Criminalization of Civil Disputes: Need for Care and Guidelines

The process of seeking to settle civil disputes and claims, by applying pressure by way of a criminal prosecution has the potential of having a cataclysmic effect on the economic system and will likely, adversely impact the atmosphere of investment and development...

A. Background

Picture the following scenario:

a) A (a foreign company) enters into an agreement with B (an Indian company) for development of certain infrastructure.
b) A proceeds with the contract.
c) Disputes arise between the parties.
d) A initiates arbitration for recovery of monies against B. The seat of arbitration is in India.
e) Arbitration proceedings are on. A's witnesses are to be cross examined.
f) B files a criminal complaint with the police, alleging offenses under the Indian Penal Code on the facts/issues to be determined in arbitration. First Information Report (FIR) is registered. Police calls A's Directors for investigation. These Directors are foreign nationals.
g) A concerned Director seeks legal advise. He is told that (i) he could be arrested; (ii) that if arrested, he would need to apply for bail; (iii) if granted bail, he could be told to deposit his passport and/or will be prevented from leaving the country till the trial is concluded; and (iv) anticipatory bail, even if granted, could lead to the imposition of terms similar to (iii) above.
h) The Director decides to leave India.
i) The cross examinations are derailed at least for the time being. The lawyers of A are now receiving instructions via conference calls at an important stage of the arbitration.
j) The Directors of A file quashing petitions before the concerned High Court. The High Court issues notice and then there is a long gap of several years before the matter is taken up and decided.

k) In the meantime, A decides it has had enough. It settles the dispute with B and the criminal proceedings are withdrawn.

The above scenario is not a self-created one. It was a reality. And this is not the only one.

B. You Get What You Want

As young practicing lawyers, we were often advised by our seniors that we could find judgments to support any view, given the same set of facts. Herein lies the problem. The misuse of the criminal law machinery for getting relief in disputes that are civil in nature, by using legal precedents and false charges is rampant in today's time. This practice leads to vexatious and oppressive litigation.

A person seeking recovery in an otherwise civil dispute wants to have the money in his pocket in the shortest possible time. The advice that he receives (not necessarily from a lawyer) is - 'go criminal': try and involve the spouse or relatives of the person from whom monies are to be recovered and involve all the directors if a company is involved. The chances of this advise increase if the person or his/her relatives or directors are either foreigners or foreign based. It is often advised that in such situations, pressure from the police alone will bring justice.

Thus, the filing of misconceived criminal proceedings is used as a bargaining chip to pressurize and threaten the accused to enter into a settlement. Even though these cases involve civil liability, they are given criminal contours with the object of expediting the civil recovery mechanism or to apply pressure on the accused or out of enmity towards the accused or to subject the accused to harassment.¹ These instances add to the complexities of doing business in India, especially when the accused is a foreigner.

C. Criminal Proceedings As Abuse Of Process

It is not that there is not enough legal precedent to guard against this abuse of process. A few instances have been listed hereinbelow:

a) A purely civil dispute arising out of a contractual relationship between the parties cannot be converted in a criminal offense in order to get favorable results. In the case of Hriday Ranjan Prasad Verma & Ors. v. State of Bihar & Anr.² the Court drew a distinction between the mere offense of breach of contract and that of cheating.

"In determining the question, it has to be kept in mind that the distinction between mere breach of contract and the offense 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 offense is said to have been committed. Therefore, it is the intention which is the gist of the offense. 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."

b) Rule of Law allows everyone with a legitimate cause or grievance to avail remedies available in criminal law. However, a complainant who initiates a prosecution with the knowledge that criminal proceedings are unwarranted and the remedy lies in the civil law, should be made accountable as per the Law for pursuing misconceived criminal proceedings. In the case of G. Sagar Suri v. State of U.P.³, the Supreme Court observed as follows:

"It is to be seen if a matter, which is essentially of civil nature, has been given a cloak of criminal offense. Criminal proceedings are not a short cut of other remedies available in law. Before issuing process, a criminal court has to exercise a great deal of caution. For the accused, it is a serious matter. This Court has laid certain principles on the basis of which High Court is to exercise its jurisdiction under Section 482 of the Code. Jurisdiction under this Section has to be exercised to prevent abuse of the process of any court or otherwise to secure the ends of justice."

