Parallel Paths: Understanding Section 138 and Arbitration Proceeding

Introduction:??

In the case of M/S Banco Construction Pvt Ltd Vs Narmada Extrusions Ltd [1], the Madhya Pradesh High Court, the issue of concurrent jurisdiction between proceedings under the Arbitration and Conciliation Act, 1996, and cases of cheque bounce under the Negotiable Instruments Act, 1881, was brought into question. The court, presided over by Justice Anand Pathak, made a significant observation emphasizing that these proceedings are parallel rather than overlapping. This conclusion was reached when proceedings under the Arbitration Act were challenged on the grounds of pending proceedings under the NI Act.

About the case:??

The Applicant, invoking Section 11 of the Arbitration and Conciliation Act, 1996, approached the Madhya Pradesh High Court seeking various reliefs pertaining to arbitration proceedings. These included requests for filing certified copies, the appointment of an independent arbitrator(s) in accordance with Clause 14.7 of the arbitration agreement, establishing territorial jurisdiction for appointing a sole arbitrator, and any other orders deemed necessary by the High Court. The agreement in question was executed between the Petitioner and the Respondent, with the former acting as the Supplier of Electricity and the latter as the Purchaser.??

The agreement formed part of a tripartite arrangement involving the Supplier, The Madhya Pradesh Power Management Company Ltd. (M.P.P.M.C.L.) in Jabalpur, and Madhya Pradesh Paschim Kshetra Vidhyut Vitaran Company Ltd. (M.P.P.K.V.V.C.L.) in Indore, with the Purchaser being the recipient of the electricity. Disputes emerged concerning payment obligations, prompting the issuance of a demand notice followed by a legal notice invoking arbitration proceedings. The Applicant sought arbitration due to the lack of response from the Respondent to these notices, grounding their request in the arbitration agreement's Clause 14.7.?

Rationale:??

The Madhya Pradesh High Court, in its ruling, emphasized the distinct nature of proceedings under Section 138 of the Negotiable Instruments Act and arbitration, allowing both to proceed concurrently. The court highlighted that while Section 138 of the N.I. Act pertains specifically to dishonoured cheques, the dispute between the parties in this case delves much deeper, necessitating the intervention of an arbitrator to fully comprehend its complexities. Drawing from the Supreme Court's decision in Trisuns Chemical Industry Vs. Rajesh Agrawal and others [2], the court underscored that arbitration cannot serve as a substitute for criminal prosecution in cases where an act constitutes an offense. While arbitration offers a means of redress for breaches of contractual agreements, it does not extend to adjudicating acts that amount to criminal offenses. Therefore, the court upheld the viability of both proceedings concurrently, recognizing the limitations of arbitration in addressing criminal acts while affirming its role in resolving contractual disputes beyond the scope of Section 138 of the N.I. Act.?

Analysis:??

The case involved M/S Banco Construction Pvt. Ltd. as the petitioner, a supplier of electricity, and Narmada Extrusion Ltd. as the respondent, the purchaser. The petitioner had issued a legal notice due to outstanding dues from the respondent, which went unanswered, leading to the initiation of arbitration proceedings.? However, the respondent argued that since proceedings under the NI Act had already been initiated due to dishonoured cheques, the arbitration application lacked maintainability. Despite this contention, the court determined that the dispute, encompassing not just the cheque amount but other expenses and recoveries as well, required arbitration for resolution. The court highlighted the importance of parties approaching an arbitrator to ascertain the quantum of the amount, the nature of the dispute, and the potential resolution, based on the arbitration clause and the agreement between the parties.??

The court recognized the significance of the arbitration clause outlined in Clause 14.7 of the Power Purchase Agreement, affirming its role as the designated mechanism for resolving disputes between the parties. Given the lack of response from the Respondent despite the initiation of dispute through notices by the Applicant, the court concluded that arbitration was indispensable for determining the quantum of the amount in dispute, the nature of the conflict, and its ultimate resolution, in accordance with the parties' agreement. Moreover, the High Court reiterated the distinct jurisdictional realms of proceedings under Section 138 of the Negotiable Instruments Act and arbitration under the Arbitration Act, emphasizing their parallel rather than overlapping nature.??

It underscored that while Section 138 pertains solely to dishonoured cheques, arbitration serves as a remedy for breaches of agreement and cannot supplant criminal prosecution. With this rationale, the High Court endorsed the appointment of an arbitrator to facilitate the resolution of the dispute. Subsequently, with the consent of both parties, Justice M.K. Mudgal, a former Judge of the Madhya Pradesh High Court, was proposed as the arbitrator, marking a significant step towards the amicable resolution of the contentious matter.?

Conclusion:??

In conclusion, the ruling of the Madhya Pradesh High Court in this case serves as a testament to the importance of arbitration as a mechanism for resolving disputes outlined in contractual agreements. Additionally, the court's clarification on the distinct jurisdictional realms of proceedings under Section 138 of the Negotiable Instruments Act and arbitration under the Arbitration Act elucidates the complementary nature of these legal avenues. The High Court has taken a significant step towards fostering a fair and impartial resolution to the dispute, guided by the principles of equity and justice.??

References:

[1] ARBITRATION CASE No. 40 of 2022.??

[2] (1999) 8 SCC 686.??