SUPREME COURT REITERATES LIMITS OF CRIMINAL PROSECUTION IN CONTRACTUAL DISPUTES

The Judgment in the Case of Aaditya Khaitan & Ors. v. The State of Jharkhand & Ors., Criminal Appeal No. of 2025 (Special Leave Petition (Crl.) No.15413 of 2023), was delivered by a Division Bench of the Supreme Court of India, comprising Hon’ble Justice Sudhanushu Dhulia and Justice K. Vinod Chandran Ujjal Bhuyan on 28^th, April 2025. In this judgment the Supreme Court examined the scope of power under Section 482 of the Code of Criminal Procedure 1973, to quash an FIR alleging cheating and forgery in a contractual dispute. It clarifies that civil disputes cannot be given criminal color when no prima facie offence is made out.

Facts of the Case

The Appellants in this case were officers of a company which had entered  into a contract with M/s National Building Construction Corporation Limited (NBCCL) for the execution of a civil project. A portion of the work was subcontracted to the complainant (Second Respondent), allegedly without obtaining NBCCL’s consent, which was a requirement under the main contract. Work began, but delays and disruptions ensued, leading to part payments and outstanding dues.

The complainant alleged that they were misled into believing the subcontract was valid and only later discovered the restrictive clause prohibiting subletting without NBCCL’s approval. When attempts to intervene in proceedings between the original contractor and NBCCL failed, the complainant filed an FIR under Sections 406, 420, 467, 468, and 471 read with Section 34 of the IPC, alleging fraud and suppression.

Meanwhile, arbitration was invoked for recovery of dues but was stayed due to a Moratorium under insolvency proceedings against the main contractor. The Appellants  approached the High Court under Section 482 CrPC for quashing the FIR but were denied relief. Aggrieved, they approached the Supreme Court.

Main Issues in the Judgment:

1. Whether the FIR against the Appellants  disclosed the commission of any cognizable offence to justify prosecution.
2. Whether the High Court erred in refusing to exercise its inherent powers under Section 482 CrPC to quash the FIR.
3. Whether a civil dispute relating to a contractual claim can be transformed into criminal proceeding.

Contentions by both Parties

Contentions by Appellant

The Appellants  contended that the FIR was a misuse of criminal law to pressurize them into paying amounts allegedly due under a subcontract. They argued that the dispute was entirely civil in nature, related to unpaid invoices, and that arbitration had already been initiated. The criminal complaint, they claimed, was devoid of ingredients necessary to constitute any offence under the IPC and was filed as a retaliatory measure after the insolvency moratorium stalled financial recovery.

Contentions by Respondent

The Respondents, (State and the Complainant) countered that the Appellants fraudulently suppressed the existence of a restrictive covenant prohibiting subletting, thereby inducing the complainant to enter into a contract. This, according to them, amounted to cheating, criminal breach of trust and forgery.

Judgment

The Supreme Court allowed the Appeal and quashed the FIR. It held that even if the allegations were taken at face value, they did not prima facie disclose the commission of any cognizable offence. The dispute arose from a commercial transaction involving performance of a subcontract, part-payments, and a moratorium under insolvency proceedings, all pointing to a civil nature of the dispute.

The Court observed that merely because there was a restrictive covenant in the main contract, and its non-disclosure to the subcontractor led to business loss, does not by itself amount to criminality. Importantly, the complainant resumed work even after learning of the restrictive clause, showing that they proceeded voluntarily. The Court emphasized, the  remedy lies in civil law and arbitration, not in criminal prosecution.

The Apex Court Criticized the High Court for mechanically refusing to exercise its jurisdiction under Section 482 CrPC, the Supreme Court invoked its own inherent powers and quashed the FIR, holding that continuation of criminal proceedings would amount to an abuse of the process of law.

 

Parichaya Reddy

Associate

The Indian Lawyer & Allied Services

 

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