Full Judgment Text
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PETITIONER:
THE UNION OF INDIA
Vs.
RESPONDENT:
KISHORILAL GUPTA AND BROS.
DATE OF JUDGMENT:
21/05/1959
BENCH:
SUBBARAO, K.
BENCH:
SUBBARAO, K.
IMAM, SYED JAFFER
SARKAR, A.K.
CITATION:
1959 AIR 1362 1960 SCR (1) 493
ACT:
Contract--Arbitration clause-Cancellation of contract-
Settlement of disputes by mutual agreement-Arbitration
clause, if survives-Award based on such clause-Validity.
HEADNOTE:
The respondents entered into three several contracts with
the appellant, for the fabrication and supply of diverse
military stores, each of which contracts contained an
arbitration clause. Before the contracts had been fully
executed disputes arose between the parties, one alleging
that the other was committing a breach of the contract. The
parties then entered into three fresh contracts on
successive dates purporting to settle these disputes on the
terms therein contained. By the first two of these
settlement contracts the respondents agreed to pay to the
appellant certain moneys in settlement respectively of the
disputes relating to the first two original contracts. By
the last of these settlement contracts the respondents
agreed to pay to the appellant in specified instalments
certain moneys in settlement of the disputes relating to the
third original contract as also the moneys which had then
become due on the first two settlement contracts and had not
been paid and further undertook to hypothecate certain
properties to secure the due repayment of these moneys. The
third settlement contract provided: " The contracts stand
finally concluded in terms of the settlement and no party
will have any further or other claim against the other."
The respondents paid some of the instalments but failed to
pay the rest. They also failed to create the hypothecation.
The appellant then referred its claims for breach of the
three original contracts to arbitration under the
arbitration clauses contained in them. On this reference an
award for a total sum of Rs. 1,i6,446-iI-5 was made against
the respondents in respect of the appellant’s claim on the
first and the third original contracts, the claim in respect
of the second original contract having been abandoned by the
appellant, and this award was filed in the High Court at
Calcutta. The respondents applied to the High Court for a
declaration that the arbitration clauses in the original
contracts had ceased to have any effect and the contracts
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stood finally determined as a result of the settlement
contracts and for an order setting aside the award as void
and nullity. The High Court held that the first original
contract had not been abrogated by the settlement in respect
of it, but the third original contract and the arbitration
clause contained in it had ceased to exist as a result of
the last settlement and, the arbitrator had no jurisdiction
to arbitrate under that arbitration clause. It further
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494
held that as the award was a single and inseverable award
the whole of it was null and void. In this view the High
Court set aside the award.
Held (per Imam and Subba Rao, JJ., Sarkar J., dissenting),
that the third settlement, properly construed, left no
manner of doubt that it was for valid consideration and
represented the common intention of the parties to
substitute it for the earlier contracts between them. It
gave rise to a new cause of action by obliterating the
earlier contracts and the parties could look to it alone for
the enforcement of their claims. There could, therefore, be
no question that the arbitration clause which, whether a
substantive or a collateral term, was nevertheless an
integral part of the said contracts, must be deemed to exist
along with them as a result of the said settlement.
Hirji Mulji v. Cheong Yue Steamship Company, [1926] A.C. 502
and Heyman v. Darwin Ltd., [1942] 1 All E.R. 337, referred
to.
Tolaram Nathmull v. Birla Jute Manufacturing Co. Ltd.,
I.L.R. (1948) 2 Cal. 171, distinguished.
Held, further, that it was well settled that the parties to
an original contract could by mutual agreement enter into a
new contract In substitution of the old one.
Payana Reena Saminathan v. Pana Lana Palaniappa, [19I4] A.C.
618: Norris v. Baron and Company, [1918] A.C. i and British
Russian Gazette and Trade Outlook Ltd. v. Associated
Newspaper, Limited, [1933] 2 K.B. 616, referred to.
Per Sarkar, J.-The award was valid and could not be set
aside as the third settlement neither expressly put an end
to the arbitration clause nor, considered as an accord and
satisfaction, did it have that effect.
An accord and satisfaction is only a method of discharge of
a contract. It does not annihilate the contract but only
makes the obligation arising from it unenforceable.
An arbitration clause stands apart from the rest of the
contract in which it is contained. It does not impose on
the one party an obligation in favour of the other; it only
embodies an agreement that if any dispute arises with regard
to any obligation which one party has undertaken to the
other, such dispute shall be settled by arbitration. An
accord and satisfaction, which is concerned with the
obligations arising from the contract, does not affect an
arbitration clause contained in it.
Heyman v. Darwins [1942] A.C. 356 and British Russian
Gazette and Trade Outlook Ltd. v. Associated Newspapers Ltd.
[1933] 2 K.B. 616, referred to.
The settlement of February 22, 1949, did not, in the circum-
stances of the case, amount to an accord and satisfaction.
JUDGMENT:
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 250 of 1955.
495
Appeal by special leave from the judgment and order dated
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February 11, 1953, of the Calcutta High Court, in Award No.
254 of 1949.
H. N. Sanyal, Additional Solicitor-General of India,B. Sen,
R. H. Dhebar and T. M. Sen, for the appellant.
C. B. Aggarwala and Sukumar Ghose, for the respondent.
1959. May 21. The judgment of Jafer Imam and Subba Rao,
JJ., was delivered by Subba Rao, J. Sarkar, J., delivered a
separate judgment.
SUBBA RAO J.-This appeal by special leave raises the
question of survival of an arbitration clause in a contract
after the said contract is superseded by a fresh one. The
respondent’-firm, styled as " Kishorilal Gupta & Brothers ",
entered into the following three contracts with the
Governor-General-in-Council through the Director General of
Industries and Supplies, hereinafter called the Government:
(i) contract dated April 2, 1943, for the supply of 43,000
"Ladles Cook"; (ii) contract dated September 15, 1944, for
the supply of 15,500 "Bath Ovals"; and (iii) contract dated
September 22, 1944, for the supply of 1,00,000 "Kettles Camp
" Each of the said contracts contained an arbitration
clause, the material part of which was as follows :
" In the event of any question of dispute arising under
these conditions or any special conditions of contract or in
connection with this contract (except as to any matters the
decision of which is specially provided for by these
conditions) the same shall be referred to the award of an
arbitrator to be nominated by the purchaser and an
arbitrator to be nominated by the contractor..........
