Arbitration Clause Or Civil Remedy No Bar To Criminal Prosecution If Offence Prima Facie Disclosed: Allahabad High Court

"Mere existence of an arbitration clause or even the pendency of arbitration proceedings or availability of civil remedies would, in our considered opinion, not oust the jurisdiction of criminal Courts, to consider whether on the facts narrated in the FIR, a criminal offence has been committed." Allahabad High Court, in a significant ruling dated July 15, 2026, held that the existence of an arbitration clause or the availability of civil remedies does not preclude the initiation of criminal proceedings if the allegations prima facie disclose the commission of a cognizable offence.

A Division Bench comprising Justice Rajiv Gupta and Dr. Justice Ajay Kumar-II observed that criminal and civil laws are coextensive and can run side by side, as the two remedies differ essentially in their content and consequence.

The court made these observations while dismissing a writ petition filed by Amit Kumar Jaiswal and another seeking to quash an FIR registered under Sections 316(5) and 318(4) of the Bhartiya Nyaya Sanhita (B.N.S.), 2023. The FIR alleged that the petitioners, acting as franchise agents for an ATM service provider, had embezzled over ₹30.95 lakhs meant for cash replenishment in ATMs.

The dispute arose from a 'Master Franchise Service Agreement' between Hitachi Payment Services Pvt. Ltd. and the petitioners for operating ATM/CRM machines. Following a negative police verification of the first petitioner, the agreement was transferred to his son, the second petitioner. Upon reconciling ATM switch data, the company discovered a significant cash shortfall, alleging that the petitioners had siphoned off funds instead of loading them into the machines.

The primary question before the court was whether a criminal prosecution can be maintained when the dispute arises out of a commercial agreement containing a specific arbitration clause. The court was also called upon to determine if the pendency of multiple FIRs for similar allegations involving different ATM locations constituted an abuse of process.

Court Explains Coexistence Of Civil And Criminal Remedies

The court emphasized that the same set of facts can give rise to both civil liability and criminal prosecution provided the essential ingredients of an offence, including mens rea, are present. It noted that if the facts constitute an offence, the party is not precluded from setting the criminal law in motion merely because a civil remedy is also available.

The bench relied on the Supreme Court's decision in Kathyayini Vs. Sidharth P.S. Reddy & Ors. (2025), which clarified that there is no bar against prosecution during the pendency of a civil suit. The judges observed that the object of criminal law is to punish an offender, while civil remedies focus on redressing private wrongs, and one does not necessarily rule out the other.

"Criminal Law And Civil Law Can Run Side By Side" - Arbitration Clause Not A Substitute For Criminal Trial

Addressing the petitioners' argument regarding the arbitration clause, the court held that such a provision is intended for affording reliefs for breach of contract but cannot conduct a trial for acts amounting to an offence. The bench noted that an arbitrator has no jurisdiction to investigate or launch a prosecution in respect of criminal acts.

Citing Trisuns Chemical Industry v. Rajesh Aggarwal, the court reiterated that the investigating agency must have the freedom to examine the entire gamut of allegations. The court held that the arbitration clause cannot be read as a bar to criminal proceedings if the acts complained of prima facie constitute a cognizable offence.

"Arbitrator Cannot Conduct A Trial Of Any Act Which Amounted To An Offence"

Prima Facie Evidence Of Embezzlement And Mens Rea

The court observed that the petitioners were entrusted with cash as custodians and trustees of the ATM vault, and the failure to replenish the machines resulted in wrongful loss to the company and the public. The bench found that the deliberate act of providing misleading information and failing to return the shortfall indicated the necessary mens rea for prosecution.

The court highlighted that the misappropriation of ₹30,95,700/- while working as an agent of the company squarely fell under the category of a punishable offence. It remarked that the deposit of partial amounts by the petitioners was prima facie indicative of "temporary embezzlement," which does not absolve them of criminal liability.

Scope Of Section 482 CrPC And Quashing Of FIR

Referring to the settled law in State of Telangana vs. Habib Abdullah Jellani, the bench stated that an FIR should not be quashed at a nascent stage when a prima facie offence is disclosed. The court noted that the matter requires a deep probe and thorough investigation, which cannot be throttled by the High Court under its extraordinary jurisdiction.

Regarding the plea of multiple FIRs, the court found that the two FIRs in question related to different ATM machines at different locations and involved different amounts. Therefore, the court concluded that the jurisdiction to investigate vested in different police stations and did not constitute an impermissible duplication of proceedings.

"FIR Cannot Be Quashed At This Nascent Stage"

The High Court concluded that the writ petition lacked merit as the allegations clearly disclosed a criminal offence notwithstanding the contractual nature of the relationship. By refusing to quash the FIR, the court affirmed that commercial disputes involving elements of fraud or embezzlement must be allowed to reach their logical conclusion through criminal investigation.

Date of Decision: July 15, 2026