Arbitration Clauses No Defence Against Fraud: Chhattisgarh High Court Reaffirms Criminal Liability

The existence of an arbitration agreement cannot create an embargo on criminal proceedings if the FIR discloses cognizable offences. – Chhattisgarh HC in Ajay Jain & Ors Vs State of Chhattisgarh on 29-Jul-2026

Even where parties agree to resolve disputes through arbitration, criminal prosecution cannot be barred if allegations of fraud, forgery, or misrepresentation disclose cognizable offences.

The Chhattisgarh High Court in CRMP No. 2089 of 2023 has reaffirmed a vital principle in Indian criminal jurisprudence that the existence of an arbitration agreement does not shield parties from criminal liability when fraud is apparent.

The case arose from a Memorandum of Understanding (MOU) involving takeover of the Seirra Group of Companies, which contained an arbitration clause for dispute resolution.

The petitioners argued that the matter was purely contractual and should have been referred to arbitration.

However, the Court held that arbitration is a civil remedy and cannot operate as an embargo on criminal proceedings where the FIR discloses cognizable offences such as cheating, forgery, or conspiracy.

Allegations of concealment of liabilities, forged board resolutions, and inducement to invest substantial sums were found sufficient to constitute prima facie offences under the IPC.

Relying on precedents including Neeharika Infrastructure Pvt. Ltd. v. State of Maharashtra and State of Haryana v. Bhajan Lal, the Court emphasized that criminal law functions independently of civil remedies, and quashing of proceedings is permissible only in rare cases where allegations are patently absurd or inherently improbable.

Since the investigation had yielded documentary and oral evidence supporting the prosecution, the petition for quashing was dismissed.

This ruling sends a clear message: arbitration clauses cannot be misused as a protective shield against criminal accountability, particularly when fraudulent intent is evident at the inception of the transaction.

Arbitration clauses cannot block criminal prosecution when fraud is alleged. The Chhattisgarh High Court reaffirms that civil remedies like arbitration do not shield parties from liability under criminal law if an FIR discloses cognizable offences.