Under the terms of the said three contracts, the Government
supplied certain raw-materials to the respondents and the
latter also delivered some of the goods to the former. On
May 21, 1945, the contract dated April 2, 1943, hereinafter
called the first contract, was cancelled by the Government.
The Government
496
also demanded certain sums towards the price of the
;materials supplied by them to the respondents. On the same
day, the Government cancelled the contract dated September
15, 1944, hereinafter called the second contract, and made a
claim on the respondents for the price of the raw-materials
supplied to them. The respondents made a counter-claim
against the Government for compensation for breach of the
contract. On March 9, 1946, the Government cancelled the
contract dated September 22, 1944, hereinafter called the
third contract. Under that contract there were mutual.
claims-by the Government for’ the raw-material supplied to
the contractors and by the latter for compensation for
breach of contract. The disputes under the three contracts
were amicably settled. ’The outstanding disputes under the
first and the second contracts were settled on September 6,
1948, and two separate documents were executed to evidence
the said settlement. As the decision, to some extent, turns
upon the comparative study of the recitals in the said
documents of settlement, it will be convenient to read the
material part of the recitals contained therein. The
settlement in respect of the first contract contained the
following recitals:
" (1) The contractor expressly agrees to pay the Government
the sum of Rs. 3,164-8 as. only on this contract.
(2) The contract on payment of the amount mentioned in
clause (1) shall stand finally determined." The recitals in
the settlement of the second contract are as follows:
" (1) The contractor expressly agrees to pay to the
Government the sum of Rs. 36,276. If D. G. 1. & S. has
recovered any amount under the contract out of the sum due
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credit will be given to the contractor.
(2) The contract stands finally determined and no party
will have any further claim against the other."
One prominent difference in the phraseology used in the two
settlements may be noticed at this stage.
497
While under the settlement of the first contract, ’the
contract should stand finally determined Only payment of the
amount agreed to be paid to the Government by the
contractor, under the settlement of the second contract, the
contract stood finally determined on the date of the
settlement itself. The third contract was settled on
February 22, 1949, and the material part of the recitals
therein is as follows:
" (1) The firm will pay a sum of Rs. 45,000 in full and
final settlement of the amount due to the Government in
respect of raw materials received against the contract and
their claims for compensation for cancellation of the same
contract.
(2) The firm will retain all surplus partly fabricated and
fully fabricated stores lying with them.
(3) The firm agrees to pay the abovementioned sum of Rs.
45,000 only together with the sums owing by them to the
Government under the settlements reached in two other cases
A/T Nos. MP/75762/R-61/ 78 dated 15th September 1944 and
MP/50730/8/R-I/ 90 dated 2nd April 1943 in monthly
instalments for Rs. 5,000 only for the first three months,
first instalment being payable on 10th March, 1949, and
further instalments of Rs. 9,000 per month till the entire
dues payable to Government are paid.
(4) In the event of default of any monthly instalments
interest will be charged by Government on the amount as
defaulted at the rate of 6% per annum from the first day of
the month in which the instalment shall be due. If the
instalments defaulted exceed two in number the Government
will have the right to demand the entire balance of the
money payable by the firm together with interest thereon at
the rate abovementioned on that balance and take such steps
to recover from them from the security to be offered.
(5) In order to provide cover for the money pay. able to
the Government the firm undertakes to hypothecate their
moveable and immoveable property in Bamangachi Engineering
Works together with all machinery sheds and leasehold
interest in
498
land measuring about 5.75 acres in Mouja Bamungachi in
Howrah. The firm further undertakes to execute the
necessary stamped documents for the purpose as drafted by
the Government Solicitor at Calcutta.,
(6) The contracts stand finally concluded in terms of the
settlement and no party will have further or other claim
against the other."
Broadly speaking, this settlement was a comprehensive one
including therein the earlier settlements and providing for
the recovery of the amounts agreed to be paid under the said
two earlier settlements. The concluding paragraph is more
analogous to that of the settlement of the second contract
rather than that of the first. Under the final settlement,
between October 28, 1948, and January 17, 1949, the respond-
ents paid a, total sum of Rs. 9,000 to the Government under
the first two settlements of the contracts. Between March
10, 1949, and October 31, 1949, the respondents paid a total
sum of Rs. 1 1,000 in instalments to the Government, though
the amounts paid were less than the amount payable in
accordance with the agreed instalments. Some correspondence
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passed between the Government and the respondents, the
former demanding the balance of the amount payable under the
instalments and the latter putting it off on one ground or
other. Finally on August 10, 1949, the Government wrote a
letter to the respondents demanding the payment of Rs.
1,51,723 payable to them under the three original contracts,
ignoring the three settlements. The Government followed
that letter with another one of the same date informing the
respondents that they had appointed Bakshi Shiv Charan Singh
as their arbitrator and calling upon the respondents to
nominate their arbitrator. The respondents did not co-
operate ’in the scheme of arbitration and instead Kishori
Lal Gupta as sole proprietor of the respondent-firm made an
application under s. 33 of the Arbitration Act, 1940, in the
Original Side of the High Court of Calcutta for a declara-
tion that the arbitration agreement was no longer in
existence. That application was dismissed by
499
Banerjee, J., of the said High Court on the ground that it
was not maintainable as the two other partners of the
respondent-firm were not made parties to the said
proceeding. But in the course of the judgment, the learned
Judge made some observation on the merits of the case.
