V. Narasimha Raju Vs. V. Gurumurthy
Raju & Ors  INSC 235 (22 August 1962)
22/08/1962 GAJENDRAGADKAR, P.B.
GUPTA, K.C. DAS DAYAL, RAGHUBAR
CITATION: 1963 AIR 107 1963 SCR (3) 687
CITATOR INFO :
R 1965 SC 166 (7) RF 1992 SC 248 (58,59,60)
reference-Consideration found unlawful-Legality of the award-Agreement for
arbitration on withdrawal of criminal case-Public policy-Indian Contract Act,
1872 (9 of 1872), s.23.
In respect of a business which the appellant
and the first respondent were carrying on in partnership along with others till
September 15,1942, the first respondent demanded that the account should be
made and the profit? divided between the partners. Disputes arose when dividing
the profits that whereas the first respondent claimed for himself alone the
amount due to him and the fourth respondent, the latter demanded that the said
amount should be divided half and half between them. The first respondent then
proceeded to file a criminal complaint in the Magistrate's court against the
partners including the appellant in which he alleged that the accused persons
hid committed offences under ss. 420, 465, 468 and 477 read with ss. 107 and
120-B of The Indian Penal Code. The charge levelled by the first respondent was
that the accounts of the partnership had been fraudulently altered with a view
to show test the fourth respondent was entitled to share equally the profits
with the first respondent. Process was issued on the complaint and the matter
stood adjourned for hearing to December 30,1943. On that date the first
respondent and the accused persons entered into an' agreement under which the
dispute between the appellant and others and the first respondent was to be
referred to a named arbitrator on the first respondent agreeing to withdraw his
Accordingly after the complaint was dismissed
on the first respondent intimating to the Court that he had no evidence to
support his case, the agreement signed by the parties was handed over to the
arbitrator. In due course, the arbitrator pronounced his award and the first
respondent took steps to have a decree passed in terms of the a-ward.
Thereupon the appellant filed an application
under the provisions of the Arbitration Act, 1940, for setting aside the award
on the ground that the consideration for the arbitration agreement was unlawful
as it was 688 the promise by the first respondent not to prosecute his
complaint which involved a non-compoundable offence and, therefore, the
agreement was invalid under s.23 of the Indian Contract Act, 1872.
Held, that the arbitration agreement executed
by the parties on December 30, 1943, was invalid under s. 23 of the Indian Contract
Act, 1872, because its consideration was opposed to public policy. Consequently
the award could not be enforced.
Bhowanipur Banking Corporation Ltd. v.
Sreemati Durgesh Nandini Dassi, A. 1. R. 1941 P. C. 95, Kamini Kumar Basu &
Ors. v. Birendra Nath Basu & Anr., L.R. 57 I. A. 117 and Sudhindra Kumar v.
Ganesh Chandra (1939)1 Cal. 241, relied on.
CIVIL APPELATE, JURISDICTION :Civil Appeals
Nos. 494 and 495 of 1957.
Appeals from the Judgment and decree dated
March 5, 1954, of the Orissa High Court in Mies. Appeals Nos. 25 and 26 of
A.V. Viswanatha Sastri and T. V. B.
Tatachari, for the appellant.
M. S. K. Sastri for respondent No. 1.
1962 August 22. The Judgment of the Court was
delivered by GAJENDRAGADKAR, J.The short question which arises in these two
appeals is whether the Muchalika (Agreement of Reference) which was executed by
the appellant and the four respondents in favour of Tanguda Narasimhamurty on
the 30th of December, 1943, is invalid because its consideration was opposed to
public policy under s. 23 of the Indian Contract Act. Both the trial Court and
the High Court of Orrisa have answered this question in the negative, and the
appellant, who has come to this Court with a certificate granted 689 by the
High Court under Art. 133 of the Constitution, contends that the said
conclusion is contrary. to law.
It appears that the appellant took a lease of
the Parlakimedi Samasthanam Rice and Oil Mill for three years from 1941 to 1944
under a registered lease-deed on the 9th December. 1940. The rent agreed to be
paid was Rs. 7,000 per annum., For the working of the Mill, the appellant took
six partners with him and their shares in the partnership were duly determined.