c) Courts have time and again deprecated the initiation of false criminal proceedings in cases having the elements of a civil dispute. The quick relief offered by a criminal prosecution as opposed to a civil dispute incentivizes the litigant to initiate false and vexatious proceedings. Moreover, in a country suffering the scourge of the world's largest backlog of cases, litigants often view criminal proceedings as a tool to pressurize and threaten the other party to enter a favorable settlement. In Indian Oil Corporation v. NEPC India Ltd. & Others⁴. The Supreme Court opined that:

"While on this issue, it is necessary to take notice of a growing tendency in business circles to convert purely civil disputes into criminal cases. This is obviously on account of a prevalent impression that civil law remedies are time-consuming and do not adequately protect the interests of lenders/creditors. Such a tendency is seen in several family disputes also, leading to irretrievable breakdown of marriages/families. There is also an impression that if a person could somehow be entangled in a criminal prosecution, there is a likelihood of imminent settlement. Any effort to settle civil disputes and claims, which do not involve any criminal offense, by applying pressure through criminal prosecution should be deprecated and discouraged."

d) Criminal courts should ensure that proceedings before it are not used for settling scores or to pressurize parties to settle civil disputes. In cases of breach of contract, the remedy is to approach a civil court. In the case of Anand Kumar Mohatta & Anr. v. State (Govt. of NCT of Delhi)⁵ the Court held that the essence of the offense lay in the use of the property entrusted to a person by that person, in violation of any direction of law or any legal contract which he had made regarding the discharge of such trust. An amount of '1 crore was to be refunded to the complainant simultaneously upon handing over of possession of the constructed area as per the agreement. It was contended that Appellants have misappropriated the amount or dishonestly used the amount contrary to the contract. The court held that the dispute had the contours of a dispute of a civil nature and did not constitute a criminal offense. Further, the Court observed that the complainant had not made any attempt for the recovery of money except by filing a criminal complaint. Their action thus appeared to be mala fide and unsustainable.

e) Unscrupulous litigants often indulge in forum shopping to get favorable decisions. Therefore, cases which are predominantly of a civil nature are given the guise of a criminal offense, that too, after availing civil remedies. Presence of mala fide intention to recover the amounts which a party is unable to recover by civil mode is an abuse of the process of law.⁶ Therefore, the Apex Court in the case of State of Haryana v. Bhajan Lal⁷ held that, 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 a private and personal grudge, such proceeding needs to be quashed and set aside.

D. FIR Quashing

The High Court can exercise its inherent power to quash criminal proceedings for disputes that are essentially private in nature between two contracting parties. However, on the other hand, there are a host of cases which propose that quashing at the FIR stage should not be done. The law states that interference at the threshold with the FIR is to be done only in very exceptional circumstances. The Courts have unanimously held that the FIR is to be quashed only very sparingly and with circumspection and only in the rarest of the rare cases. A few cases have been cited hereinbelow:

a) Recently, JCE, an Indian supplier of coke calcination packages filed a case against Samsung Dubai on account of its failure to perform certain payment

obligations under a contractual commitment entered into through an intermediary company. JCE filed civil proceedings before a Dubai court and filed a criminal complaint in India on charges of dishonest misappropriation, criminal breach of trust and cheating. In 2013, the Supreme Court of India refused to quash the summoning order and directed Samsung Electronics' Chairman, to appear before a Magistrate in Ghaziabad.⁸ It was only later in 2017, that the Supreme Court granted exemption from personal appearance to the Chairman of the Company.⁹ However, the Court also directed the police to continue with the investigation and to conclude the same within a period of three months from the date of passing of the order.

b) In the case of State of Andhra Pradesh v. Golconda Linga Swamy and Ors.¹⁰, the Supreme Court observed that the mere allegation of mala fides against the informant are of no consequence and that that alone could not be the basis for quashing the proceedings. The High Court was not required to enter into a meticulous analysis of the case before the conduct of trial to find out whether the case would end in conviction or acquittal. Interference at the threshold with the FIR is made only if the complaint does not disclose any offense or is frivolous, vexatious or oppressive.¹¹

c) In another case, State of Kerala and Ors. v. O.C. Kuttan and Ors.¹², the Supreme Court held that the power of quashing the criminal proceedings should be exercised very sparingly with circumspection and that too in the rarest of rare cases. The Court observed that it is a well settled position that FIR is only an initiation to move the machinery and to investigate into a cognizable offense. Thus, while exercising the power under Section 482 of Code of Criminal Procedure, 1973 (Cr.P.C.), to decide whether the investigation itself should be quashed, utmost care should be taken by the court and at that preliminary stage, it is not possible for the court to sift the materials or to weigh the materials and then come to the conclusion one way or the other.¹³