Thereafter the Government filed their statement of facts
before the arbitrator and the respondents filed a counter-
affidavit challenging the arbitrator’s jurisdiction and also
the correctness of the claims made by the Government. On
July 31, 1951, the arbitrator made an award in favour of the
Government for a total sum of Rs. 1,16,446-11-5 in respect
of the first and the third contracts and gave liberty to the
Government to recover the amount due to them under the
second contract in a suit. The award was duly filed in the
High Court, and, on receiving the notice, the respondents
filed an application in the High Court for setting aside the
award and in the alternative for’ declaration that the
arbitration clause in the three contracts ceased to have any
effect and stood finally determined by the settlement of the
disputes between the parties. Bachawat, J., held that the
first contract was to be finally determined only on payment
in terms of the settlement, and, as such payment was not
made, the original contract and its arbitration clause
continued to exist. As regards the third contract, the
learned Judge came to the conclusion that by the third
settlement, there was accord and satisfaction of the
original contract and the substituted agreement discharged
the existing cause of action and therefore the arbitrator
had no jurisdiction to entertain any claim with regard to
that contract. As the award on the face of it was a lump
sum award, the learned Judge held that it was not severable
and therefore the whole award was bad. In the result, he
gave the declaration that the arbitration clause contained
in the contract dated September 22,1944, for "Kettles Camp"
had ceased to exist since the settlement contract dated
February 22, 1949, and that the entire award was void and
invalid. The present appeal by special leave was filed by
the Government against the said order of the High Court.
500
At the outset, a preliminary objection taken by Shri
Aggarwal, the learned Counsel for the respondents, may be
disposed of The learned Counsel contends that the special
leave granted by this Court should be revoked on the ground
that an appeal lay against the order of the learned Judge to
an appellate bench of the same High Court both under cl. 15
of the Letters Patent and s. 39 of the Arbitration Act. It
is not, and cannot be, contended that this Court has no
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jurisdiction to entertain an appeal against the order of a
Court when an appeal lies from that order to another Court.
The provisions of Art. 136 of the Constitution are not’
circumscribed by any such limitation. But what is argued,
in our view legitimately, is that when an appeal lay to the
appellate bench of the Calcutta High Court, this Court
should not have given special leave and thereby short-
circuited the legal procedure prescribed. There is much
force in this argument. If the application for revoking the
special leave had been taken at the earliest point of time
and if this Court was satisfied that an appeal lay to an
appellate bench of the Calcutta High Court, the leave
obtained without mentioning that fact would have been
revoked. But in the present case, the special leave was
granted on March 29, 1954, and the present application for
revoking the leave was made five years after the grant of
special leave and the learned Counsel could not give any
valid reason to explain this inordinate delay. In the
circumstances, if we revoked the special leave, the
appellant would be prejudiced, for if this objection had
been taken at the earliest point of time, the appellant
would have had the opportunity to prefer a Letters Patent
appeal to the appellate bench of the Calcutta High Court.
The appellant cannot be made to suffer for the default of
the respondents. In the circumstances, we did not entertain
that application for revoking the special leave and did not
express our opinion on the merits of the question raised by
the learned Counsel.
Now coming to the merits, the main contentions of the
parties may be stated at the outset. The argument of the
Additional Solicitor-General for the
501
appellant may be summarized in the following propositions:
(1) The jurisdiction of the arbitrator depends upon the
scope of the arbitration agreement or submission; (2) its
scope would depend upon the language of the arbitration
clause; (3) if the arbitration agreement in question is
examined, it indicates that the dispute whether the original
contracts have come to an end or not is within its scope;
(4) on the facts of the case, there had been no novation or
substitution of the original contracts; and (5) if there had
been a novation of the original contracts, the non-perform-
ance of the terms of the new contract revived the original
contracts and therefore the parties to the
original contracts could enforce their terms including the
arbitration clause. The submission of Shri Aggarwal,
Counsel for the respondents,may be stated thus : (1) Upon
the facts of the case, there had been a recession of the old
contracts and substitution of a new, legally enforceable and
unconditional contract, which came into immediate effect;
(2) the new contract can be legally supported either under
s. 62 or s. 63 of the Indian Contract Act or under the
general law of contracts; (3) the non-performance of the
terms of the new contract did not have the effect of
reviving the rights and obligations under the old contracts
as they did not remain alive for any purpose; and (6) even
if the arbitration clause did not remain alive after the new
contract, the arbitrator was bound to decide the case in
terms of the new contract, and he having not done so, the
error is apparent on the face of the record and therefore
the award is liable to be set aside.
So stated the controversy covers a much wider field than
that necessary to solve the problem presented in this case.
It would, therefore’ be convenient at this stage to clear
the ground. Subtle distinctions sought to be made between
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the provisions of s. 62 and s. 63 of the Indian Contract Act
need not detain us; nor need we consider the question
whether the settlement contract in question falls under s.
62 or is covered by s. 63 of the Indian Contract Act, or is
governed by the general principles of the law of contracts,
for the validity of the said contract is not questioned. by
either
64
502
party and indeed both rely upon it one to contend ,that it
wholly superseded the earlier ones and the other to rely
upon its terms to bring out its contingent character. If
so, the only two outstanding questions are: (i) what is the
legal effect of the contract dated February 22, 1949, on the
earlier contracts ? ; and (ii) does the arbitration clause
in the earlier contracts survive after the settlement
contract ?
The law on the first point is well-settled. One of the
modes by which a contract can be discharged is by the same
process which created it, i.e., by mutual agreement; the
parties to the original contract may enter into a new
contract in substitution of the old one. The legal position
was clarified by the Privy Council in Payana Reena
Saminathan v. Pana Lana Palaniappa (1). Lord Moulton
defined the legal incidents of a substituted contract in the
following terms at p. 622:
" The ’receipt’ given by the appellants, and accepted by the
respondent, and acted on by both parties proves conclusively
that all the parties agreed to a settlement of all their
existing disputes by the arrangement formulated in the
’receipt’. It is a clear example of what used to be well
known in common law plea ding as " accord and satisfaction
by a substituted agreement ". No matter what were the
respective rights of the parties inter se they are abandoned
in consideration of the acceptance by all of a new
agreement. The consequence is that when such an accord and
satisfaction takes place the prior rights of the parties are
extinguished. They have in fact been exchanged for the new
rights; and the new agreement becomes a new departure, and
the rights of all the parties are fully represented by it.
" The House of Lords in Norris v. Baron and Company (2) in
the context of a contract for sale of goods brought out
clearly the distinction between a contract which varies the
terms of the earlier contract and a contract which rescinds
the earlier one, in the following passage at p. 26:
"In the first case there are no such executory clauses in
the second arrangement as would enable
(1) [1914] A.C. 618 622. (2) [1918] A.C. 1. 26.
