Arbitration Clause Does Not Bar Criminal Proceedings

Source: Supreme Court

Why in News? 

A bench of Justice Vikram Nath and Justice Sandeep Mehta of the Supreme Court decided Indroneel Goho v. Razouvonuo Thong & Anr. (2026). The Court held that while the existence of an arbitration clause does not bar criminal proceedings, the court must first determine whether the allegations disclose the essential ingredients of the offence alleged. Finding that the ingredients of cheating under Sections 417 and 420 of the Indian Penal Code, 1860 (IPC), now Sections 318(2) and 318(4) of the Bharatiya Nyaya Sanhita, 2023 (BNS), were not made out, the Court set aside the Gauhati High Court's order and quashed the criminal proceedings against the appellant.

What was the Background of Indroneel Goho v. Razouvonuo Thong & Anr. (2026) Case? 

• The appellant was the CEO of Darjeeling Organic Tea Estates Private Limited (the Company). 
• Respondent No. 1, the proprietor of CR Traders, negotiated with the Company regarding a tea estate. In 2021, before the agreement, she wrote to UCO Bank about the tea estate and its mortgage with the Bank. 
• A Memorandum of Understanding (MoU) was signed between the Company and CR Traders. The appellant signed it as the Company's authorised signatory. 
• In June 2021, Respondent No. 1 transferred Rs. 40,00,000 to the Company's account in two transactions. 
• The Company later terminated the MoU on the ground that Respondent No. 1 had failed to comply with its terms and conditions. 
• In 2022, Respondent No. 1 filed a criminal complaint alleging that the appellant had induced her to part with the money by representing that the tea estate belonged to the Company, when it was in fact owned by another company and was the subject of proceedings involving UCO Bank. Summons was issued. 
• The appellant approached the Gauhati High Court under Section 482 of the Code of Criminal Procedure, 1973 (CrPC), now Section 528 of the Bharatiya Nagarik Suraksha Sanhita, 2023 (BNSS). He argued that:  
  • the dispute was purely contractual; 
  • the MoU was entered into by the Company and not by him personally; 
  • the money went into the Company's account; and 
  • the Company itself had not been made an accused. 
• The High Court dismissed the petition, holding that a prima facie case under Sections 417 and 420 IPC was made out and that the arbitration clause in the MoU was no ground for quashing. 
• Aggrieved, the appellant approached the Supreme Court.

What were the Court's Observations? 

On the effect of an arbitration clause: 

• The High Court was correct that an arbitration clause does not, by itself, bar criminal proceedings. 
• However, that proposition does not answer the real question. The court must first determine whether the allegations disclose the essential ingredients of the offence alleged. 

On the distinction between breach of contract and cheating: 

• Relying on G. Saminathan v. State (represented by the Sub-Inspector of Police), the Court reiterated that for the offence of cheating, the complainant must show fraudulent or dishonest intention at the time the promise or representation was made. 
• For an offence under Sections 417 and 420 IPC, the dishonest intention must exist at the inception of the transaction and must have induced the complainant to part with property. 
• A subsequent failure to perform a contractual obligation cannot, by itself, lead to an inference of such intention. 

On the position of the appellant: 

• The MoU was between Respondent No. 1 and the Company. The appellant signed it only as the CEO and authorised signatory of the Company. 
• The amount of Rs. 40,00,000 was transferred directly to the Company's account. There was no allegation that the appellant received or appropriated any part of it for his personal benefit. 

On the alleged false representation: 

• The complaint itself suggested that the appellant was aware that the tea estate and factory did not belong to the Company, and this had to be read in the context of the transaction as a whole. 
• Respondent No. 1 knew that the tea estate was mortgaged with UCO Bank. 
• The MoU itself contemplated clearing UCO Bank's dues and encumbrances and eventually acquiring the tea estate. 
• The record indicated that the Company was in possession of and operating the tea estate, and had substantial claims concerning it. 
• In these circumstances, a bare assertion that the appellant knew the representation to be false did not establish dishonest intention at the inception of the transaction. 

On the nature of the dispute: 

• Whether the termination of the MoU was valid, and whether Respondent No. 1 was entitled to a refund or other relief, are civil questions. 
• Such issues cannot take on a criminal character merely because the contractual relationship later broke down. 
• Continuing the prosecution would give a predominantly contractual dispute the colour of a criminal case and would amount to an abuse of the process of law. 

Conclusion: 

• The Court allowed the appeal and set aside the High Court's order dated 13.05.2025 in Criminal Petition No. 32 of 2022. 
• C.R. Case No. 17 of 2022 pending before the Judicial Magistrate First Class, Dimapur, Nagaland, and all proceedings arising from it, were quashed insofar as the appellant was concerned. 
• The Court clarified that Respondent No. 1 remains free to pursue any remedy available in law for her civil or contractual claims.

What is Section 318 of the BNS? 

About: 

• Section 318 of the Bharatiya Nyaya Sanhita, 2023 defines and punishes the offence of cheating. 
• It consolidates Sections 415, 417, 418 and 420 of the IPC into a single provision. 

Provisions: 

• Section 318(1) — Definition (Section 415 IPC): Whoever, by deceiving any person, fraudulently or dishonestly induces the person so deceived to deliver any property to any person, or to consent that any person shall retain any property, or intentionally induces the person so deceived to do or omit to do anything which he would not do or omit if he were not so deceived, and which causes or is likely to cause damage or harm to that person in body, mind, reputation or property, is said to "cheat". 
• Section 318(2) — Punishment for cheating (Section 417 IPC): Imprisonment of either description for a term which may extend to three years, or fine, or both. 
• Section 318(3) — Cheating with knowledge of wrongful loss to a person whose interest the offender is bound to protect (Section 418 IPC): Imprisonment which may extend to five years, or fine, or both. 
• Section 318(4) — Cheating and dishonestly inducing delivery of property (Section 420 IPC): Imprisonment which may extend to seven years, and fine. 

Essential Ingredients of Cheating: 

• Deception of a person, by a false or misleading representation or by dishonest concealment of facts. 
• Fraudulent or dishonest inducement of that person to deliver property, or to do or omit to do something. 
• Such dishonest or fraudulent intention must exist at the time of making the representation, that is, at the inception of the transaction. 
• Damage or harm, or likelihood of it, to the person deceived (for Section 318(1) cases not involving delivery of property). 

Breach of Contract vs. Cheating: 

• Every breach of contract does not amount to cheating. A mere failure to keep a promise, without dishonest intention at the outset, gives rise only to civil liability. 
• Courts have repeatedly cautioned against giving civil disputes a criminal colour to pressurise the other party into settlement, and have treated such prosecutions as an abuse of process. 

Liability of Company Officers: 

• The IPC and BNS do not contain any general provision fastening vicarious liability on directors or officers for offences committed by a company. 
• An officer can be prosecuted only where there are specific allegations of his own active role and criminal intent, or where a statute expressly provides for vicarious liability, as held in Sunil Bharti Mittal v. CBI (2015). 
• Signing an agreement merely as the company's authorised signatory, without more, does not make the officer personally liable for cheating. 

Power to Quash Proceedings (Section 528 BNSS): 

• Section 528 of the BNSS (corresponding to Section 482 CrPC) saves the inherent power of the High Court to make orders necessary to give effect to any order under the Sanhita, to prevent abuse of the process of any court, or otherwise to secure the ends of justice. 
• Following State of Haryana v. Bhajan Lal (1992), proceedings may be quashed where the allegations, even if taken at face value, do not prima facie constitute any offence, or where the proceedings are manifestly attended with mala fides or instituted with an ulterior motive.