d) A three Judge Bench of the Supreme Court in the case of State of U.P. v. O.P. Sharma¹⁴ indicated that the High Court should be loath to interfere at the threshold to thwart the prosecution exercising its inherent power under Section 482 or under Articles 226 and 227 of the Constitution of India, as the case may be and should allow the law to take its own course. The inherent powers should be exercised sparingly and cautiously only if the court is of the opinion that it would otherwise lead to a gross miscarriage of justice.

These cases are relied upon by the complainant to urge that the FIR be registered, investigation carried out and that the investigation should not be quashed at the threshold.

E. Factors For Quashing Of FIR

Thus, the question that arises is, what are the circumstances in which a Court should consider a criminal complaint merits quashing and how can that determination be made speedily? In the State of Haryana v. Bhajan Lal¹⁵, a two Judge Bench of the Supreme Court held that in the following categories of cases, the extraordinary power under Article 226 or the inherent powers under Section 482 Cr.P.C, can be exercised by the High Court to prevent abuse of the process of any court or otherwise to secure the ends of justice. The illustrative categories indicated by the Supreme Court are listed as follows:

"(1) Where the allegations made in the first information report or the complaint, even if they are taken at their face value and accepted in their entirety, do not prima facie constitute any offense or make out a case against the accused.

(2) Where the allegations in the first information report and other materials, if any, accompanying the FIR do not disclose a cognizable offense, justifying an investigation by police officers under Section 156(1) of the Code, except under an order of a Magistrate within the purview of Section 155(2) of the Code.

(3) Where the uncontroverted allegations made in the FIR or complaint and the evidence collected in support of the same do not disclose the commission of any offense and make out a case against the accused.

(4) Where the allegations in the FIR do not constitute a cognizable offense but constitute only a noncognizable offense, no investigation is permitted by a police officer without an order of a Magistrate as contemplated under Section 155(2) of the Code.

(5) Where the allegations made in the FIR or complaint are so absurd and inherently improbable on the basis of which no prudent person can ever reach a just conclusion that there is sufficient ground for proceeding against the accused.

(6) Where there is an express legal bar engrafted in any of the provisions of the Code or the Act concerned (under which a criminal proceeding is instituted) to the institution and continuance of the proceedings and/or where there is a specific provision in the Code or Act concerned, providing efficacious redress for the grievance of the aggrieved party.

(7) 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."

In R.P. Kapur v. State of Punjab¹⁶, this Court summarized some categories of cases where inherent power can and should be exercised to quash the proceedings.

i. Cases which cannot be tried or continued because there is a legal bar against the institution or continuance of the criminal proceeding. Absence of the requisite sanction is an instance of this category;

ii. Cases where the allegations in the first information report or

complaint taken at its face value and accepted in their entirety do not constitute the offense alleged;

iii. Cases in which the allegations made against the accused person do constitute an offense, but either there is no legal evidence adduced or the evidence adduced clearly or manifestly fails to prove the charge. In exercising its jurisdiction, the High Court is not to embark upon an enquiry as to whether the evidence in question is reliable or not.

F. FIRs In Civil Dispute Matters

The above cases, while dealing with when FIRs could be quashed, unfortunately do not specifically provide for or carve out an exception for an existing civil dispute - whether pending or threatened.

The question that arises is how can the existing legal machinery prevent a FIR being registered in a matter

which is civil in nature. It is a trite proposition that registration of FIR is mandatory under Section 154 of the Cr.P.C., if the information discloses the commission of a cognizable offense. However, the Apex Court has directed that if the information received does not disclose a cognizable offense but indicates the necessity for an inquiry, a preliminary inquiry may be conducted only to ascertain whether a cognizable offense is disclosed or not.¹⁷ As per the decision of Lalita Kumari v. Govt. of U.P.¹⁸, the illustrative category of cases in which a preliminary inquiry may be made are as under:

(a) Matrimonial disputes/family disputes
(b) Commercial offenses
(c) Medical negligence cases
(d) Corruption cases
(e) Cases where there is abnormal delay/lapses in initiating criminal prosecution, for example, over 3 months delay in reporting the matter without satisfactorily explaining the reasons for delay.