503
you to sue upon that alone if the first did not exist; in
the second you could sue on the second arrangement alone,
and the first contract is got rid of either 2 by express
words to that effect, or because, the second dealing with
the same subject-matter as the first but in a different way,
it is impossible that the two should be both performed. "
Scrutton, L.J., in British Russian Gazette and Trade Outlook
Limited v. Associated Newspaper, Limited (1), after
referring to the authoritative text-books on the subject,
describes the concept of 11 accord and satisfaction " thus
at p. 643:
" Accord and satisfaction is the purchase of a ,release from
an obligation whether arising under contract or tort by
means of any valuable consideration, not being the actual
performance of the obligation itself. The accord is the
agreement by which the obligation is discharged. The
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satisfaction is the consideration which makes the agreement
operative. Formerly it was necessary that the consideration
should be executed Later it was conceded that the
consideration might be executory The consideration on each
side might be an executory promise, the two mutual promise
making an agreement enforceable in law, a contract I An
accord, with mutual promises to perform, is good, though
’the thing be not performed at the time of action; for the
party has a remedy to compel the performance’, that is to
say, a cross action on the contract of accord if, however,
it can be shown that what a creditor accepts in satisfaction
is merely his debtor’s promise and not the performance of
that promise, the original cause of action is discharged
from the date when the promise is made. "
The said observations indicate that an original cause of
action can be discharged by an executory agreement if the
intention to that effect is clear. The modern rule is
stated by Cheshire and Fifoot in their Law of Contract, 3rd
Edn., at p. 453:
"The modern rule is, then, that if what the creditor has
accepted in satisfaction is merely his
(1) [1933] 2 K.B. 6i6, 643, 644.
504
debtor’s promise to give consideration, and not the
performance of that promise, the original cause of action is
discharged from the date when the agreement is made.
This, therefore, raises a question of construction in each
case, for it has to be decided as a fact whether it was the
making of the promise itself or the performance of the
promise that the creditor consented to take by way of
satisfaction. "
So too, Chitty in his book on Contracts, 31st Edn., states
at p. 286:
" The plaintiff may agree to accept the performance of a
substituted consideration in satisfaction, or he may agree
to accept the promise of such performance. In the former
there is no satisfaction until performance, and the debtor
remains liable upon the original claim until the
satisfaction is executed. In the latter, if the promise be
not performed, the plaintiff’s remedy is by action for the
breach of the substituted agreement, and he has no right of
resort to the original claim. "
From the aforesaid authorities it is manifest that a
contract may be discharged by the parties thereto by a
substituted agreement and thereafter the original cause of
action arising under the earlier contract is discharged and
the parties are governed only by the terms of the
substituted contract. The ascertainment of the intention of
the parties is essentially a question of fact to be decided
on the facts and circumstances of each case.
We have already given the sequence of events that led to the
making of the contract dated February 22, 1949. To
recapitulate briefly, the original three contracts were
cancelled. by the Government on May 21, 1945, May 21, 1945,
and March 9, 1946, respectively. Under the first contract,
the Government made a claim for the price of the raw-
materials supplied and there was no counter-claim by the
respondents. Under the second and third contracts, there
were counter-claims-the Government claiming amounts for the
raw-materials supplied and the respondents claiming damages
for the breach thereof.
505
The disputes under the first two contracts were settled on
the same day. As the claim was only on the part of the
Government, the amount due to them was ascertained at Rs.
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3,164-8-0 and the first contract was expressly agreed to be
finally determined on payment of that amount. The express
terms of the settlement leave no room to doubt that the
contract was to be determined only after the payment of the
ascertained amount. But under the second settlement, which
was a compromise of disputed claims, a sum of Rs. 36,276 was
fixed as the amount due from the respondents to the
Government, presumably on taking into consideration the
conflicting claims and on adjusting all the, amounts
ascertained to be due from one to the other. The parties in
express terms agreed that the earlier contract stood finally
determined and that no party would have any claim thereunder
against the other. A comparative study of the terms of the
said two settlement contracts indicates that under the first
settlement the original contract continued to govern the
rights of the parties till payment, while under the second
settlement contract, the original contract was determined
and the rights and liabilities of the parties depended
thereafter on the substituted contract. Coming to the third
settlement, it was in the pattern of the second settlement.
On the breach of the third contract, there were mutual
claims, the Government claiming a large amount for raw-
materials supplied to the respondents, and the latter on
their side setting up a claim for damages. Further, though
the earlier two contracts were settled on September 6, 1948,
the amounts payable under the said two settlements were not
paid. A comprehensive settlement, therefore, of the
outstanding claims was arrived at between the parties, and
the rights and liabilities were attempted to be crystallized
and a suitable procedure designed for realising the amounts.
In full and final settlement of the amounts due to the
Government in respect of the raw-materials received against
the contracts and the respondents’ claim for compensation
for cancellation of the contracts, it was agreed that the
respondents should pay a sum of Rs. 45,000 to the Government
506
and that the respondents should retain all the material,
partly fabricated and fully fabricated stores lying with
them. Clauses 3, 4 and 5 provide for the realisation of the
entire amounts covered by the three settlements. Under cl.