The partnership carried on the work of milling rice and extracting oil from
The appellant also carried on another
business in paddy and ground-nuts and in this business too he took as his
partners four out of his six partners in the business of milling rice and
extracting oil from ground-nuts. Amongst these partners was respondent No. IV.
Gurumurty Raju. This latter busssiness was carried on for about 14 months until
the end of March, 1942. Two of the partners then retired from the said business
and took away their shares in the Capital and the profits. The remaining. three
partners continued the business of the firm; the appellant had As.0.7.3 share,
respondent No. 2 had 0.6.9 share and respondent No. 1 along with respondent No.
4. had 0.2.0 share. Thus, the partnership, in fact, consisted of five partners
respondents 1 and 4 being together entitled to a share of As. 0.2.0. The
business of the partnership thus carried on by these partners went on till the
15th September, 1942. Respondent No. 1 then demanded that the accounts should
be made and the profits divided between the partners. As a result of this
demand, the-partnership was stopped, accounts were made and profits divided.
The appellant and respondent 690 No. 2 took away their respective amounts, but
1 claimed for himself alone the amount due to
him and respondent No. 4, whereas respondent No. 4 demanded that the said
amount should be divided half and half between him and respondent No. 1. That
is how a dispute arose about the share of respondent No. 1.
Respondent No. 1 then proceeded to file a
criminal complaint in the Court of the Joint Magistrate at Berhampur against
six persons, including the appellant. In this complaint he alleged that the six
accused persons had committed offences under s. 420, 465, 468 and 477 read with
se. 107 and 120-B of the Indian Penal Code. The substance of the charge thus
levelled by respondent No. 1 was that the accounts of the partnership had been
fraudulently altered with a view to show that respondent No. 4 was entitled to
share equally the profits with respondent No. 1. In these proceedings,
respondent No. 1 obtained an attachment of the account-books of the two
businesses carried on by the appellant with his partners. This criminal
complaint was numbered as Criminal Case No. 139 of 1943, and after process was
issued on it and some preliminary steps had been taken, it stood adjourned for
hearing to December 30, 1943.
On December 30, 1943, respondent No. 1 and
the accused persons entered into an agreement (Exbt. 1) as a result of which
the dispute between the appellant and others and respondent No. 1 was agreed to
be referred to the arbitration of Mr. Murty on the respondent No. 1 agreeing to
withdraw his criminal complaint. Accordingly, when the criminal case was called
out for hearing on that date, respondent No. 1 stated that he had no evidence
to support his case and so, the complaint was dismissed; and the arbitration
paper signed by 691 the parties was handed over to the arbitrator, Mr. Murty.
That is how the impugned arbitration.
agreement came to be passed between the parties and Mr. Murty came to be
appointed an arbitrator.
The arbitrator then began his proceedings and
after recording evidence, he pronounced his award ex-parte on September 14,
1946, During the pendency of the said arbitration proceedings, the, appellant
had applied to the Subordinate Judge at Berhampur for removing the arbitrator
on the ground of his misconduct under ss, 5 and II of the,, Arbitration Act
(M.J.C. No. 34 of 1944). The said., application was dismissed. The appellant
then preferred a RevisionaI Application against the order of the trial Judge
(Revision. Petition No. C.R. 78 of 1946), but the said petition was also dismissed'
on March 26, 1949. Pending the disposal of the. said Revision Petition, the
award was pronounced on September 14, 1946.
After the award was thus pronounced,
respondent No. 1 made an application to the Subordinate ;Judge at Berhampur on
December 10, 1946, (M.J.C. No. 105 of 1946) under ss. 14 and 30 of the Arbitration
Act for the filing of the award and for passing a decree in terms thereof. The
appellant filed an application on January 14, 1947, in the same Court under s.
33 of the Arbitration Act for setting aside the award (M.J.C. No. 8 of 1947).
To both these applications, all the parties to the Reference and the Arbitrator
By his application, the appellant claimed the
setting aside of the award on several grounds, one of which was that the
arbitration agreement was invalid under s. 23 of the Indian Contract Act. Both
the Courts have rejected this contention. In the result, the application for
setting aside of the award made by the appellant has been dismissed and the
application made by respondent No. 1 for passing a decree in terms 692 of the
award has been allowed. Both the Courts have also considered and rejected the
other contentions raised by the appellant in support of his plea that the award
but for the purpose of these appeals, it is
unnecessary to refer to he said findings, because we have come to the conlusion
that the appellant is right in contending hat the arbitration agreement is
invalid under s. 23 of the Indian Contract Act.