G. Safeguards: Preliminary Enquiry

The abuse of the process established by law by litigants seeking to settle civil disputes, using the criminal law machinery continues unabated and is, on the contrary, ever on the increase. More than ever before, there is a need that in cases where agreements are involved, and where there is an existing civil dispute, the concerned investigative agencies must have a preliminary look at the complaint, and not immediately resort to the filing/registering of an FIR. Chapter 9 of the Central Bureau of Investigation Manual, 2005 (CBI Manual) makes provision for the conducting of a Preliminary Enquiry (PE) before the registration of a Regular Case (RC) but this chapter too treats this situation as a rarity.

This safeguard of conducting a preliminary enquiry can prevent criminalization of disputes that are civil in nature, thereby distinguishing them from the cases where the offense of fraud, cheating or breach of trust were present since the inception of the transaction. Though Lalita Kumari's case does make this possible and feasible, in reality, the procedure followed in conducting a preliminary enquiry is also far from satisfactory.

H. Need For Guidelines In Relation To Alleged Offenses Which Are Or Could Be, Only Civil Disputes

Maybe, it is time for guidelines to be framed to check any abuse of process. Subjectivity needs to be removed so that a case of a breach of contract is not given a criminal color unless fraudulent or dishonest intention is shown right at the beginning of the transaction.

A mere closure of the complaint/quashing of the same is not enough because by that time, the accused has usually suffered immense mental harassment and monetary losses. Damage has already been done by subjecting the accused to the rigors of the criminal law without there being any justifiable reason to proceed against them.

There is an urgent need to emphasize the verification of facts by way of a preliminary/initial investigation and not to rush through the process of arrest. Indeed, perhaps, while the preliminary investigation is being conducted, there should be no occasion for arrest and upon the conclusion of the preliminary enquiry, the accused ought to be informed of the outcome of the enquiry and be given a reasonable period of time to avail of his legal remedies. This would include a predetermined period during which, no arrest is sought to be effected. In cases where civil proceedings are already pending, anticipatory bail should normally be granted and in respect of persons ordinarily residing out of India, impounding of passports should not be a prior condition for grant of bail. Impounding of passport should only be resorted to in exceptional circumstances where the offense involves tangible physical injuries or death.¹⁹

Following guidelines should be kept in mind while conducting preliminary enquiries in matters which touch upon a civil dispute and/or involve agreements:

i. Preliminary enquiries should be done prudently and quickly, keeping in mind the timelines stipulated by the Hon'ble Supreme Court in the Lalita Kumari case.

ii. If the information has, prima facie, a civil connotation, the Station House Officer (SHO) should make a request for directions, in writing, from the concerned supervisory officer. The supervisory officer shall convey his/her decision at the earliest to the SHO, with the directions to the manner of conduct of the preliminary enquiry, clearly laid out.

iii. A preliminary enquiry registration report should be made in a separate Preliminary Enquiry Registration Report Form and not in the form prescribed for recording FIR under Section 154 of Cr.P.C.

iv. A close supervision by supervisory officers is required, otherwise there is high chance of the preliminary enquiry being rendered an exercise in futility.

v. A preliminary enquiry should be made timebound and, in any case, it should not exceed fifteen days and in exceptional cases, by giving adequate reasons it should not exceed six weeks' time. The fact of such delay and the causes of it must be reflected in the General Diary entry.²⁰

vi. After the registration of the preliminary enquiry, a General Diary entry should be made, and a plan of action should be drawn up by the enquiry officer in consultation with the supervisory officer. A time limit should be decided for each of the action points contained in the plan of action.

vii. It is important that the following questions be asked in order to understand the elements of a civil dispute and whether or not an imputation of criminality can be made in these cases:

a) Was there a contract/agreement between the parties?

b) Was that agreement partially performed?

c) Was this partial performance accepted by both the parties?

d) When did the disputes arise and on what grounds?

e) Did one party send a legal notice to the other seeking recovery in monetary terms?

f) Would money payment/damages make good the breaches alleged?

g) Would an order of injunction make good the loss suffered?

h) Was there any physical harm caused?

i) Was there inducement to enter into contract for dishonest purposes at inception?

