This guest post is authored by Tulika Gupta, a recent graduate from ILS Law College, Pune. Tulika has a keen interest in international law and arbitration. She has previously worked as a Research Assistant at the International Law Commission during its 70th Annual Session in New York. She can be reached at tulika03gupta@gmail.com

On 22 November 2018, the Allahabad High Court (HC) in Rakesh Kapoor v. State of Uttar Pradesh held that criminal proceedings may be quashed where they are intended to circumvent arbitration or if they constitute an abuse of process. In this important judgment, the Allahabad HC has addressed certain key issues that stand in the way of the effective use of arbitration to settle disputes.

Factual Background

One M/S Digital World (the Company) was engaged in the business of computerized digital fabric printing and suffered significant losses due to an accidental fire. The Company then raised a claim on the basis of the Company’s Fire and Perils Policy. In this regard, the surveyor for the National Insurance Company (NIC), prepared a loss-assessment report issued in January 2014 (the Report) and assessed damages to the tune of INR 13,75,392/-. This amount was be released by IDBI Bank.

Once all attempts to have the funds released by IDBI Bank failed, the Company initiated a consumer complaint before the National Consumer Dispute Redressal Commission (NCDRC) citing deficiency of service and unfair trade practices, claiming compensation of INR 3.50 crores.

The NCDRC dismissed this complaint in 2016 citing two factors, (i) an Agreement between the parties to withdraw the complaint against the Surveyor, and (ii) the existence of an arbitration clause in the insurance policy. The pending dispute regarding the quantum payable under the insurance policy was referred to a sole arbitrator pursuant to the arbitration clause in the insurance contract. In 2017, the sole arbitrator awarded interim payment of a part of the amount assessed by the surveyor. The arbitration proceedings are still pending.

        Criminal proceedings

However, in June 2014, the Company had also initiated criminal proceedings under Sections 419, 420, 468, 471, 506 and 120-B of the Indian Penal Code, 1860 (IPC) against the surveyor and divisional manager of the Insurance Company. The FIR alleged a criminal conspiracy between the Surveyor and the Regional Manager of the insurance company to manipulate the quantum of the claim. A charge-sheet was filed in September 2014 and the Chief Judicial Magistrate took cognizance of the case in August 2015.

In the circumstances, the Applicants requested the Allahabad HC to exercise its inherent powers under section 482 of the Criminal Procedure Code, 1973 to quash the aforesaid complaint on two grounds:

  1. That the initiation of criminal proceedings was malicious and constituted an abuse of process; especially considering that all such allegations were withdrawn in the proceedings before the NCDRC.
  2. That the issue of the quantum of the insurance claim was still pending before an arbitral tribunal.

Findings and Analysis

The Allahabad HC substantially relied upon the landmark Supreme Court (SC) decision in A. Ayyasamy v. A. Paramasivam (Ayyasamy).[1] This judgment considered whether criminal proceedings could continue in spite of a pending arbitration on the same matter. In that decision, the SC had attempted to strike a balance between giving effect to the parties’ intent to arbitrate and the policy considerations of allowing an arbitral tribunal to determine issues that were an inherent part of the jurisdiction of courts.

The SC in Ayyasamy applied the test of arbitrability to observe that civil disputes are ordinarily capable of being settled by arbitration. However, when the subject matter of such disputes involve complex questions of fact and law, such as in claims of fraud, must be adjudicated upon by a Court. Separately, the Allahabad HC also addressed the impact of Ayyasamy and discussed the possibility of parties misusing fraud as a contention to circumvent any arbitration clauses and thus applied a strict test of arbitrability.

Relying on Ayyasamy, the Allahabad HC observed that the subject matter of the dispute in the criminal complaint was already being adjudicated before an arbitral tribunal and did not suffer from a lack of arbitrability. The Court also noted that the investigating officer had clearly indicated in the case diary that there was no document evidencing manipulation/fraud by the Applicants. Eventually, the court concluded that the issues before it were essentially civil in nature and therefore capable of being settled by arbitration.

The Court relied upon several other SC judgments to show that ordinarily, where the act in issue attracts civil as well as criminal liability, parties may pursue both forms of claims simultaneously[2], [3].  In particular, the Court adverted to  Indian Oil Corporation v. NEPC India Ltd.[4] to reiterate the position that criminal proceedings ought to be dismissed if filed for the purpose of pressurizing another a party to settle civil proceedings.

The Court also made reference to the guidelines laid down by the SC in State of Haryana v. Bhajan Lal,[5] where the court discussed the categories of cases in which a court could quash criminal proceedings in order to prevent the abuse of process. Category 7 of these guidelines referred to circumstances: “Where a criminal proceeding is manifestly attended with mala fide and/or where the proceeding is maliciously instituted with an ulterior motive for wreaking vengeance on the accused and with a view to spite him due to private and personal grudge.”

Thus, relying upon these judgments, the Allahabad HC exercised its inherent powers under section 482 of the CrPC and quashed the criminal complaint since it was filed with the intention of pressurizing a settlement in the corresponding arbitration, thereby constituting an abuse of process.

Concluding Remarks

This judgment serves to facilitate arbitration and addresses the issue of the common misuse of criminal proceedings to either avoid arbitration or to force parties into a settlement. This judgment, combined with the strict time limits imposed by the latest amendment to the Arbitration and Conciliation Act, 1996 serve to ensure that parties are held to their bargains and cannot circumvent arbitration by initiating criminal proceedings.

Tulika Gupta

[1] (2016) 10 SCC 386, p. 15 – 20.

[2] Kamala Devi Agarwal v. State of West Bengal, 2002 (1) SCC 555.

[3] Devendra v. State of Uttar Pradesh, 2009 (7) SCC 495.

[4] (2006) 6 SCC 736, p. 13 – 17.

[5] (1992) Suppl. 1 SCC 335, p. 102.

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