Section 23 provides that every agreement of
which the object or consideration is unlawful is void, and it lays down that
the consideration of an agreement is lawful unless, inter alia, it is opposed
to public policy. Agreement made by parties for stifling prosecution are not
enforced by Courts on the ground that the consideration for such agreements is
opposed to public policy. If a person sets the machinery of the Criminal Law
into action on the allegation that the opponent has committed a
non-compoundable offence and by the use of this coercive criminal process he
compels the opponent to enter into an agreement, that agreement would be
treated as invalid for the reason that its consideration is opposed to public
policy. Under the Indian Law, offences are divided into three categories, some
are compoundable between the parties, some are compoundable with the leave of
the Court and some are non-compoundable. In the present case, it is common ground
that amongst the offences charged by respondent No. 1 against the appellant and
others were included non-compoundable offences, and so, we are dealing with a
ease where, according to the appellant, a criminal process was issued in
respect of non-compoundable offences and the withdrawal of the criminal
proceedings was a consideration for the agreement of reference to which the
appellant has put his signature. Whether or not the appellant 693 proves his
case, we will consider later; but the true legal position on this point is not
in doubt. If it is shown that the consideration for the arbitration agreement
was the withdrawal and the non-prosecution of the criminal complaint, then the
provisions of s. 23 of the Indian Contract Act would be attracted. The
principle underlying this provision is obvious. Once the machinery of the
Criminal Law is set into motion on the allegation that a non-compoundable
offence has been committed, it is for the criminal courts and criminal courts
alone to deal with that allegation and to decide whether the offence alleged
has in fact been committed or not. The decision of this question cannot either
directly or indirectly be taken out of the hands of criminal courts and dealt
with by private individuals. When as a consideration for not proceeding with a
criminal complaint, an agreement is made, in substance it really means that the
complainant has taken upon himself to deal with his complaint and on the
bargaining counter he has used his non-prosecution of the complaint as a
consideration for the agreement which his opponent has been induced or coerced
to enter into. As Mukherjea, J.. has observed in Sudhindra Kumar v. Ganesh
Chandra(1) "no Court of law can countenance or give effect an agreement
which attempts to take the administration of law out of the hands of the judges
and put in the hands of private individuals." Therefore, it is clear that
if the appellant proves that the consideration for the arbitration agreement
was the promise by respondent No. 1 not to prosecute his complaint, then the
said consideration would he opposed to public policy and the agreement based on
it would be invalid in law.
In this connection. it would be relevant to
refer to two decisions of the Privy Council. in Bhowanipur Banking Corporation
Lid. v. Sreemati Durgesh Nandini Dasi(2) Lord Atkin has observed (1)  I
Cal. 241, 250. (2) A.I.R. 1941 P.C. 95.
694 that to insist on reparation as a
consideration for promise to abandon criminal proceedings is a, serious abuse
of the right of private prosecution. The citizen who proposes to vindicate the
criminal law must do so wholeheartedly in the interests of justice, and must
not seek his own advantage.' In' dealing with the question as to whether the
consideration for the agreement is opposed to public policy or not, it is
immaterial that the debt in respect of which an agreement is made for the
illegal consideration was real, nor is it necessary to prove that a crime in
fact had been committed. All that is necessary to prove in such a case is
"that each party should understand that the one is making his .'promise in
exchange or part exchange for the promise of the other not to prosecute or
continue prosecuting". In that case, a mortgage bond was executed by the
respondent as 'a part of the consideration for a promise by the bank to
withdraw criminal proceedings instituted by it against the mortgagor's husband,
and it was held by the Privy Council that the mortagage bond was invalid. In
dealing with the question that the debt which was a consideration for the
mortgage bond was real, their Lordships observed that the existence of the debt
made no difference at all because whether or not the debt was real, the
mortgage had been executed for a consideration which was opposed to public
policy and so, it became illegal and void.
In Kamini Kumar Basu v. Virendra Nath
Basu,(1), their Lordships held that ,if it is an implied term of a reference to
arbitration, and of an "ekrarnama pursuant to an award, that a complaint
that a non-compoundable offence under the Indian Penal Code has been committed
shall not be proceeded with, the consideration is unlawful on the ground of public
policy, and the award and ekrarnama are, (1)  L.R. 57 I.A. 117.
