DISTINCTION BETWEEN CHEATING AND BREACH OF CONTRACT

[Mr. M. GOVINDARAJAN]

Cheating

‘Cheating’ may be defined as a dishonest act in order to gain advantage. Section 420 of Indian Penal Code (IPC) provides that whoever cheats and thereby dishonestly induces the person deceived any property to any person, or to make, alter or destroy the whole or any part of a valuable security, or anything which is signed or sealed, and which is capable of being converted into a valuable security, shall be punished with imprisonment of either description for a term which may extend to seven years, and shall also be liable to fine.  The offence ‘cheating’ is proceeded under criminal law.

Breach of contract

Breach of contract is a legal cause of action in which a binding agreement or bargained-for exchange is not honored by one or more of the parties to the contract by non-performance or interference with the other party's performance.  The remedy for breach of contract is under civil law only.

Issue

Cheating should not be confused with breach of contract.  Criminal case could not be launched for the breach of contract in the guise of ‘cheating’.  In this article the distinction between cheating and breach of contract is discussed with decided case laws.

Case laws

In ‘S.W. Palanitkar V. State of Bihar’ – 2001 (10) TMI 1150 - SUPREME COURT the Supreme Court held that in order to constitute an offence of cheating, the intention to deceive should be in existence at the time when the inducement was made.   It is necessary to show that a person had fraudulent or dishonest intention at the time of making the promise, to say that he committed an act of cheating.   A mere failure to keep up promise subsequently cannot be presumed as an act leading to cheating.

In ‘Anil Mahajan V. Bhor Industries Limited’ – (2005) 10 SCC 228 the Supreme Court held that a distinction has to be kept in mind between mere breach of contract and the offence of cheating.  The subsequent conduct is not the sole test.   Mere breach of contract cannot give rise to criminal prosecution for cheating unless fraudulent, dishonest intention is shown at the beginning of the transaction.  The Supreme Court held that the substance of the complaint is to be seen.   Mere use of the expression ‘cheating’ in the complaint is of no consequence.  Except mention of the words ‘deceive’ and ‘cheat’ in the complaint filed before the Magistrate and ‘cheating’ in the complaint filed before the police, there is no averment about the deceit, cheating or fraudulent intention of the accused at the time of entering into MoU wherefrom it can be inferred that the accused had the intention to deceive the complainant to pay.  The breach of contract will always lies in a civil court.

In ‘International Advanced Research Centre for Power Metallurgy and new materials (ARCI) and others V. NIMRA CERGLASS Technics Private Limited and another’ – 2016 (3) TMI 32 - SUPREME COURT the respondent is a private company engaged in the manufacturing and marketing of scientific devices and equipments.   The respondent made an agreement with ARCI for transfer of technology for the manufacturing process of extruded ceramic honeycombs inclusive of transfer of extrusion die fabrication technology which is an integral part of the manufacturing process for a consideration of ₹ 10 lakhs exclusive of royalty amount on the sales.   The respondent in pursuance of the agreement established his industrial unit within the campus of ARCI at Balapur, Hyderabad.   ARCI conducted trial tests and succeeded and handed over a few samples of the final products to the respondent.  The respondent procured raw materials in anticipation of commencing commercial production in the belief that the final perfected technology is in its hands.  After three years the respondent was informed that the targeted specification could not be achieved.  Therefore the respondent filed a complaint against ARCI and its officers on the grounds of committing an offence of ‘cheating’.

The respondent filed the complaint before the Court of the II Metropolitan Magistrate, Cyberabad seeking prosecution of  ARCI and its officers punishable under sections 405, 415, 418 and 420 of IPC read with Sections 34 and 120B of IPC.  The Investigation Officer, after investigation, submitted final report stating that the dispute is purely of civil nature and that no offence was made out against the appellants and the same may be treated as closed.  On protest by the respondent the Magistrate took cognizance of the case for the offences under Sections 419 and 420 IPC read with Section 134 IPC.  Aggrieved by the summoning order of the Magistrate, ARIC and its officers filed petition under Section 482 Cr.PC before the High Court to quash the proceedings.  The High Court dismissed the petition.  Against the order of High Court the appellants filed the present appeal before the Supreme Court.

