Mediation Legal for Cheque Bouncing Cases u/Section 138 of NI Act


January 06, 2018

In a remarkable judgment passed by the Delhi High Court, the Court has drawn a distinction between traditional criminal cases and offence under Section 138 of Negotiable Instruments Act, 1881 to hold that it is legal to refer a criminal compoundable case as one under Section 138 of NI Act to mediation.

The Court in the case also expounded the procedure that is to be followed in cases of mediation for offences under Section 138 of NI Act and also delineated the contents of the settlement.

In this recent judgement delivered by the Delhi High Court in the case of Dayawati v. Yogesh Kumar Gosain[1], the Court held that it is legal to refer a criminal compoundable case as one under Section 138 of NI Act to mediation.

In the case the fundamental issue related to settlement of disputes in criminal law through alternative dispute mechanisms.

The Court in order to arrive at its decision studied distinction between the kinds of criminal offences i.e. compoundable and non-compoundable offences. The Court stated that though an express statutory provision enabling the criminal Court to refer the complainant and accused persons to alternate dispute redressal mechanisms has not been specifically provided by the Legislature, however, the Code of Criminal Procedure does permit and recognize settlement without stipulating or restricting the process by which it may be reached. There is thus no bar to utilizing the alternate dispute mechanisms including arbitration, mediation, conciliation (recognized under Section 89 of CPC) for the purposes of settling disputes which are the subject matter of offences covered under Section 320 of the Code of Criminal Procedure.

Other key observations made by the Court in the case are:

That Section 138 of NI Act was introduced to inculcate faith in the efficacy of banking operations and credibility in transacting business of negotiable instruments.

Distinction between traditional criminal offences and offences under Section 138 of NI Act

The Delhi High Court to clarify on the difference between traditional criminal offences and offence under Section 138 of NI Act made reference to plethora of judgements. For instance in the case of Kaushalya Devi Massand v. Roopkishore Khore[2] drew the following distinction between the traditional criminal offences and the offence under Section 138 of NI Act observing thus:

“Having considered the submissions made on behalf of the parties, we are of the view that the gravity of a complaint under the Negotiable Instruments Act cannot be equated with an offence under the provisions of the Penal Code, 1860 or other criminal offences. An offence under Section 138 of NI Act, is almost in the nature of a civil wrong which has been given criminal overtones.”

That cases arising under Section 138 of NI Act are really “civil cases masquerading as criminal cases”. The statutory object in effect appears to be both punitive as also compensatory and restitutive in regard to cheque dishonouring cases. The judgment notes that Chapter XVII of the enactment is a unique exercise which bears the dividing line between civil and criminal jurisdictions and that it provides a single forum to enforce a civil and criminal remedy[3].

Unlike that for other forms of crime, the punishment under Section 138 of NI Act is not a means of seeking retribution, but is more a means to ensure payment of money. The complainant’s interest lies primarily in recovering the money rather than seeing the drawer of the cheque in jail. The threat of jail is only a mode to ensure recovery. As against the accused who is willing to undergo a jail term, there is little available as remedy for the holder of the cheque[4].

That proceedings under Section 138 of NI Act have a special character. They arise from a civil dispute relating to dishonoring to a cheque but may result in a criminal consequence. Even though the statute is punitive in nature, however, its spirit, intendment and object is to provide compensation and ensure restitution as well which aspects must received priority over punishment. The proceedings under Section 138 of the NI Act are therefore, distinct from other criminal cases. It is well settled that they are really in the nature of a civil wrong which has been given criminal overtones.

The Delhi Hugh Court also rendered answers to the following questions in the case. Relevant extract from the judgement is reproduced below:

Question I: What is the legality of referral of a criminal compoundable case (such as on under Section 138 of the NI Act) to mediation?

It is legal to refer a criminal compoundable case as one under Section 138 of the NI Act to mediation.

Question II: Can the Mediation and Conciliation Rules, 2004 formulated in exercise of powers under the CPC, be imported and applied in criminal cases? If not, how to fill the legal vacuum? Is there a need for separate rules framed in this regard (possibly under Section 477 of the Cr.P.C.)?

The Delhi Mediation and Conciliation Rules, 2004 issued in exercise of the rule making power under Part-10 and Clause (d) of Sub-section (ii) of Section 89 as well as all other powers enabling the High Court of Delhi to make such rules, applies to mediation arising out of civil as well as criminal cases.

Question III: In cases where the dispute has already been referred to mediation – What is the procedure to be followed thereafter? Is the matter to be disposed of taking the very mediated settlement agreement to be evidence of compounding of the case and dispose of the case, or the same is to be kept pending, awaiting compliance thereof (for example, when the payments are spread over a long period of time, as is usually the case in such settlement agreements)?

The Delhi High Court in the case also enumerated the procedure that is to be followed for Mediation for offences under Section 138 of NI Act.