3 the respondents agreed to pay the total amount payable
under the three settlements in monthly instalments for the
first three months commencing from March 10, 1949, at a sum
of Rs. 5,000 and thereafter at a sum of Rs. 9,000 per month
till the entire amount was paid. Clause 4 prescribed that
in case of default of any monthly instalment interest would
be charged at the rate of 6% per annum and if the
instalments defaulted exceeded two in number the Government
was given the right to realise the entire amount payable
under the three contracts with interest not only from the
security but also otherwise. Under cl. 5 it was stipulated
that the respondents should hypothecate their moveable and
immoveable properties described thereunder to provide cover
for the moneys payable to the Government. Clause 6 in
express terms declared that the contracts should be finally
concluded in terms of the settlement and no party would have
any claim against the other. Is there any justification for
the contention that the substituted contract should either
come into force after the hypothecation bond was executed or
that it should cease to be effective if the said bond was
not’ executed within a reasonable time from the date of the
settlement? We do not find any justification for this
contention either in the express terms of the contract or in
the surrounding circumstances whereunder the document came
to be executed. It was a self-contained document; it did
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not depend upon the earlier contracts for its existence or
enforcement. The liability was ascertained and the mode of
recovery was provided for. The earlier contracts were
superseded and the rights and liabilities of the parties
were regulated thereunder. No condition either precedent or
subsequent was expressly provided; nor was there any scope
for necessarily implying one or either. The only argument
in this direction,
507
namely, that it is impossible to attribute any intention to
the Government to take a mere promise on. the part of the
respondents to hypothecate their properties "’ as
satisfaction " and therefore it should be held that the
intention of the parties was that there would be no
satisfaction till such a document was executed, does not
appeal to us. We are concerned with the expressed intention
of the parties and when the words are clear and unambiguous-
they are undoubtedly clear in this case-there is no scope
for drawing upon hypothetical considerations or supposed
intentions of the parties; nor are we attracted by the
argument that the description of the properties intended to
be hypothecated was not made clear and therefore the
presumed intention was to suspend the rights under the new
contract till a valid document in respect of a definite and
specified property was executed. Apart from the fact that
we are not satisfied with the argument that the description
was indefinite, we do not think that such a flaw either
invalidates a document or suspends its operation till the
defect is rectified or the ambiguity clarified. The
substituted agreement gave a new cause of action and
obliterated the earlier ones and if there was a valid
defence against the enforcement of the new contract in whole
or in part, the party affected must take the consequences.
We have, therefore, no doubt that the contract dated
February 22, 1949, was for valid consideration and the
common intention of the parties was that it should be in
substitution of the earlier ones and the parties thereto
should thereafter look to it alone for enforcement of their
claims. As the document does not disclose any ambiguity, no
scrutiny of the subsequent conduct of the parties is called
for to ascertain their intention.
If so, the next question is whether the arbitration clause
of the original contracts survived after the execution of
the settlement contract dated February 22, 1949. The
learned Counsel for the appellant contends that the terms of
the arbitration clause are wide and comprehensive, and any
dispute on the question whether the said contract was
discharged by any of the ways known to law came within its
fold.
508
Uninfluenced by authorities or case-law, the logical outcome
of the earlier discussion would be that the arbitration
clause perished with the original contract. Whether the
said clause was a substantive term or a collateral one, it
was none the less an integral part of the contract, which
had no existence de hors the contract. It was intended to
cover all the disputes arising under the conditions of, or
in connection with, the contracts. Though the phraseology
was of the widest amplitude, it is inconceivable that the
parties intended its survival even after the contract was
mutually rescinded and substituted by a new agreement. The
fact that the new contract not only did not provide for the
survival of the arbitration clause but also the circumstance
that it contained both substantive and procedural terms
indicates that the parties gave up the terms of the old
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contracts, including the arbitration clause. The case-law
referred to by the learned Counsel in this connection does
not, in our view, lend support to his broad contention and
indeed the principle on which the said decisions are based
is a pointer to the contrary.
We shall now notice some of the authoritative statements in
the text-books and a few of the cases bearing on the
question raised: In Chitty on Contract, 21st Edn., the scope
of an arbitration clause is stated thus, at p. 322:
" So that the law must be now taken to be that when an
arbitration clause is unqualified such a clause will apply
even if the dispute involve an assertion that circumstances
had arisen whether before or after the contract had been
partly performed which have the effect of discharging one or
both parties from liability, e.g., repudiation by one party
accepted by the other, or frustration."
In " Russel on Arbitration ", 16th Edn., p. 63, the
following test is laid down to ascertain whether an
arbitration clause survives after the contract is deter-
mined:
" The test in such cases has been said to be whether the
contract is determined by something outside itself, in which
case the arbitration clause
509
is determined with it, or by something arising out of the
contract, in which case the arbitration clause. remains
effective and can be enforced."
The Judicial Committee in Hirji Mulji v. Cheong Yue
Steamship Company (1) gives another test at p. 502:
"That a person before whom a complaint is brought cannot
invest himself with arbitral jurisdiction to decide it is
plain. His authority depends on the existence of some
submission to him by the parties of the subject matter of
the complaint. For this purpose a contract that has
determined is in the same position as one that has never
been concluded at all. It founds no jurisdiction."
A very interesting discussion on the scope of an arbitration
clause in the context of a dispute arising on the question
of repudiation of a contract is found in the decision of the
House of Lords in Heyman v. Darwine Ltd .(2 ) There a
contract was repudiated by one party and accepted as such by
the other. The dispute arose in regard to damages under a
number of heads covered by the contract. The arbitration
clause provided that any dispute between the parties in
respect of the agreement or any of the provisions contained
therein or anything arising thereout should be referred to
arbitration. The House of Lords held that the dispute was
one within the arbitration clause. In the speeches of the
Law Lords a wider question is discussed and some of the
relevant principles have been succinctly stated. Viscount
Simon L.C. observed at p. 343 thus:
" An arbitration clause is a written submission, agreed to
by the parties to the contract, and, like other written
submissions to arbitration, must be construed according to
its language and in the light of the circumstances in which
it is made. If the dispute is as to whether the contract
which contains the clause has ever been entered into at all,
that issue cannot go to arbitration under the clause, for
the party who denies that he has ever entered into the
contract is thereby denying that he has ever joined in the
submission. Similarly, if one party to
(1) [1926] A.C. 497,502.
65
(2) [1942] 1 All E.R. 337, 343-345, 347, 350.
510
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the alleged contract is contending that it is void ab initio
(because, for example, the making of such a contract is
illegal), the arbitration clause cannot operate, for on this
view the clause itself is also void.
If, however, the parties are at one in asserting that they
entered into a binding contract, but a difference has arisen
between them as to whether there has been a breach by one
side or the other, or as to whether circumstances have
arisen which have discharged one or both parties from
further performance, such differences should be regarded as
differences which have arisen " in respect of ", or " with
regard to ", or " under " the contract, and an arbitration
clause which uses these, or similar, expressions, should be
construed accordingly. By the law of England (though not,
as I understand, by the law of Scotland) such an arbitration
clause would also confer authority to assess damages for
breach even though it does not confer upon the arbitral body
express power to do so.
