Arbitration and the Negotiable Instruments Act – Separate proceedings for separate causes of action

In its recent decision in Newton Engineering and Chemicals Limited and Ors. vs. UEM India Pvt. Ltd.^[1] the Delhi High Court re-affirmed the position that arbitration proceedings and proceedings under Section 138 of the Negotiable Instruments Act, 1881 (NI Act), arise from separate causes of action and can therefore proceed simultaneously.

ONGC awarded a contract to Newton Engineering and Chemicals Limited and others (Newton) for modernisation of an Effluent Treatment Plant. Prior to being awarded the contract, Newton and UEM India Pvt. Ltd. (UEM) entered into a Memorandum of Understanding (MOU) whereby it was agreed that if the contract was awarded to Newton, UEM would provide its technical expertise to Newton. The MOU contained an arbitration clause. After Newton was awarded the contract, it gave a post-dated cheque of INR 7,00,000/- to UEM. ONGC later terminated the contract with Newton. Newton therefore asked UEM to not deposit the cheque. However, UEM proceeded to deposit the cheque. Since the cheque was dishonored, UEM filed a complaint under Section 138 of the NI Act. Newton approached the Delhi High Court seeking quashing of the said complaint.

Newton’s main submission was that the complaint under Section 138 of the NI Act was not maintainable since the MOU contained an arbitration clause pursuant to which arbitration proceedings were initiated. The Delhi High Court promptly dismissed this argument and held that the arbitration proceedings and the proceedings under Section 138 of the NI Act arose from separate causes of action and therefore could proceed simultaneously. The Delhi High Court relied on decisive judicial precedent.

In Sri Krishna Agencies v. State of Andhra Pradesh and Anr^[2], the Supreme Court agreed with the view that when cheques are dishonoured, a separate liability arises under the NI Act which is independent of the contractual disputes between the parties that may be adjudicated through arbitration. In the landmark decision of Trisnus Chemical Industry v. Rajesh Agarwal^[3], the Supreme Court held that an agreement to refer disputes to arbitration is not an effective substitute for a criminal prosecution.

Even in the cases of Gurucharan Singh v. Allied Motors Ltd.^[4] and Shiva Wire & Steel Products Ltd. vs. Rashtriya Ispat Nigam Ltd.[5], the Courts stressed on the fundamental principle that civil or arbitration proceedings for recovery and criminal proceedings under Section 138 of the NI Act are based on independent causes of action, even if they arise from the same set of facts. Therefore, an award passed in an arbitration is no ground to stall proceedings under Section 138 of the NI Act.

The principle that arbitration proceedings are no bar on the continuation of proceedings under Section 138 of the NI Act, is well-established. However, the facts of Newton’s case draw attention to some relevant points. Once the cheque deposited by UEM was dishonoured, Newton could not quash and/or stall the consequent proceedings under Section 138 of the NI Act. However, speedy invocation of arbitration may have enabled Newton to utilise the constituted arbitral tribunal’s powers to pass interim orders to protect and/or secure itself. Newton might have also considered seeking recourse for interim relief, through the powers given to courts under Section 9 of the Arbitration & Conciliation Act, 1996.

Therefore, while there is no bar on the simultaneous progression of arbitration proceedings and proceedings under Section 138 of the NI Act, parties faced with a similar situation may be wise to act promptly to seek urgent interim remedies under the Arbitration & Conciliation Act, 1996 and avoid the possibility of criminal proceedings.

We hope you have found this information useful. For any queries/clarifications please write to us at insights@elp-in.com  or write to our authors:

Ashna Contractor, Senior Associate – Email –  ashnacontractor@elp-in.com
Kareena Tahilramani, Associate – Email – kareenatahilramani@elp-in.com

[1] Crl. M.C. 5931/2023, Newton Engineering and Chemicals Limited and Ors v. UEM India Pvt. Ltd., Delhi High Court, judgment dated 23 November 2023.
[2] Sri Krishna Agencies v. State of A.P. and Anr, (2009) 1 SCC 69
[3] Trisnus Chemical Industry v. Rajesh Agarwal, AIR 1999 SC 3499
[4] Gurucharan Singh v. Allied Motors Ltd., 2006 CrLJ 360
[5] Shiva Wire & Steel Products Ltd. v. Rashtriya Ispat Nigam Ltd., 2009 SCC Online Cal 2606