Cheque Bounce With Arbitration Clause: Forum Choice

Your buyer's cheque has come back unpaid, and the supply contract you signed with him carries an arbitration clause. The immediate question is whether that clause blocks a Section 138 complaint under the Negotiable Instruments Act, or pushes you into arbitration first. It does neither in the way most suppliers fear. A cheque bounce arbitration clause governs the contract; it does not take away the criminal remedy Parliament created for a dishonoured cheque. But the clause does change how you should sequence the demand notice, the complaint and the claim for the balance, and it changes both the cost and the timeline of getting paid.

What a Cheque Bounce Arbitration Clause Does Not Do to Section 138

Section 138 of the Negotiable Instruments Act, 1881 creates a criminal offence. Where a cheque drawn by a person on an account maintained by him, for discharge of any debt or other liability, is returned unpaid because of insufficient funds or because it exceeds the arrangement, the drawer commits an offence. The payee must serve a demand notice within 30 days of receiving the bank's return memo, and the drawer then gets 15 days to pay. If he does not, a complaint can be filed within one month of the cause of action.

None of that depends on whether the underlying contract contains an arbitration clause. The reason is simple: the offence is a statutory wrong, not a breach of contract. Once a cheque is dishonoured, the payee's right to prosecute is a right given by law, and two private parties cannot contract it away. A magistrate trying a Section 138 complaint is not deciding a contractual dispute between supplier and buyer. He is trying an offence.

Section 8 of the Arbitration and Conciliation Act, 1996 is the provision a drawer usually waves at the magistrate. It applies where a judicial authority is asked to decide an action in a matter that is the subject of an arbitration agreement. A criminal complaint is not that kind of action. The Supreme Court has also held that certain categories of disputes are not arbitrable at all, and disputes giving rise to criminal offences sit firmly outside the arbitrator's remit (Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd., (2011) 5 SCC 532).

So the honest answer to the supplier's question is this. The clause does not block Section 138, and it will not get the drawer off the hook. What it can do is delay you, if you let it.

When the Bounced Cheque Dispute Genuinely Belongs in Arbitration

Separate the crime from the debt. The dishonour is a crime. The unpaid invoice is money owed under a contract. Arbitration reaches the second, not the first.

If your supply contract has a wide clause covering all disputes arising out of or in connection with the contract, the buyer's failure to pay the invoice is squarely a contractual dispute. You can refer it to arbitration and ask for the principal, contractual interest and any other unpaid invoices. Section 16 of the Arbitration Act lets the tribunal rule on its own jurisdiction, so a preliminary objection by the buyer is decided inside the arbitration rather than by a civil court.

Three limits are worth remembering. First, the arbitrator cannot try the Section 138 offence or convict anyone. Second, if the cheque was issued for a liability that sits outside the contract, such as a personal loan between the promoters, the arbitration clause in the supply contract may not cover it. Third, a claim for the money carries the ordinary three-year limitation under the Limitation Act, 1963, applied to arbitration through Section 43 of the Arbitration Act. The 30-day and one-month windows under Section 138 are far tighter.

Practical Order: Notice, Section 138, Arbitration

The clock decides the sequence. Section 138 has hard deadlines; arbitration does not. Protect the criminal remedy first, and run the civil claim alongside or behind it.

1. Serve the Section 138 notice immediately on dishonour, within 30 days of receiving the bank's return memo. Send it by registered post and by email to the address named in the contract.

2. Wait out the full 15 days. A complaint filed before that period expires is premature and will be dismissed as not maintainable.

3. File the complaint within one month of the date the cause of action arises, under Section 142(1)(b). The court can condone delay, but do not build a plan around it.

4. Invoke arbitration by a Section 21 notice for the debt, interest and other invoices. It can go out the same week as the Section 138 notice.

5. If the buyer does not appoint an arbitrator, move a Section 11 application before the Supreme Court or the High Court, as the clause provides.

Where to file the complaint

After the 2015 amendment, Section 142(2)(a) fixes jurisdiction where the cheque was delivered for collection. If it was presented through the payee's bank, the court is the one covering that branch. A supplier in Coimbatore can therefore complain in Coimbatore even if the drawer's account sits in Pune. Confirm your bank branch's location before drafting; this is an easy point to lose on.

A worked timeline

Take a Coimbatore auto-components supplier. Invoice dated 4 February 2026 for ₹18,40,000. The purchase order carries an arbitration clause with the seat at Pune. The buyer issues cheque number 441278, dated 12 March 2026, drawn on a Pune branch.