I do not agree that an arbitration clause expressed in such
terms as above ceases to have any possible application
merely because the contract has "come to an end", as, for
example, by frustration. In such cases it is the
performance of the contract that has come to an end."
The learned Law Lord commented on the view expressed by Lord
Dunedin at p. 344 thus:
" The reasoning of Lord Dunedin applies equally to both
cases. It is, in my opinion, fallacious to say that,
because the contract has " come to an end " before
performance begins, the situation, so far as the arbitration
clause is concerned, is the same as though the contract had
never been made. In such case a binding contract was
entered into, with a valid submission to arbitration
contained in its arbitration clause, and, unless -the
language of the arbitration clause is such as to exclude its
application until performance has begun, there seems no
reason why the arbitrator’s jurisdiction should not cover
the one case as much as the other."
511
Lord Macmillan made similar observations at p. 345:
" If it appears that the dispute is as to whether, there has
ever been a binding contract between the parties, such a
dispute cannot be covered by an arbitration clause in the
challenged contract. If there has, never been a contract at
all, there has never been as part of it an agreement to
arbitrate; the greater includes the less. Further, a claim
to set aside a contract on such grounds as fraud, duress or
essential error cannot be the subject matter of a reference
under an arbitration clause in the contract sought to be set
aside. Again, an admittedly binding contract containing a
general arbitration clause may stipulate that in certain
events the contract shall come to an end. If a question
arises whether the contract has for any such reason come to
an end, I can see no reason why the arbitrator should not
decide that question. It is clear, too, that the parties to
a contract may agree to bring it to an end to all intents
and purposes and to treat it as if it had never existed. In
such a case, if there be an arbitration clause in the
contract, it perishes with the contract. If the parties
substitute a new contract for the contract which they have
abrogated, the arbitration clause in the abrogated contract
cannot be invoked for the determination of questions under
the new agreement. All this is more or less elementary. "
These observations throw considerable light on the question
whether an arbitration clause can be invoked in the case of
a dispute under a superseded contract. The principle is
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obvious; if the contract is superseded by another, the
arbitration clause, being a component part of the earlier
contract, falls with it. The learned Law Lord pin-points
the principle underlying his conclusion at p. 347:
" I am accordingly of opinion that what is commonly called
repudiation or total breach of a contract, whether
acquiesced in by the other party or not, does not abrogate a
contract, though it may relieve the injured party of the
duty of further fulfilling the obligations which he has by a
contract undertaken
512
to the repudiating party. The contract is not put out of
existence, though all further performance of the obligations
undertaken by each party in favour of the other may cease.
It survives for the purpose of measuring the claims arising
out of the breach, and the arbitration clause survives for
determining the mode of their settlement. The purposes of
the contract have failed, but the arbitration clause is not
one of the purposes of the contract."
Lord Wright, after explaining the scope of the word "
repudiation " and the different meanings its bears,
proceeded to state at p. 350:
" In such a case, if the repudiation is wrongful and the
rescission is rightful, the contract is ended by the
rescission; but only as far as concerns future performance.
It remains alive for the awarding of damages, either for
previous breaches, or for the breach which constitutes the
repudiation. That is only a particular form of contract
breaking and would generally, under an ordinary arbitration
clause, involve a dispute under the contract like any other
breach of contract."
This decision is not directly in point; but the principles
laid down therein are of wider application than the actual
decision involved. If an arbitration clause is couched in
widest terms as in the present case, the dispute, whether
there is frustration or repudiation of the contract, will be
covered by it. It is not because the arbitration clause
survives, but because, though such repudiation ends the
liability of the parties to perform the contract, it does
not put an end to their liability to pay damages for any
breach of the contract. The contract is still in existence
for certain purposes. But where the dispute is whether the
said contract is void ab initio, the arbitration clause
cannot operate on those disputes, for its operative force
depends upon the existence of the contract and its validity.
So too, if the dispute is whether the contract is wholly
superseded or not by a new contract between the parties,
such a dispute must fall outside the arbitration clause,
for, if it is superseded, the arbitration clause falls with
it. The argument, therefore, that the legal position is
513
the same whether the dispute is in respect of repudiation or
frustration or novation is not borne out by these decisions.
An equally illuminating judgment of Das, J., as he then was,
in Tolaram Nathmull v. Birla Jute Manufacturing Co. Ltd.(1)
is strongly relied upon by the learned Counsel for the
appellant. There the question was whether an arbitration
clause which was expressed in wide terms would take in a
dispute raised in that case. It was contended on one side
that the contract was void ab intio and on the other side
that, even on the allegations in the plaint, the contract
was not ab initio void. The learned Judge, on the facts of
that case, held that no case had been made out for staying
the suit and therefore dismissed the application filed by
the defendant for stay of the suit. The learned Judge
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exhaustively considered the case-law oil the subject and
deduced the principles and enumerated them at p. 187. The
learned Judge was not called upon to decide the present
question, namely, whether an arbitration clause survived in
spite of substitution of the earlier contract containing the
arbitration clause by a fresh one, and therefore we do not
think that it is necessary to express our opinion on the
principles culled out and enumerated in that decision.
The following principles relevant to the present case emerge
from the aforesaid discussion: (1) An arbitration clause is
a collateral term of a contract as distinguished from its
substantive terms; but none the less it is an integral part
of it; (2) however comprehensive the terms of an arbitration
clause may be, the existence of the contract is a necessary
condition for its operation; it perishes with the contract;
(3) the contract may be non est in the sense that it never
came legally into existence or it was void ab initio; (4)
though the contract was validly executed, the parties may
put an end to it as if it had never existed and substitute a
new contract for it solely governing their rights and
liabilities thereunder; (5) in the former case, if the
original contract has no legal existence, the arbitration
clause also cannot operate, for along with the original
contract, it is also void ; in the latter case, as the
(1) I.L.R. [1948] 2 Cal. 171.
