Supreme Court: Stop Criminalizing Civil Disputes

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To create a peer police pressure, civil disputes such as breach of contractual obligations were converted into criminal complaints and First Information Reports u/s 406 (Criminal Breach of Trust) or 415 (Cheating) were registered.

With the increase in those Criminal Cases coming forward, Hon’ble Supreme Court in Hridaya Rangan Pd. Verma And Ors vs State Of Bihar And Anr on 31 March, 2000 while quashing an FIR for cheating had cautioned against criminalizing civil disputes and explained the difference between breach of contractual obligations, criminal breach of trust and cheating.  

Breach of Contractual Obligations

One party may enter into contract with other to perform certain obligation in lieu of the consideration received by him and if the party who has received consideration fails to perform his obligation, it amounts to a breach of contract and the other party can file a civil suit for recovery of the consideration given or suit for specific performance along with the damages suffered due to breach of contract. 

Criminal Breach of Trust 

To attract the provision of Section 405 of the Indian Penal Code for Criminal Breach of Trust, it is important that the accused should have been entrusted or dominion over the property and the entrustment of property creates a trust which is only an obligation annexed to the ownership of the property and arises out of a confidence reposed and accepted by the owner of the property. 

In Chelloor Mankkal Narayan Ittiravi Nambudiri v. State of Travancore, Cochin [AIR 1953 SC 478], this Court held:

” to constitute an offence of criminal breach of trust, it is essential that the prosecution must prove first of all that the accused was entrusted with some property or with any dominion or power over it. It has to be established further that in respect of the property so entrusted, there was dishonest misappropriation or dishonest conversion or dishonest use or disposal in violation of a direction of law or legal contract, by the accused himself or by someone else which he willingly suffered to do.

It follows almost axiomatically from this definition that the ownership or beneficial interest in the property in respect of which criminal breach of trust is alleged to have been committed, must be in some person other than the accused and the latter must hold it on account of some person or in some way for his benefit.”

In Jaswantrai Manilal Akhaney v. State of Bombay [AIR 1956 SC 575], this Court reiterated that the first ingredient to be proved in respect of a criminal breach of trust is ‘entrustment’. It, however, clarified:

“.. But when S. 405 which defines “criminal breach of trust” speaks of a person being in any manner entrusted with property, it does not contemplate the creation of a trust with all the technicalities of the law of trust. It contemplates the creation of a relationship whereby the owner of property makes it over to another person to be retained by him until a certain contingency arises or to be disposed of by him on the happening of a certain event.”

There are two distinct parts of the said offence
  1. The first involves the fact of entrustment, wherein an obligation arises in relation to the property over which dominion or control is acquired. 
  2. The second part deals with misappropriation which should be contrary to the terms of the obligation which is created.

The gist of the offence is misappropriation done in a dishonest manner.

Cheating

To attract the provision of cheating as defined in section 415 of the Indian Penal Code, 1860 the following essentials must be satisfied, which are as follows:- 

  1. Deception of a person,
  2. Fraudulently or dishonestly inducing the person so deceived:- a.) to deliver any property to any person; or b.) to consent that any person shall retain any property; or c.) the person was intentionally induced to do or omit to do anything which he would not do or omit if he were not so deceived, and which act or omission causes or is likely to cause damage or harm to that person in body mind, reputation or property.

On a reading of the section it is manifest that in the definition there are set forth two separate classes of acts which the person deceived may be induced to do. 

In the first place he may be induced fraudulently or dishonestly to deliver any property to any person. The second class of acts set forth in the section is the intentional doing or omitting to do anything which the person deceived would not do or omit to do if he were not so deceived. In the first class of cases the inducing must be fraudulent or dishonest. In the second class of acts, the inducing must be intentional but not fraudulent or dishonest.

Medchl Chemicals & Pharma (P) Ltd. Vs. Biological E. Ltd. & Ors., wherein Hon’ble Supreme Court had observed that:

“In order to attract the provisions of Sections 418 and 420 the guilty intent, at the time of making the promise is a requirement and an essential ingredient thereto and subsequent failure to fulfil the promise by itself would not attract the provisions of Section 418 or Section 420. Mens rea is one of the essential ingredients of the offence of cheating under Section 420. As a matter of fact Illustration (g) to Section 415 makes the position clear enough to indicate that mere failure to deliver in breach of an agreement would not amount to cheating but is liable only to a civil action for breach of contract.”

 In Vesa Holdings (P) Ltd. and Anr. v. State of Kerala and Ors., this Court observed:

“12. The settled proposition of law is that every breach of contract would not give rise to an offence of cheating and only in those cases breach of contract would amount to cheating where there was any deception played at the very inception.

13. It is true that a given set of facts may make out a civil wrong as also a criminal offence and only because a civil remedy may be available to the complainant that itself cannot be a ground to quash a criminal proceeding. The real test is whether the allegations in the complaint disclose the criminal offence of cheating or not.”

Therefore, in determining the question it has to be kept in mind that the distinction between mere breach of contract and the offence of cheating is a fine one. 

It depends upon the intention of the accused at the time to inducement which may be judged by his subsequent conduct but for this subsequent conduct is not the sole test. Mere breach of contract cannot give rise to criminal prosecution for cheating unless fraudulent or dishonest intention is shown right at the beginning of the transaction, that is the time when the offence is said to have been committed.

Therefore, it is the intention which is the gist of the offence. To hold a person guilty of cheating it is necessary to show that he had fraudulent or dishonest intention at the time of making the promise. 

From his mere failure to keep up promise subsequently such a culpable intention right at the beginning, that is, when he made the promise cannot be presumed and every breach of civil contractual obligations will not become Criminal Breach of Trust or Cheating, unless the complaint specifically in clear words disclose the offences as required by the law.


This Article is written by Adv. Kapil Chandna. Advocate Kapil Chandna is a graduate from Delhi University, founding partner of C&C Associates and is enrolled with the Bar Council of Delhi (2012).


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