Supreme Court Upholds Quashing of Criminal Proceedings in Contract Dispute: Vinod Natesan vs. State of Kerala (2018)

Date of the Judgment: 11 December 2018

Citation: 2018 INSC 1078

Judges: M. R. Shah, J., Mohan M. Shantanagoudar, J.

Can a contractual dispute over non-payment of dues be escalated to a criminal offense? The Supreme Court of India addressed this question in the case of Vinod Natesan vs. State of Kerala, where the court examined whether a breach of contract for intellectual services could be considered criminal cheating. The Court ultimately held that a civil dispute cannot be converted into a criminal case, affirming the High Court’s decision to quash the criminal proceedings. The judgment was delivered by a bench of Justices M. R. Shah and Mohan M. Shantanagoudar, with Justice M. R. Shah authoring the opinion.

Case Background

The appellant, Vinod Natesan, filed a complaint against the respondents, alleging offenses under Section 420 (cheating) and Section 406 (criminal breach of trust), read with Section 34 (acts done by several persons in furtherance of common intention) of the Indian Penal Code (IPC). The complaint arose from an agreement where the respondents were to provide intellectual services for marketing the appellant’s products. The appellant claimed that the respondents failed to pay the agreed amount, paying only Rs. 1,50,000 out of the total due, and subsequently withdrew from the agreement. The appellant argued that this non-payment and withdrawal constituted cheating.

The appellant contended that after availing his intellectual services, the accused did not make the full payment, including the one month’s notice before terminating the contract/agreement.

Timeline:

Course of Proceedings

The Judicial First Class Magistrate Court-III at Kozhikode registered the complaint as CC No. 139 of 2015. The respondents then approached the High Court of Kerala under Section 482 of the Code of Criminal Procedure (Cr.PC) to quash the criminal proceedings, arguing that the dispute was civil in nature and did not disclose any cognizable offense under Sections 406 and 420 of the IPC. The High Court agreed with the respondents and quashed the criminal proceedings, stating that the dispute was essentially a civil matter being improperly converted into a criminal one. The original complainant, feeling aggrieved, appealed to the Supreme Court.

Legal Framework

The case primarily revolves around the interpretation of Section 406 (punishment for criminal breach of trust) and Section 420 (cheating and dishonestly inducing delivery of property) of the Indian Penal Code, 1860. These sections are invoked when there is a dishonest intention to cause wrongful loss or gain. Section 406 of the IPC states:

“406. Punishment for criminal breach of trust.—Whoever commits criminal breach of trust shall be punished with imprisonment of either description for a term which may extend to three years, or with fine, or with both.”

Section 420 of the IPC states:

“420. Cheating and dishonestly inducing delivery of property.—Whoever cheats and thereby dishonestly induces the person deceived to deliver any property to any person, or to make, alter or destroy the whole or any part of a valuable security, or anything which is signed or sealed, and which is capable of being converted into a valuable security, shall be punished with imprisonment of either description for a term which may extend to seven years, and shall also be liable to fine.”

The court also considered Section 34 of the IPC, which deals with acts done by several persons in furtherance of common intention. The High Court’s decision was based on Section 482 of the Cr.PC, which allows the High Court to quash proceedings to prevent abuse of the process of law.

Arguments

Appellant’s Submissions:

• The appellant, appearing as party-in-person, argued that the respondents did not adhere to the agreement, failing to make the full payment of Rs. 3,00,000, thereby committing the offense of cheating.
• The appellant contended that the respondents availed his intellectual services but did not make the full payment, including the one-month notice payment before terminating the contract.
• The appellant pointed out that initially, the learned Judge dismissed the application to quash the proceedings, but later allowed it, which the appellant argued was an error.

Respondent’s Submissions:

• The respondents argued that the dispute was purely civil in nature, arising from a breach of contract, and did not constitute a criminal offense.
• The respondents submitted that the ingredients of Sections 406 and 420 of the IPC were not satisfied by the allegations made in the complaint.
• The respondents supported the High Court’s decision, asserting that the criminal proceedings were an abuse of the legal process.

Issues Framed by the Supreme Court

The Supreme Court did not frame specific issues but considered the core question of whether the High Court was justified in quashing the criminal proceedings.

Treatment of the Issue by the Court

The following table demonstrates how the Court dealt with the issue:

Authorities

The Supreme Court did not cite any specific cases or books in this judgment. The court primarily relied on its own understanding of the law and the facts of the case.

Judgment

The Supreme Court upheld the High Court’s decision to quash the criminal proceedings, stating that the dispute was civil in nature and did not constitute a criminal offense.

The Court observed that merely because the accused did not pay the amount due under the agreement or did not give one month’s notice before terminating the agreement, it could not be said to be a case of cheating or criminal breach of trust.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the fact that the dispute was contractual in nature and lacked the necessary elements of criminal intent required for offenses under Sections 406 and 420 of the IPC. The Court emphasized that a civil dispute cannot be converted into a criminal case. The court was also influenced by the fact that the initial dismissal of the quashing application was not substantiated by the docket of the file.

The court reasoned that “Even considering the allegations and averments made in the FIR and the case on behalf of the Appellant, it cannot be said that the ingredients of Sections 406 and 420 are at all satisfied.” The court further stated, “The dispute between the parties at the most can be said to be the civil dispute and it is tried to be converted into the criminal dispute.” The court also noted, “Merely because the original accused might not have paid the amount due and payable under the agreement or might not have paid the amount in lieu of one month Notice before terminating the agreement by itself cannot be said to be a cheating and/or having committed offence under Sections 406 and 420 of the IPC as alleged.”

Key Takeaways

• A breach of contract, by itself, does not constitute a criminal offense.
• Criminal proceedings should not be initiated to resolve civil disputes.
• For offenses under Sections 406 and 420 of the IPC, there must be a clear indication of dishonest intention.
• The High Court has the power under Section 482 of the Cr.PC to quash criminal proceedings that are an abuse of the process of law.

Directions

No specific directions were given by the Supreme Court in this judgment.

Development of Law

The ratio decidendi of this case is that a breach of contract, particularly one involving non-payment of dues, does not automatically constitute a criminal offense under Sections 406 and 420 of the IPC. The judgment reinforces the principle that civil disputes should be resolved through civil remedies and not through criminal proceedings. This judgment reaffirms the settled position of law that criminal proceedings should not be used to settle civil disputes.

Conclusion

The Supreme Court dismissed the appeal, upholding the High Court’s decision to quash the criminal proceedings. The Court reiterated that a civil dispute cannot be converted into a criminal case and that merely not paying dues under a contract does not amount to cheating or criminal breach of trust under Sections 406 and 420 of the IPC. This judgment serves as a reminder that criminal law should not be used to settle contractual disputes.