695 therefore, unenforceable, and this would
be so irrespective of whether in law a prosecution has been commenced or
In that case, the criminal case was withdrawn
the day after the execution of the impugned agreement, but it appeared that
prior to the execution of the agreement, there bad been an understanding
between the parties that they would withdraw from their respective criminal
cases. Sir Binod Mitter who delivered the judgment of the Board observed that
in such cases, it is unlikely that it would be expressly stated in the
ekrarnama that a part of its consideration was an agreement to settle the
criminal proceedings. it would, however, be enough for the parties which
impeached the validity of the agreement to give evidence from which the
inference necessarily arises that part of the consideration was unlawful. It is
in the light of these decisions that we will have to consider the question as
to whether the appellant has succeeded in showing that the consideration for
the agreement of reference in the present case was the withdrawal and
non-prosecution of the criminal complaint filed by respondent No. 1.
We will first refer to the complaint filed by
1 against the appellant and others. In this
complaint it was alleged that all the accused persons conspired with each other
with intent to defraud respondent No. 1 of a half of his 2 annas share in the
partnership assets and altered the account books of both the Rice and Oil
Mills, and the joint business in material parts by inserting the name of the
4th respondent by the side of respondent No. 1's name in order to make it
appear that the 4th respondent also owned the two annas share along with or
jointly with respondent No. 1. It is on the basis of this allegation that
respondent No. 1 complained that the accused persons 'including the appellant
bad committed offences under ss. 420, 465, 468 and 477 696 read with sections
107 and 120-B. 1. P. C. It is common ground that process was issued on this
complaint and it stood adjourned for hearing to December 30, 1943.
On December 30, 1943, the arbitration
agreement was entered into by the parties. This document consists of eight
clauses. It purported to authorise Mr. Murty to determine whether 2 annas share
belonged exclusively to respondent No.
1 or jointly to respondents 1 and 4; and it
also authorised him to determine incidental and subsidiary issues in respect of
respondent No. 1's claim for his share in the profits of the partnership.
Clause 5 of the agreement provided that the arbitrator was to determine who and
in what manner are to bear the costs incurred by both the parties in Criminal
Case No. 139 of 1943 on the file of Berhampur 2nd Officer's Court, according to
justice and injustice. In other words, the arbitrator had to decide not,only
the civil dispute between the parties resulting from the claim made by
respondent No. 1 to two annas share in the profits of the partnership, but also
to determine the dispute about the expenses in the criminal proceedings.
Let us now examine the evidence which shows
the circumstances under which the arbitration agreement came to be executed.
Mr. Murty who has been examined for respondent No. 1 L stated that he did not
suggest any term to be embodied in the fair draft and he could not say at whose
instructions the draft was written because it was written in his absence. Then
he added that the parties gave the Muchalika to him first and as he was
returning with it, they told him that they would intimate about the Muchalika
to the Criminal Court and lot him know court's orders thereon. He also pleaded
that he could not say if the 1st respondent had any idea that after the
Muchalika was given to him, he would 697 withdraw the case. The Muchalika has
been attested by two witnesses both of whom have given evidence in this case.
Sitharamaswamy is one of the two attesting
witnesses. He has stated that the parties had gathered at about 1 or 2 p.
m. in the Court hall of the Sub-Collector's
Court where the criminal case was going to be heard. 1 he document was executed
to bring the criminal case between the parties then pending to a close. After
the document was executed, the criminal case was got cancelled. The 1st
respondent definitely stated that he would withdraw the case and accordingly he
went to the criminal court and got the case dismissed. Thereafter, the original
of the document was handed over to the arbitrator. It is significant that this
witness who has attested the document was one of the witnesses called by
respondent No. 1 in the criminal case filed by him against the appellant and
others and in fact be had come to the criminal court to give evidence on that
To the same effect is the evidence of the
other attesting witness Jayachandra Padhi. After the agreement was scribed and
duly executed, respondent No. 1 told the criminal court about his inability to
prove his case and accordingly the case was dismissed. Then all the parties
gathered on the court verandah and the appellant handed over the fair copy of
the agreement to the arbitrator. According to this witness, the reference was
executed in order that respondent No. 1 should withdraw the criminal case and
the arbitration should settle their dispute. This witness expressly stated that
the condition was that after the criminal case was withdrawn, the reference was
to be handed over to the arbitrator.