The appellants submitted the following:

• When the technology transfer agreement was entered into NIMRA was fully was aware if ARCI’s honeycomb technology and the second and third appellants were involved in the process of developing the technology wholly in their capacity as Associate Director and Director of ARCI and there was no dishonest intention on their part to cheat the respondent;
• The said agreement provides for a contingency that if the targeted specifications are not achieved, then ARCI is liable to pay damages to the tune of 20% of the lump sum technology transfer fee charged;
• The case is purely of a civil nature and for the alleged breach of contract, arbitral proceedings have already commenced and the criminal prosecution is clear abuse of process of law;

The respondent submitted the following:

• The appellants made false representation to the respondent that ARCI was possessed of proved ceramic honeycomb technology and the appellants conspired and induced the respondent to enter into agreement and based on the assurance of the appellants, the respondent made huge investments;
• But it was intimated that ceramic honeycomb technology has failed and the facts and circumstances clearly show that the representation was a fraudulent one right from the inception.

The Supreme Court considered the facts and rival contentions and also impugned order and the material on record.  The Supreme Court held that the legal position is well settled that when a prosecution at the initial stage is asked to be quashed, the test to be applied by the Court is, as to whether uncontroverted allegations as made in the complaint establish the offence.  It is to be seen that whether the averments in the complaint make out a case to constitute an offence of cheating.  In order to bring a case for the offence of cheating, it is not merely sufficient to prove that a false representation had been made, but, it is further necessary to prove that the representation was false to the knowledge of the accused and was made in order to deceive the complainant.

The essential ingredients for Section 420 IPC are-

• Cheating;
• Dishonest inducement to delivery property or to make, alter or destroy any valuable security or anything which is sealed or signed or is capable of being converted into a valuable security ; and
• ‘mens rea’ of the accused at the time of making the inducement.

The Supreme Court pointed out the distinction between the breach of contract and the cheating.   The Supreme Court held that the distinction would depend upon the intention of the accused at the time of alleged inducement.  If it is established that the intention of the accused was dishonest at the very time when he made a promise and entered into a transaction with the complainant to part with his property or money, then the liability is criminal.  The accused is guilty of the offence of cheating.  If it is established that a representation made by the accused has subsequently not kept, criminal liability cannot be foisted on the accused and the only right which the complainant acquires is the remedy for breach of contract in a civil court.

The Supreme Court analyzed the provisions of the agreement made between the appellants and the respondents.   The terms and conditions of technology transfer agreement clearly suggest that the Centre is to conduct performance guarantee to achieve the product quality/specification of extruded ceramic honeycombs as provided in the agreement.   In the event of failure to achieve the guarantee even after second performance test, option was given to ARCI either to conduct another performance test or pay the liquidated damages equal to 20% on the lump sum technology transfer fee charged.  The Supreme Court held that it cannot be said that ARCI act with dishonest intention to cheat the respondent attracting the essential ingredients of Section 420 IPC.   No dishonest intention could be attributed to the appellants as is apparent from the fact that NIMRA earlier had collaboration with ARCI and ARCI put in sufficient efforts by conducting repeated performance guarantee tests.

The respondent relied on the letter of ARCI in which it has been intimated that the technology is imperfect technology.  It is clear before the said letter all the details were discussed and well within the knowledge of NIMRA and NIMRA proposed for modification of the canning process and evidently there was no dishonest intention on the part of the appellants and no criminal liability could be attributed to the appellants.

The Supreme Court further held that the second appellant and third appellant are the Directors of ARCI and both of them were acting in their official capacity.   They neither acted in their personal capacity nor stood to receive any personal monetary benefits from the transfer of the said technology.   Previous sanction as mandated under Section 197 CrPC must have been obtained before proceeding against them as their act was only in discharge of their official duty.    The Supreme Court set aside the impugned order and allowed the appeal.

Conclusion

It is 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 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 to 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 offence by applying pressure through criminal prosecution should be deprecated and discouraged.