminal proceedings pending before the Additional Chief Judicial Magistrate Court, Ernakulam requires to be quashed.

IN THE HIGH COURT OF KERALA AT ERNAKULAM

Crl. M.C. No. 1813 of 2014

Decided On: 08.03.2019

Abdul Hakkem P.V. Vs.  State of Kerala and Ors.

Hon'ble Judges/Coram:

T.V. Anil Kumar, J.

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Whether mother in law can recover money from son in law before family court?

Adjudication of matrimonial disputes in a congenial atmosphere is the function of the Family Court. No doubt, a broad and liberal approach is required in determining the jurisdiction of the Family Court. But, it does not mean that, the Family Court has the jurisdiction to adjudicate matters not even remotely connected with marriage and marital relationship. Exclusion of jurisdiction of civil courts cannot be readily inferred. The expression "in circumstances arising out of a marital relationship" in Clause (d) of the explanation to Section 7(1) of the Act, denotes such circumstances surrounding, preceding and closely following a marital relationship, that is, the principal event of marriage and the eventualities surrounding the same. The "circumstances" must have a direct bearing on marriage. Prime consideration should be as to whether the cause of the lis has got any bearing with marital relationship. If the cause of action is emerging out of any circumstances related to matrimonial relationship and the same could not have existed independently, then the suit can be maintained before the Family Court, and it will fall under Clause (d) of the explanation to Section 7(1) of the Act. It is not necessary that, parties to a suit or proceeding under that clause, shall be parties to a marriage.

23. On an analysis of the facts of the present case on the basis of the parameters stated above, it is evident that the foundation of the claim for money made by the appellant against her daughter and son-in-law is not any circumstance arising out of a marital relationship. The amount was allegedly given by her to the respondents purely on account of her confidence and faith in them. There is no plea, as contended by the learned counsel for the appellant, that she gave the money at the instance of her husband or due to the pressure or influence made on her by her husband. The transaction between the appellant and the respondents has no connection with her marital relationship with her husband. The cause of action for the claim of money made by the appellant does not relate to the matrimonial relationship between her and her husband. The cause of action for realisation of money from the respondents would exist independently. The jurisdiction conferred on the Family Court is settlement of issues arising out of matrimonial causes. The dispute in the instant case is purely a civil dispute which one could agitate and seek relief from an ordinary civil court. The dispute is not one arising out of any marital relationship.

IN THE HIGH COURT OF KERALA AT ERNAKULAM

Mat. Appeal No. 541 of 2016

Decided On: 09.11.2018

 Vijayalakshmy Vs.  P.K. Jayashree and Ors.

Hon'ble Judges/Coram:

C.K. Abdul Rehim and R. Narayana Pisharadi, JJ.

Citation: AIR 2019 Kerala 53

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Whether criminal prosecution can be initiated at instance of person who has no title to property?

The further legal contention that the pendency of a civil dispute would not preclude criminal proceedings or that the end result of the two proceedings being different or that both are not dependant on each other, is concerned, in the present case on hand, there is no established civil right of the complainant or his mother-in-law. There is no civil dispute pending which would determine any such right with any degree of finality. The criminal proceedings are instituted in a vacuum and may possibly result in civil rights being conferred by proxy as it were, in view of the assumptions on which the criminal proceedings are instituted by the complainant and entertained by the court below, albeit these infirmities. The facts and circumstances are not such that both civil and criminal liability is attracted as in the case of Vijayendra Kumar v. State of Rajasthan, MANU/SC/0092/2014 : 2014 AIR SCW 1197, which is cited in support of the above propositions which are not relevant for the case on hand.

Further, the allegation of having engineered fraudulent mutation entries as against the petitioners is wholly irrelevant at the instance of the complainant, in the absence of an established claim to ownership by Mallamma. This is the primary error in the approach of the Investigating Officer in submitting the Charge Sheet and in the court below accepting the same and having taken cognizance of the alleged offences and having issued process against the accused.

The contention that at the stage of issuing summons, it is only a minimum scrutiny that is expected of the court, cannot be implied to mean that the court can overlook glaring circumstances that would not make out a case as suggested by the complainant. When the court below has already failed in its duty to examine the bare details, which would indicate that there is no case made out against the accused, the indignation expressed over the seeming fraud on the part of accused No. 1 on analysis of records and documents, to which the complainant or his mother-in-law were not privy and the parties to those documents not seeking to raise any controversy over the same, would result in pure adventurism on the part of the prosecution in alleging a conspiracy against the petitioners, while having thought it fit to drop Accused No. 4 & 5 from the proceedings, when they are in fact holding the portion of land claimed by Mallamma.

IN THE HIGH COURT OF KARNATAKA AT BENGALURU

Criminal Petition Nos. 979 of 2013 and 5438 of 2012

Decided On: 03.11.2016

 S. Muniraju and Ors.

Vs.

 State of Karnataka and Ors.

Hon'ble Judges/Coram:

Anand Byrareddy, J.

Citation: 2017 CRLJ 845

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Whether accused can stop payment of cheque on ground that area of land sold to him is less?

I   have   gone   through   the   impugned   judgment   to

ascertain the reasoning of the Magistrate in passing the order of

acquittal.    The Magistrate has referred to the evidence of the

accused   no.1,   wherein,   he   had   stated   that   an   amount   of

Rs.4,79,000/­ was not paid and the payment was kept pending for

the reason of clearance of title, survey of land, clearance from one

Jayantilal   Shah   and   Arun   Mehta,   with   whom,   apparently,   the

complainant had a dispute, etc.   The Magistrate also referred to

the evidence of the accused no.1, wherein, he stated that during

the survey of the land it was found that it was less by 137 sq.mts.