514
original contract is extinguished by the substituted one,
the arbitration clause of the original contract perishes
with it; and (6) between the two falls many categories of
disputes in connection with a contract, such as the question
of repudiation, frustration, breach etc. In those cases it
is the performance of the contract that has come to an end,
but the contract is still in existence for certain purposes
in respect of disputes arising under it or in connection
with it. As the contract subsists for certain purposes, the
arbitration clause operates in respect of these purposes.
We have held that the three contracts were settled and the
third settlement contract was in substitution of the three
contracts; and, after its execution, all the earlier
contracts were extinguished and the arbitration clause
contained therein also perished along with them. We have
also held that the new contract was not a conditional one
and after its execution the parties should work out their
rights only under its terms. In this view, the judgment of
the High Court is correct. This appeal fails and is
dismissed with costs.
SARKAR J.-On different dates in 1943 and 1944, a firm of
contractors of the name of Kishorilal Gupta & Brothers
entered into three contracts with the appellant to fabricate
and supply certain military stores. The first contract was
for 43,000 ladles cook, the second for 15,500 bath ovals and
the third for 1,00,000 kettles camp. Each of these
contracts contained an arbitration clause. The last
mentioned contract provided that the appellant would supply
materials for the fabrication of the articles to be
delivered under it.
Before the contracts had been finally executed, disputes
arose between the parties. These disputes were settled by
mutual agreements which were contained in three separate
documents. The settlement in respect of the ladles cook
contract which was made on September 6, 1948, provided that
the contractors would pay to the appellant a sum of Rs.
3,164-8-0 and on such payment that contract would stand
finally determined. Under the settlement in respect of the,
bath ovals contract which also was made on
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515
September 6, 1948, the contractors agreed to pay to the
appellant Rs. 36,276 and it provided that " the contract
stands finally determined and no party shall have any
further claim against the other ". The terms of the
settlement of the kettles camp contract are set out below in
full, for, this case depends on them:
Dated the 22nd February 1949.
Messrs. Kishorilal Gupta & Bros., Calcutta.
Subs:-A.T. No. MP/75442/R-11397 dated the 22nd September
1944.
Dear Sir,
Reference discussion held on 5th February 1949 between your
Proprietor Mr. Kishorilal Gupta and General Manager J. B.
Breiter and the Claims Committee of the Directorate General.
I hereby confirm the following terms of settlement arrived
at in the meeting. The settlement has received the approval
of Director General of Industries and Supplies, New Delhi.
1. The firm will pay a sum of Rs. 45,000 in full and final
settlement of the amount due to the Government in respect of
raw materials received against the contract and their claims
for compensation for cancellation for the same contract.
2. The firm will retain all surplus partly fabricated and
fully fabricated stores, lying with them.
3. The firm agree to pay the above-mentioned sum of Rs.
45,000 only together with the sums owing by them to the
Government under the settlements reached in two other cases
A/T Nos. MP/75762/R-61/78 dated 15th September 1944 and
MP/50730/8/R-1/90 dated 2nd April 1943 in monthly
instalments for Rs. 5,000 only for the first three months,
first instalment being payable on 10th March 1949 and
further instalments of Rs. 9,000 per month till the entire
dues payable to Government are paid.
4. In the event of default of any monthly instalments
interest will be charged by Government on the amount as
defaulted at the rate of 6% per annum from the first day of
the month in which the instalment shall due. If the
instalments defaulted
516
exceed two in number, the Government will have the right to
demand the entire balance of the money payable by the firm
together with interest thereon at the rate abovementioned on
that balance and take such steps to recover from the
Security to be offered by the firm, in terms of the
settlement or otherwise.
5. In order to provide cover for the monies payable to the
Government the firm undertakes to hypothecate their movable
and immoveable property in Bamangachi Engineering Works,
together with all machinery sheds and lease-hold interest in
land measuring about 5.75 acres at Mouja Bamangachi in
Howrah. The firm further undertakes to execute the
necessary stamped documents for the purpose as drafted by
the Government Solicitor at Calcutta.
6. The contracts stand finally concluded in terms of the
settlement and no party will have any further or other claim
against the other.
Please acknowledge receipt.
Yours faithfully,
Sd. R. B. L. Mathur
Director of Supplies (Claims)
for and on behalf of the Governor General."
The contract referred to in cl. (1) of this document is the
contract No. MP/75442/R-1/397 mentioned at the top of the
letter and concerned the kettles camp. The contracts
referred to in cl. (3) are the contracts concerning ladles
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cook and bath ovals which had been settled earlier but the
amounts due in respect of the settlements concerning them
had not been paid in full.
After the settlement of February 22, 1949, the contractors
made certain payments aggregating Rs. 1 1,000, the last
payment made being on October 31, 1949. These payments had
not been made as provided in el. (3). The contractors also
failed to execute the hypothecation deed mentioned in el.
(5). Certain correspondence appears to have taken place but
with no tangible result. The appellant was unable to obtain
payments or the hypothecation deed in terms of the
settlement.
517
In these circumstances the appellant made a claim against
the contractors under the three original con-, tracts
amounting to Rs. 1,52,723 and referred it to’ arbitration
under the arbitration clauses contained in them. The
appellant nominated an arbitrator and called upon the
contractors to nominate the other, the arbitration clause
providing that the arbitration shall be by two arbitrators,
one to be nominated by each party. The contractors did not
nominate any arbitrator, contending that the matter had "
already been negotiated to a settlement " and that there
were " no outstanding disputes to be referred to arbitration
". The appellant then appointed the person nominated by it
as the sole arbitrator under the provisions of the
Arbitration Act and an arbitration was held by him in which
the contractors joined. In the arbitration proceedings, for
reasons with which we are not concerned, the appellant
abandoned its claim in respect of the bath ovals contract.
On July 31, 1951, the arbitrator made an award in favour of
the appellant in the sum of Rs. 1,16,446-11-5 in respect of
its claim on the ladles cook and kettles camp contracts.
Being aggrieved by the award, the respondent Kishorilal
Gupta, who is a partner of the contractors’ firm, made an
application to the High Court at Calcutta in its Original
Jurisdiction for a declaration that the arbitration clauses
in the original contracts had ceased to have any effect and
the contracts stood finally determined as a result of the
settlements earlier referred to and for an order setting
aside the award as void and a nullity.