The supplier deposits it on 18 March 2026. The cheque returns on 23 March with the remark "funds insufficient", and the memo reaches the supplier on 25 March. A Section 138 notice goes out on 8 April, inside the 30-day window, and is served on 11 April. The 15-day period ends on 26 April and the cause of action arises on 27 April. The complaint is filed on 20 May 2026, inside the one-month limit. Separately, a Section 21 notice is served on 15 April 2026 for ₹18,40,000 with contractual interest at 18% per annum.

If the magistrate exercises the discretion under Section 143A after the drawer pleads not guilty, interim compensation is capped at 20% of the cheque amount, which here is ₹3,68,000. That order is not a finding of guilt; it is interim and is adjusted against the final fine or compensation.

Drafting the Section 138 Notice When the Contract Has an Arbitration Clause

The notice is a statutory document, not a letter of demand. Keep it clean. State the invoice, the cheque particulars, the date of the bank's return memo and the fact of dishonour. Demand the cheque amount within 15 days of receipt. Add that failure will lead to prosecution under Section 138. Do not renegotiate the amount in the notice and do not offer a discount.

On the arbitration clause, one sentence is enough: that the notice is issued for the purposes of Section 138 and that the payee reserves the right to refer the contractual claim to arbitration. That sentence stops the buyer from later arguing that the notice was an election to abandon arbitration, and it stops you from having to explain why the same amount appears in two proceedings.

Resist writing one combined letter that both demands arbitration and threatens prosecution. A combined notice invites the argument that it is not a proper statutory demand. Keep the two documents separate, with separate dates, and keep proof of despatch for both.

Costs, Delay and Choosing the Realistic Remedy

Section 138 is faster at the front end and slower at the back. The complaint is cheap to file, the trial is summary under Section 143, and interim compensation under Section 143A can arrive within months. But trial courts are crowded, and appeals carry their own price: Section 148 allows the appellate court to require a deposit of at least 20% of the fine or compensation before a conviction appeal is heard, which is why many drawers settle rather than appeal.

Arbitration is slower at the front end and stronger at the back. Appointing an arbitrator, waiting out a Section 11 petition if the buyer refuses, and completing the reference can take a year or more before the first hearing on merits. What you get is an award on the full contractual claim, including interest and other invoices, and an executable order. For a supplier with ₹18,40,000 plus interest at stake and a repeat buyer, running both is often worth it.

The real risk in running both is double recovery. If the arbitrator awards the cheque amount and the criminal court also orders compensation, you cannot keep both. Tell each forum what you have received in the other, keep a running statement of amounts recovered, and adjust the claim. Concealing one proceeding from the other is the fastest way to lose credibility with both.

There is also a settlement route many suppliers ignore. An offence under Section 138 is compoundable under Section 147, at any stage. If the buyer offers a lump sum, a compounding application supported by an affidavit is cleaner than an informal letter, and it closes the criminal case without a trial.

Documents to keep

• Original cheque and the bank return memo
• Invoice, e-way bill, delivery challan and the buyer's goods receipt
• Ledger extract or statement of account signed by the buyer, which also works as an acknowledgment under Section 18 of the Limitation Act
• The purchase order or supply agreement containing the arbitration clause
• Section 138 notice with postal receipt, tracking record and email delivery proof
• Section 21 arbitration notice and any reply from the buyer

Common mistakes

Waiting for arbitration to finish before sending the Section 138 notice destroys the criminal remedy. Filing the complaint on day three after the notice, before the 15 days end, gets it dismissed. Assuming the magistrate will stay the case because of the arbitration clause wastes months. And claiming the identical amount in both fora without disclosing either is the surest way to lose both. None of these are clever tactics; they are the reasons suppliers lose cases they should have won.

Checklist before you file

• Locate the original cheque and the bank return memo with its date.

• Serve the Section 138 notice within 30 days of receiving the return memo.

• Wait the full 15 days before filing; a premature complaint is dismissed.

• File in the court covering the bank branch where you presented the cheque.

• Issue a separate Section 21 notice for the debt, interest and other invoices.

• Disclose both proceedings in each forum and track every rupee recovered.

• Keep the contract, invoices and delivery proof ready for both matters.

Next step: check the date on the bank return memo. If it is under 30 days old, get the Section 138 notice drafted and despatched this week, and take the arbitration decision only after the 15-day period runs out.

This article is for general information only and is not legal advice. Consult a qualified professional for your specific facts.