The other witness examined by the appellant
is Appa Rao. He refers to the circumstances under which the arbitration agreement
was executed and adds that the appellant kept the final draft with 698 him and
handed it over to the arbitrator after the criminal complaint was dismissed. It
appears that Appa Rao was confronted with his prior statement made in the
proceedings started by the appellant to remove the arbitrator for misconduct.
We will have occasion to refer to this statement later on.
The appellant has stated on oath in support
of his case that respondent No. 1 agreed to with draw the criminal case and not
to prosecute it an it was in consideration of that promise that hentered into
the arbitration agreement. In his evidence he has added that after the criminal
complaint was filed, the partnership books were seized and the joint business
did not continue. According to him, Mr. Murty offered to effect a compromise if
a reference was made to him and' get the case withdrawn. It was at that stage
that pleaders of both the sides prepared the draft of the agreement. Then the
witness has narrated how respondent No:
1 went to the court and stated that he was
unable to prove his case whereupon the complaint was dismissed, Then the
parties came out and the agreement was delivered over to Mr. Murty. The
evidence of this witness clearly shows that the agreement was executed by him
because he was promised that the criminal case would be taken out if he
executed the agreement. That is the evidence adduced by the appellant in
support of his case that the consideration of the agreement was the promise of
respondent No. 1 not to prosecute his case and that in fact the document was
given over to the arbitrator after the promise was carried out by respondent
No. 1 and the criminal case was dismissed.
Respondent No. 1 in his evidence has not made
any categorical statement to the contrary. He has admitted the circumstances
disclosed by the appellant and his witnesses as to the place 699 where, the
time when and the manner in which the agreement came to be executed. He only
stated that he could not say whether the talk of reference to the arbitrator in
question cropped up before or after the dismissal of the case. He admits that
be pleaded his inability to prove his case in the criminal court and that the
arbitrator then entered upon arbitration.
It would thus be seen that the evidence adduced
by the appellant is cogent, satisfactory and categorical, whereas the evidence
of respondent No. 1 and of the arbitrator examined by him is not categorical to
the contary and at best is ambiguous. Even according, to respondent No. 1 and
the arbitrator, the agreement was drafted within the premises of the criminal
court just before the criminal case was taken out. In other words, the place
where the agreement was drafted and the time at which it was drafted, are
significant. It was known that the criminal case would be heard in the
afternoon of December 30, 1943, and so, the sequence of events clearly
indicates that the parties entered into an understanding, the essence of which
was that respondent No. 1 was to get the criminal case dismissed and as a consideration
for that, the appellant and the other accused persons had to agree to refer
their dispute to the arbitration of Mr. Murty. In this connection, it is very
significant that the final draft which was executed and attested was handed
over to the arbitrator after the criminal case was withdrawn. Therefore, the
circumstances attending the execution of the document and the sequence of
events disclosed in the evidence clearly show that the Promise of respondent
No. 1 to withdraw and not to prosecute the criminal case was a consideration
for which the appellant and his friends entered into the arbitration agreement.
This is not a case where it can be reasonably
said that the withdrawal of the criminal case may have 700 been a motive and
not the consideration for the impugned transaction.
Then again cl.5 of the agreement corroborates
the appellant's case that the withdrawal and non-prosecution of the criminal
complaint was a consideration for the arbitration agreement. That is why the
arbitrator was authorised to decide as to who and in what manner are to bear
the expenses incurred in criminal proceedings. The intimate connection of the
criminal proceedings and their withdrawal with the arbitration agreement is
thus clearly established. That is another factor which supports the appellant's
It has, however, been urged by Mr. M. S. K.
Sastri for respondent No. 1 that the agreement was entered into because Mr.