These are matters which can be discussed with the complainant at the stage of lodging of the complaint itself. These will give an indication of whether the very entering into the contract was fraudulent. The investigative agencies all over the country must be notified of the need to adhere to the guidelines.

viii. After the completion of the preliminary enquiry, a Final Report should be prepared and submitted to the supervisory officer along with recommendations for further necessary action.

ix. The preliminary enquiries should be limited to the scrutiny of records and examination of bare minimum persons which may be necessary to judge whether there is any substance in the allegations which are being enquired into and whether the case merits further pursuing or not.

x. The required documents/records should be collected under proper receipt memos. The statements of witnesses during the preliminary enquiries should be recorded in the same manner as recorded during the investigation of criminal cases. However, issuance of notices under Sections 91 and 160 of Cr.P.C. should not be resorted to during this stage.

xi. The preliminary enquiries should either result in registration of criminal cases or in recommending departmental action or being closed for want of evident criminality. Thus, quick disposal of preliminary enquiry is extremely important.

I. Remedies For Wrongful Charges: Not Enough Disincentives

The Law provides remedies in the form of punishment to persons who abuse the process by instituting false cases. It is important to note that the false charge of an offense made with an intent to injure is punishable under Section 211 of the Indian Penal Code (IPC)²¹. This offense may be read with Section 182 of the IPC²². Injury is defined in Section 44 of the IPC and denotes any harm whatever, illegally caused to any person in body, mind, reputation or property. If a person is convicted under the first clause of Section 211, he/she can be sentenced to imprisonment for a term which may extend to two years, or with fine, or with both. Moreover, if such person is convicted under second clause of Section 211, he/she must be sentenced to imprisonment with or without fine. The necessary ingredients to constitute a false charge under Section 211 are as follows:

i. An intention to cause injury to a particular person.

ii. Such injury should have been intendeda-

a) by instituting or causing to be instituted criminal proceedings against that person, or

b) by falsely charging him with having committed an offense.

iii. Knowledge that there was no just or lawful ground for such proceedings or charge against that person.

Hence, when a criminal case is falsely initiated for disputes that are civil in nature, a remedy is available under Section 211 of the IPC. However, where an offense under Section 211 is committed in, or in relation to, a proceeding in a court, cognizance of the same on private complaint is barred under Section 195(1)(b) of the Cr.P.C.. The Court shall not take cognizance of an offense punishable under Section 211 except on a complaint in writing of that court or by such officer of the court as that court may authorize in writing in this behalf or of some other court to which that court is subordinate.

In addition to this, a civil remedy in the form of damages is available against the action of malicious prosecution in the law of torts. The necessary ingredient for malicious prosecution is as follows :

i. That the plaintiff was prosecuted by the defendant.

ii. That the proceedings complained of terminated in

favor of the plaintiff if from their nature they were capable of so terminating.

iii. That the prosecution was instituted against him without any reasonable or probable cause.

iv. That the prosecution was instituted with a malicious intention, that is, not with the mere intention of carrying the law into effect, but with an intention which was wrongful in point of fact.

v. That the plaintiff has suffered damage to his reputation or to the safety of person, or to the security of his property.

Thus, punishment in the form of imprisonment or pecuniary damages imposed on anyone instituting a false criminal case can act as a deterrent. However, these remedies are time-consuming, thereby dis-incentivizing the accused from seeking these remedies. What is required is that in cases which are civil in nature, the registration of the FIR itself be rendered considerably more onerous and persons who take recourse to attempting to register FIRs in such matters must face deterrent costs if it is determined that the facts do not disclose the commission of a cognizable offense and that the complaint is an attempt to abuse the process established by law.

J. Need Of The Hour

Over-reliance and wrongful invocation of criminal machinery to meet civil ends achieves nothing but acts as a deterrent to the growing economy of the country. Criminal law should be used only as a last resort (ultima ratio) and it should be invoked only in those instances where culpability is shown to exist from the inception of the transactions. Criminal sanction is the most drastic of the State's institutional tools and thus, it should be used as the last remedy in a constitutional democracy. The process of seeking to settle civil disputes and claims, by applying pressure by way of a criminal prosecution has the potential of having a cataclysmic effect on the economic system and will likely, adversely impact the atmosphere of investment and development. At a time when the Indian government is trying to boost investor confidence and increase investment flows into and out of the country, it is required that appropriate protection is provided to foreign investors and the Directors of multi-national corporations from such false and frivolous litigations.

(With special thanks to Mr. Sushil Bajaj, Barrister-at-law for his valuable comments)
Disclaimer – Views expressed are that of the authors and not of the firm.