Arbitration Clause In MOU Does Not Bar Criminal Prosecution If Allegations Disclose Cognizable Offense: Telangana High Court

"The existence of an arbitration clause or the initiation of arbitral proceedings does not bar or nullify criminal prosecution if the allegations disclose the commission of an offence," Telangana High Court, in a significant ruling, held that the presence of an arbitration clause in a Memorandum of Understanding (MOU) does not preclude criminal proceedings if the complaint prima facie discloses the commission of cognizable offenses.

A bench of Justice J. Sreenivas Rao observed that "arbitration is a civil remedy for contractual breaches and cannot substitute or override the criminal process where the acts complained of constitute offences under law."

The petitioners, who were accused of misappropriating nearly Rs. 5.52 Crores intended for land procurement, had approached the High Court seeking to quash an FIR registered by the Economic Offences Wing (EOW), Cyberabad. They primarily contended that the dispute was civil and contractual in nature, especially given the existence of an arbitration clause in the governing MOU.

The case originated from a complaint by the Managing Partner of JSS Ventures, alleging that the petitioners, acting as agents, conspired with the firm’s CEO to misappropriate funds. It was alleged that the accused created fabricated sale agreements and fake payment receipts to show the purchase of lands in Sangareddy, while actually pocketing the investment amounts. The petitioners argued that the matter was purely civil and should have been referred to an arbitrator as per the terms of their agreement.

The primary question before the court was whether the existence of an arbitration mechanism in an MOU bars the police from investigating allegations of forgery and cheating. The court was also called upon to determine if the inherent powers under Section 528 of the Bharatiya Nagarik Suraksha Sanhita (BNSS) should be exercised to quash an investigation that involves disputed questions of fact regarding misappropriation.

Arbitration Clause No Bar to Criminal Prosecution

The Court meticulously analyzed the intersection of civil remedies and criminal liability, noting that the presence of a contractual dispute does not automatically wash away criminal culpability. Referring to the Supreme Court's decision in Priti Saraf v. State (NCT of Delhi), the bench emphasized that an arbitrator has no jurisdiction to try criminal charges, even if they arise out of the same transaction as a civil dispute.

Criminal Law Cannot Be Interdicted by Civil Agreements

The bench observed that the nature of the allegations—specifically the creation of forged documents and the dishonest inducement of JSS Ventures to part with large sums—prima facie disclosed cognizable offenses. The Court held that "investigation and criminal proceedings should not be pre-empted or quashed merely because an arbitration mechanism exists, except in rare cases where the complaint is patently frivolous or malicious."

High Court Erred if it Fails to Consider Prima Facie Allegations

While acknowledging the petitioners' reliance on cases like Anukul Singh and Vandala Jain, the High Court clarified that those precedents apply when a purely civil dispute is given a "criminal colour" to exert pressure. However, in the present case, the Court found specific material indicating that the accused may have harbored a dishonest intention from the inception, evidenced by the alleged fabrication of sale records to conceal the non-payment to original land owners.

Disputed Questions of Fact to be Decided During Trial

The Court further noted that whether the receipts produced by the petitioners were genuine or fabricated, and whether the full sale consideration reached the land owners, are disputed questions of fact. Justice Rao asserted that such issues cannot be adjudicated by the High Court while exercising extraordinary jurisdiction under Section 528 of the BNSS, as they require a thorough investigation and assessment of evidence.

Police Have Statutory Right to Investigate Cognizable Offenses

Reiterating the principles laid down in State of Haryana v. Bhajan Lal and Neeharika Infrastructure (P) Ltd. v. State of Maharashtra, the Court underscored that the police have a statutory duty to investigate when an FIR discloses a cognizable offense. The bench remarked that "the FIR is not expected to be an encyclopedia of all facts" and criminal proceedings ought not to be scuttled at their nascent stage unless they are legally barred or manifestly mala fide.

The High Court concluded that the case did not fall within the "rarest of rare" category warranting the exercise of quashing powers. Finding that the investigation was still in progress and the allegations were serious in nature, the Court dismissed the criminal petition, allowing the Economic Offences Wing to proceed with its probe into the alleged Rs. 5.52 Crore scam.

Date of Decision: 23.06.2026