This fact was just believed by the Magistrate, though no details of

such survey were given by the accused no.1 in his evidence.  The

Magistrate also referred to the evidence of Jayantilal Shah as the

second witness for the defence, with whom, the complainant, as

aforesaid, had a dispute.   This dispute was regarding the same

land, and the said Jayantilal Shah had written to the accused no.1

informing him of the dispute and advising him not to have a

transaction with the complainant, as the transaction in respect of

the same land was pending between him and the complainant.

The  Magistrate  then  referred  to  the  provisions  of  Section  54

of   the   Indian   Contract   Act, Section 52 of the Transfer of

Property Act, Sections 18 and 19 of the Indian Contract Act and

came to the conclusion that the accused were not liable to pay the

amount of the contract.  Apart from the fact that the reference to

the said provisions was absolutely unwarranted and irrelevant in

the light of the controversy that was involved in the matter, the

fact remains that the only basis for the Magistrate's coming to the

conclusion that the accused were not liable to pay the amount,

was that the area of the plot of land in question was indeed less

than what was agreed to be sold.  The Magistrate, in that regard,

as aforesaid, only relied on the oral testimony of the accused no.1

to that effect, and did not require any report of any such survey.

The Magistrate was of the view that the complainant had not

specifically denied that the area of the plot of land was less while

giving rejoinder to the reply of the accused to the demand notice

in   the   complaint   etc.     What   he,   however,   overlooked   is   the

assertion of the accused persons, in reply to the demand notice

was itself vague i.e. 'the area is noticed to be much less.'   The

Magistrate overlooked that the accused no.1 even did not give the

details as to when and by whom the survey of the land was taken.

The Magistrate did not bother to think that the alleged survey

was, admittedly, not taken in the presence of the complainant.

Such oral evidence of the accused no.1 could not have been relied

upon to hold that the area was indeed less.  Once that itself was

not established, there was no question of judging by reference to

the   provisions   of   the   Indian   Contract   Act   as   to   whether   the

accused were liable to pay the amount of the cheques in question

or   not.    The   Magistrate   overlooked   that   the   accused   had   not

approached any civil court for avoidance of the contract or any

other   appropriate   relief,   where   the   dispute   could   have   been

properly adjudicated upon, but were merely content with holding

back the part of the payment.   The Magistrate overlooked that

after the Agreement, Conveyance was effected and the property

was actually conveyed to the accused and was in their possession.

Moreover, as aforesaid, the Agreement at Exh.D1 clearly indicates

    that the accused had agreed to purchase the property on     'as it is

whe re it is condition.'  The evidence of the accused no.1 was

clearly,   contrary   to   the   terms   of   the   written   agreements   /

instruments and could not have been relied upon.

16 The   reasoning   of   the   Magistrate   and   the   approach

adopted by him was not in accordance with law.  Here, there was

a completed and clear transaction between the complainant and

the   accused,   and   cheques   had   been   issued   by   the   accused   in

favour of the complainant towards the payment of the balance

consideration in respect of the land purchased by them from the

complainant.    The object  of  Section 138 of  N.I.Act  is to  lend

credibility to the cheque transaction by bringing them on par with

transactions in cash.  Even assuming that the accused had a right

to recover the amount of compensation paid to the complainant,

on   the   basis   of   some   mistake   or   misrepresentation,   still,   the

accused were not entitled to withhold the payment of the cheque

which was agreed to be done when the Conveyance was effected.

The accused had got the property conveyed in their name by a

registered   Conveyance   Deed   and   it   was   not   open   for   them,

thereafter, to stop the payment of the cheque, which had been

issued towards the balance consideration, which was, as per the

notion   of   the   parties   at   the   time   when   the   Conveyance   was

effected, payable to the complainant.

17 Moreover, on facts, the stand of the accused persons

does   not   appear   to   be   sincere,   or   at   any   rate,   supported   by

satisfactory evidence.  In the first place, as aforesaid, that the area

of   the   plot   of   land   in   question   is   less,   itself   has   not   been

established.    Secondly,   the   accused   were   not   interested   in

approaching   a   civil   court,   where   the   issues   ­   (i)   whether   the

contract was voidable and the accused could avoid it, (ii) whether

there had been a fraud, misrepresentation or mistake, and (iii)

whether the accused were liable to recover some amount from the

complainant, and if so, how much, ­ could have been properly and

fully adjudicated.

18 This was a case where the cheques had been clearly

issued for the payment of what was agreed to be due and payable,

and that the payment would be received by the complainant on a

future date, was only an arrangement arrived at by the parties, by

mutual consent.  It was, infact, not necessary for the Magistrate to

have gone into the finer aspects of the matter in the prosecution in

respect of an offence punishable under Section 138 of the N.I.Act,

when, as per the notion of the parties, when the cheques were

given and when the transaction was completed, the accused were

liable to pay the amount.   There is no dispute that as per the

notion of the accused themselves, at that time, the amount was

due and payable to the complainant; and their claim is only that

the subsequent revelation made them realize that, that amount

should not be paid to the complainant.  If that was so, the proper

course for the accused persons would not be to stop the payment

of the cheques, but to raise the issue directly by approaching the

civil court and claiming refund of the excess amount, if any, paid

to the complainant.

19 The order of acquittal, as recorded by the Magistrate,

is not proper and legal. The accusation against the respondents

had been proved and they were liable to be convicted.

IN THE HIGH COURT OF JUDICATURE AT BOMBAY

CRIMINAL APPELLATE JURISDICTION

CRIMINAL APPEAL NO.116 OF 2006

PRADEEP KASHIRAM KADAM  V/s. K.A.VERGHESE AND OTHERS

CORAM : ABHAY M. THIPSAY, J.

DATE : 24th JUNE 2015.

Citation: 2016 ALLMR(CRI) 4838

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