Procedure for Settlement of Offence through Mediation under Section 138 of NI Act

  1. When the respondent first enters appearance in a complaint under Section 138 of the NI Act, before proceeding further with the case, the Magistrate may proceed to record admission and denial of documents in accordance with Section 294 of the Cr.P.C., and if satisfied, at any stage before the complaint is taken up for hearing, there exist elements of settlement, the magistrate shall inquire from the parties if they are open to exploring possibility of an amicable resolution of the disputes.
  2. If the parties are so inclined, they should be informed by the Court of the various mechanisms available to them by which they can arrive at such settlement including out of Court settlement; referral to Lok Adalat under the Legal Services Authorities Act, 1987; referral to the Court annexed mediation centre; as well as conciliation under the Arbitration and Conciliation Act, 1996.
  • Once the parties have chosen the appropriate mechanism which they would be willing to use to resolve their disputes, the Court should refer the parties to such forum while stipulating the prescribed time period, within which the matter should be negotiated (ideally a period of six weeks) and the next date of hearing when the case should be again placed before the concerned Court to enable it to monitor the progress and outcome of such negotiations.
  1. In the event that the parties seek reference to mediation, the Court should list the matter before the concerned mediation centre/mediator on a fixed date directing the presence of the parties/authorized representatives before the mediator on the said date.
  2. If referred to mediation, the Courts, as well as the mediators, should encourage parties to resolve their overall disputes, not confined to the case in which the reference is made or the subject matter of the criminal complaint which relates only to dishonouring of a particular cheque.
  3. The parties should endeavour to interact/discuss their individual resolutions/proposals with each other as well and facilitate as many interactions necessary for efficient resolution within the period granted by the Court. The parties shall be directed to appear before the mediator in a time bound manner keeping in view the time period fixed by the magistrate.
  • In the event that all parties seek extension of time beyond the initial six week period, the magistrate may, after considering the progress of the mediation proceedings, in the interest of justice, grant extension of time to the parties for facilitating the settlement.

Contents of the settlement

If a settlement is reached during the mediation, the settlement agreement which is drawn-up must incorporate:

(a) a clear stipulation as to the amount which is agreed to be paid by the party;
(b) a clear and simple mechanism/method of payment and the manner and mode of payment;
(c) undertakings of all parties to abide and be bound by the terms of the settlement must be contained in the agreement to ensure that the parties comply with the terms agreed upon;
(d) a clear stipulation, if agreed upon, of the penalty which would enure to the party if a default of the agreed terms is committed in addition to the consequences of the breach of the terms of the settlement;
(e) an unequivocal declaration that both parties have executed the agreement after understanding the terms of the settlement agreement as well as of the consequences of its breach;
(f) a stipulation regarding the voluntariness of the settlement and declaration that the executors of the settlement agreement were executing and signing the same without any kind of force, pressure and undue influence.

Thereafter, the mediator should forward a carefully executed settlement agreement duly signed by both parties along with his report to the Court on the date fixed, when the parties or their authorized representatives would appear before the Court.

Proceedings before the Court

The magistrate would adopt a procedure akin to that followed by the civil Court under Order XXIII of the C.P.C.

The magistrate should record a statement on oath of the parties affirming the terms of the settlement; that it was entered into voluntarily, of the free will of the parties, after fully understanding the contents and implications thereof, affirming the contents of the agreement placed before the Court; confirming their signatures thereon. A clear undertaking to abide by the terms of the settlement should also be recorded as a matter of abundant caution.

A statement to the above effect may be obtained on affidavit. However, the magistrate must record a statement of the parties proving the affidavit and the settlement agreement on Court record.

The magistrate should independently apply his judicial mind and satisfy himself that the settlement agreement is genuine, equitable, lawful, not opposed to public policy, voluntary and that there is no legal impediment in accepting the same.

Pursuant to recording of the statement of the parties, the magistrate should specifically accept the statement of the parties as well as their undertakings and hold them bound by the terms of the settlement terms entered into by and between them.

Upon receiving a request from the complainant, that on account of the compromise vide the settlement agreement, it is withdrawing himself from prosecution, the matter has to be compounded. Such prayer of the complainant has to be accepted in keeping with the scheme of Section 147 of the NI Act.

At this point, the trial Court should discharge/acquit the accused person, depending on the stage of the case. This procedure should be followed even where the settlement terms require implementation of the terms and payment over a period of time.

In the event that after various rounds of mediation, the parties conclude that the matter cannot be amicably resolved or settled, information to this effect should be placed before the magistrate who should proceed in that complaint on merits, as per the procedure prescribed by law.

Question V: If the Mediated Settlement Agreement, by itself, is taken to be tantamount to a decree, then, how the same is to be executed? Is the complainant to be relegated to file an application for execution in a civil Court? And if yes, what should be the appropriate orders with respect to the criminal complaint case at hand. What would be the effect of such a mediated settlement vis-a-vis the complaint case?

The settlement reached in mediation arising out of a criminal case does not tantamount to a decree by a civil Court and cannot be executed in a civil Court.

However, a settlement in mediation arising out of referral in a civil case by a civil Court, can result in a decree upon compliance with the procedure under Order 23 of the C.P.C. This can never be so in a mediation settlement arising out of a criminal case.

The entire case can be accessed here.

[1] 243 (2017) Delhi Law Times 117 (DB), decided on October 17, 2017

[2] (2011) 4 SCC 593

[3] Rule Vijayan v. Baby, (2012) 1 SCC 260

[4] Damodar S. Prabhu v. Sayed Babalal H, (2010)50 SCC 663