Supreme Court Quashes Criminal Proceedings in Contract Dispute: Naresh Kumar vs. State of Karnataka (2024)

Introduction

Date of the Judgment: 12 March 2024

Citation: 2024 INSC 196

Judges: Justice Sudhanshu Dhulia and Justice Prasanna B. Varale

Can a civil dispute, such as a breach of contract, be escalated into a criminal offense? The Supreme Court of India recently addressed this critical question in a case involving a contractual disagreement between a bicycle manufacturer and a contractor. The court examined whether the dispute, which primarily concerned the number of bicycles assembled and the corresponding payment, warranted criminal charges of cheating and breach of trust. The bench, composed of Justice Sudhanshu Dhulia and Justice Prasanna B. Varale, delivered the judgment.

Case Background

The appellants, Naresh Kumar and another, were the Assistant Manager (Marketing) and Managing Director of a bicycle manufacturing company. They had contracted with Respondent No. 2 for the assembly, transport, and delivery of bicycles at a rate of Rs. 122 per bicycle. The contractor claimed to have assembled 83,267 bicycles, raising invoices for Rs. 1,01,58,574. However, the company paid only Rs. 35,37,390. Consequently, the contractor filed a First Information Report (FIR) on 24.05.2017, alleging criminal breach of trust and cheating under Sections 406, 420, and 506 of the Indian Penal Code at P.S. Doddaballapura, Bangalore Rural District. The appellants were made accused in the chargesheet dated 30.05.2019.

Subsequently, a settlement was reached between the parties on 27.12.2017, where the company agreed to pay an additional Rs. 26 lakhs to the contractor, which was duly paid on 29.12.2017. This brought the total payment to Rs. 62 lakhs. However, the contractor later claimed that they were coerced into the settlement and that the criminal proceedings should continue. The High Court of Karnataka dismissed the appellants’ petition to quash the FIR, stating that the discrepancy in the number of bicycles claimed to be assembled and the amount paid indicated a prima facie case of cheating.

Timeline

Course of Proceedings

The appellants approached the High Court of Karnataka under Section 482 of the Criminal Procedure Code seeking to quash the FIR, arguing that the dispute was civil in nature and the criminal proceedings were an abuse of process. The High Court, however, dismissed their petition. The High Court was of the opinion that since the appellants had claimed that the complainant assembled only 28,995 bicycles, which would make them liable to pay only an amount of Rs. 35 lakhs, but instead the appellants had paid an amount of Rs.62 lakhs which shows that the actual number of bicycles which were assembled by the complainant was much more than 28,995 bicycles, as claimed by the appellants and therefore, the appellants had an intention to cheat the complainant right from the beginning. Thus, it was held by the High Court that prima facie a case of cheating is made out against the appellants.

Legal Framework

The case involves the interpretation of several sections of the Indian Penal Code, specifically:

• Section 406 of the Indian Penal Code: This section deals with the punishment for criminal breach of trust.
• Section 420 of the Indian Penal Code: This section defines and penalizes cheating and dishonestly inducing delivery of property.
• Section 506 of the Indian Penal Code: This section deals with the punishment for criminal intimidation.

The court also considered Section 482 of the Criminal Procedure Code, which grants inherent powers to the High Court to prevent abuse of the process of any court or otherwise to secure the ends of justice.

Arguments

The appellants argued that the dispute was primarily civil in nature, concerning the number of bicycles assembled and the corresponding payment. They contended that the settlement reached on 27.12.2017, where an additional Rs. 26 lakhs was paid, was to bring a quietus to the dispute and not an admission of guilt. They argued that the criminal proceedings were an abuse of process and should be quashed.

The respondent argued that the settlement was not entered into freely but under coercion. The respondent also argued that the company initially claimed that only 28,995 bicycles were assembled, which would amount to Rs. 35 lakhs, but later paid Rs. 62 lakhs, indicating that the actual number of bicycles assembled was higher and that the intention to cheat was present from the beginning.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issue addressed by the court was:

• Whether the dispute between the parties was essentially civil in nature and whether the criminal proceedings were an abuse of process.

Treatment of the Issue by the Court

Authorities

The Supreme Court relied on the following authorities:

Judgment

The court considered the following authorities:

• Paramjeet Batra v. State of Uttarakhand (2013) 11 SCC 673*: The court emphasized that the High Court should not hesitate to quash criminal proceedings which are essentially of a civil nature.
• Randheer Singh v. State of U.P. (2021) 14 SCC 626*: The court reiterated that criminal proceedings cannot be taken recourse to as a weapon of harassment.
• Usha Chakraborty & Anr. v. State of West Bengal & Anr. 2023 SCC OnLine SC 90*: The court held that where a dispute which is essentially of a civil nature, is given a cloak of a criminal offence, then such disputes can be quashed.
• Sarabjit Kaur v. State of Punjab and Anr. (2023) 5 SCC 360*: The court stated that a mere breach of contract would not attract prosecution for criminal offence in every case.
• Vesa Holdings (P) Ltd. v. State of Kerala, (2015) 8 SCC 293*: The court held that every breach of contract would not give rise to the offence of cheating, and it is required to be shown that the accused had fraudulent or dishonest intention at the time of making the promise.

What weighed in the mind of the Court?

The Supreme Court was primarily influenced by the fact that the dispute between the parties was essentially civil in nature, revolving around the number of bicycles assembled and the due payment. The Court emphasized that a mere breach of contract should not be treated as a criminal offense unless there is a clear indication of fraudulent or dishonest intention from the beginning. The Court also noted that the settlement between the parties, where an additional amount was paid, was to bring a quietus to the dispute and not an admission of guilt. The Court was also influenced by the fact that the complainant had accepted the additional amount paid as a settlement.

Key Takeaways

• A mere breach of contract does not automatically constitute a criminal offense.
• Criminal proceedings should not be used to settle civil disputes.
• The High Court has inherent powers under Section 482 of the Criminal Procedure Code to quash criminal proceedings that are essentially civil in nature.
• Settlements reached between parties should be respected, and additional payments made in settlement should not be used to infer criminal intent.

Directions

The Supreme Court set aside the order of the High Court dated 02.12.2020 and quashed the criminal proceedings arising out of FIR No. 113 of 2017.

Development of Law

The ratio decidendi of this case is that criminal proceedings should not be used to settle civil disputes, and a mere breach of contract does not automatically constitute a criminal offense. This case reinforces the principle that criminal law should not be used as a tool for harassment or to settle contractual disagreements, and it reiterates the importance of using the inherent powers of the High Court under Section 482 of the Criminal Procedure Code to prevent abuse of the process.

Conclusion

The Supreme Court’s decision in Naresh Kumar vs. State of Karnataka (2024) clarifies that disputes arising from contractual breaches should not be automatically treated as criminal offenses. The court emphasized that the intention to cheat must be present from the beginning for a criminal charge of cheating to hold. In this case, the court found that the dispute was primarily civil in nature and that the criminal proceedings were an abuse of process. The court set aside the High Court’s order and quashed the criminal proceedings, reinforcing the principle that civil disputes should be resolved through civil remedies rather than criminal prosecution.