Murty offered to ,settle the disputes between the parties and the parties
accepted his advice. It does appear that Mr. Murty had stood surety for the
appellant in the criminal case for his due appearance in the criminal court
whenever the case would be fixed for hearing and Mr. Sastri relies on the
statement made by the appellant that Mr. Murty offered to effect a compromise
if a reference was made to him and get the case withdrawn. The argument is that
it was at the suggestion of Mr. Murty that the whole incident took place and
so, there can be no scope for arguing that respondent No. 1 promised to
withdraw the criminal case as a consideration for the execution of the
arbitration agreement. This argument cannot be accepted because Mr. Murty
himself does not admit that he offered to mediate and parties thereupon
accepted his advice. According to Mr. Murty he was not present when the
agreement was written and he in fact does not, know who dictated the contents
of the agreement. But apart from this consideration, even the statement made by
the appellant on which the argument is founded shows that the proposal 701 was
clear-criminal case had to be 'Withdrawn a not to be prosecuted and the
agreement of reference had to be made.
These two steps were related to each other as
cause and effect, or one step was or consideration and the other was the
acceptance of the proposal to enter into the arbitration agreement. Therefore,
we do not see how it would be possible to repel the appellant's argument that
the consideration for the arbitration 'agreement was the promise of respondent
No. 1 not to prosecute his criminal complaint.
It is true that both the trial Court and the
High Court have rejected the appellant's contention and normally this Court is
reluctant to interfere with a concurrent finding made on an issue like this by
both the courts below. But in this case, the, judgment of the High Court shows
that unfortunately the High Court has not considered the relevant evidence
bearing on the point. Its conclusion rests mainly on two considerations. It has
criticised the appellant for not having taken this point when the appellant
applied for the removal of the arbitrator by his petition M. J. C. 34 of 1944,
and so, the High Court took the view that the present plea had been taken at a
very belated stage. In our opinion, this criticism is not well-founded. Whether
or not the appellant could have taken this plea by another proceeding under
some provision of the Arbitration Act is a different matter. But it would be
erroneous to find fault with the appellant for not taking this point in an
application made by him for removing the arbitrator on the ground of his
misconduct. If the appellant sought the removal of the arbitrator on the ground
of his misconduct, it would not have been relevant or material in that context
to allege that the arbitration agreement itself was invalid.
In any case, the failure of the appellant to
take this point otherwise in an 'earlier proceeding would 702 not justify the
rejection of the point without considering the merits of the evidence led by
the appellant in support of it. and that substantially is what the High Court
has purported to do in this case, The other consideration which seems to have
influenced the High Court proceeded from the fact that Appa Rao who has been
examined by the appellant in the present proceedings had stated in the
proceedings which were taken by the appellant by his application to remove the
arbitrator that after respondent No. 1 had deposed in the criminal case, the
reference to the arbitration was made,, and the High Court apparently thought
that this prior statement of Appa Rao is so completely inconsistent with the
present version set up by the appellant and his witnesses that it should for
that reason alone be rejected. This view is obviously erroneous.
What Appa Rao stated in the earlier
proceedings is wholly consistent with his evidence in the present proceedings
as well as the evidence given by the appellant and his other witnesses. The
reference in law and in fact was made only when the arbitration agreement duly
executed was handed over to the arbitrator and this happened after the criminal
case was dismissed. That is the appellant's version even now.
This is not inconsistent with the other part
of the appellant's version which deals with the negotiations between the
parties which preceded the drafting of the arbitration agreement, the
preparation of the draft and its final engrossment all of which took place
before the criminal case was called out. All the witnesses of the appellant
have said that the draft was shown to the arbitrator, but the final agreement
was given to his after the criminal case was dismissed. Thus, what the High
Court thought to be a serious inconsistency between the present story deposed
to by Appa Rao and his 703 past statement does not amount to any inconsistency
It is to be regretted that the High Court did
not examine the rest of the evidence carefully before it came to the conclusion
that the appellant's challenge to the validity of the arbitration agreement
under s. 23 could not be sustained. It is because of this infirmity in the
judgment of the High Court that we thought it necessary to examine the evidence
ourselves. The said evidence, in our opinion, clearly supports the appellant's
case and so, it must be held that the arbitration agreement executed by the
parties on December 30, 1943, is invalid under s. 23 of the Indian Contract Act,
because its consideration was opposed to public policy.
The result is, the two appeals are allowed,
the application made by respondent No. 1 (M. J. C. 105 of 1946) for passing a
decree in terms of the award is dismissed and the application made by the
appellant (M. J. C. No. 8 of 1947) for setting aside the award is allowed. The
appellant would be entitled to his costs from respondent No. 1 throughout.
One set of hearing fees.