I wish to draw attention here to the fact that the
application was really concerned with the contracts for
ladles cook and kettles camp. It had nothing to do with the
bath ovals’ contract for the appellant withdrew its claim
under it from arbitration and no award was made in respect
of it. So in this appeal we are not really concerned with
that contract.
Bachawat, J., who heard the application held that the
contract for ladles cook had not been abrogated by the
settlement in respect of it for -reasons which it is
unnecessary to state here as this part of the decision
518
of the learned Judge has not been challenged before us. a We
have therefore to proceed on the basis that the arbitration
clause contained in the ladles cook contract continued in
force in spite of the settlement in respect of it.
The learned Judge however held that the contract for kettles
camp including the arbitration clause contained in it had
ceased to exist as a result of the settlement of February
22, 1949, and the arbitrator had consequently no
jurisdiction to make any award purporting to act under that
arbitration clause. He then proceeded to hold that as the
award was a single and inseverable award in respect of the
claims under the ladles cook as well as the kettles camp
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contracts, the whole award became invalid. In the result
the learned Judge made an order declaring that the arbi-
tration clause contained in the kettles camp contract had
ceased to exist and setting aside the award as a whole.
It is against this judgment that the present appeal has been
filed with leave granted by this Court. It was contended on
behalf of the respondent that the leave should not have been
granted as the appellant had a right of appeal to the High
Court itself. We were on this basis asked to revoke the
leave. It appears that there are some cases of the Calcutta
High Court which create a good deal of doubt as to whether
an appeal lay to that High Court from an order of the kind
made in this case. The appellants therefore were
legitimately in difficulty in deciding whether an appeal lay
to the High Court. Again, leave was granted by this Court
as far back as March 29, 1954, and the respondent at no
stage earlier than the hearing of the appeal before us took
any objection to that leave. It is too late now to allow
him to do that. So to do would leave the appellant entirely
without remedy as an appeal to the High Court would in any
event be now barred. I feel therefore that no question of
revoking the leave should be allowed to be raised.
It is useful to remind ourselves before proceeding further
that what was referred to arbitration in this case was a
claim by the appellant for damages for
519
breach of the contracts said to have been committed by the
contractors. That indeed is the respondent’s, case. With
regard to the merits of this claim the’ Court has no
concern. But it is important to note that those claims were
clearly within the arbitration clause in the contracts;
about this there does not appear to be any dispute. No
question therefore arises in this appeal that the claims
referred to arbitration were not within the arbitration
clauses.
What is in dispute in this case is whether the ’arbitration
clause had ceased to exist as a result of settlement. In
considering the question it is not necessary however to
concern ourselves with the settlements regarding the ladles
cook contract or the bath ovals contract. The bath ovals
contract is not the subject matter of the award. As regards
the ladles cook contract, the Court below has held that
settlement did not affect the relative arbitration clause
and that decision has not been challenged before us.
The real question that we have to consider is whether the
settlement of February 22, 1949, altogether put out of
existence the arbitration clause in the kettles camp
contract. If it did, the arbitration in this case was
clearly without jurisdiction and the award resulting from it
a nullity, for on that basis there would be no arbitration
agreement under which an arbitration could be held. An
arbitration agreement, of course, is the creature of an
agreement and what is created by agreement may be destroyed
by agreement. Lord Macmillan considered it elementary "
that the parties to a contract may agree to bring it to an
end’ to all intents and purposes and to treat it as if it
had never existed " and that " In such a case if there be an
arbitration clause in the contract it perishes with the
contract "-: Heyman v. Darwins (1).
Now it is clear that the settlement of February 22, 1949,
does not expressly make the arbitration clause nonexistent.
It is however said that the settlement of February 22, 1949,
operated as an accord and satisfaction and therefore the
arbitration clause in the relative original contract was
brought to an end by it.
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(1) [1942] A.C. 356, 371.
520
It if; said that such a settlement amounts to a substituted
agreement which abrogated the original contract and the
arbitration clause contained in it perished with it.
I venture to think that this view is wrong and originates
from a misapprehension of the real nature of accord and
satisfaction and an arbitration clause in a contract. It
must here be stated that the appellant disputes that the
settlement of February 22, 1949, amounted to an accord and
satisfaction. I will examine the appellant’s contention
later and shall for the present assume that the settlement
constituted an accord and satisfaction.
Now what is an accord and satisfaction ? It is only a method
of discharge of a contract. It only means that the parties
are freed from their mutual obligations under the contract :
see Cheshire and Fifoot on Contracts, 3rd edn., p. 433. "
It is a good defence to an action for the breach of any
contract, whether made by parol or specialty, that the cause
of action has been discharged by accord and satisfaction,
that is to say, by an agreement after breach whereby some
consideration other than his legal remedy is to be accepted
by the party not in fault ": Chitty on Contracts, 21st edn.,
p. 286. In British Russian Gazette and Trade Outlook. Ltd.
v. Associated Newspapers Ltd. (1) Scrutton, L.J., said, "
Accord and satisfaction is the purchase of the release from
an obligation whether arising under contract or tort by
means of any valuable consideration, not being the actual
performance of the obligation itself. The accord is the
agreement by which the obligation is discharged. The
satisfaction is the consideration which makes the agreement
operative."
The effect of an accord and satisfaction is therefore to
secure a release from an obligation arising under a
contract. Now it is difficult to conceive of an obligation
arising from a contract unles the contract existed. An
accord and satisfaction which secures a release from such an
obligation is really based on the existence of the contract
instead of treating it as non-existent.
(1) [1933] 2 K.B. 616, 643-4.
521
The contract is not annihilated but the obligations under it
cease to be enforceable. Therefore it is that when an
action is brought for the appropriate remedy for
nonperformance of these obligations, that an accord and
satisfaction furnishes a good defence. The defence is not
that the contract has come to an end but that its breach has
been satisfied by accord and satisfaction and therefore the
plaintiff in the action is not entitled to the usual remedy
for the breach.
It would clearly appear from the terms of the settlement
that it dealt with remedies for the breach of the kettles
camp contract. Clause (1) shows that the parties were
making cross-claims against each other for breach of that
contract and these were settled by mutual agreement upon the
term that the contractors would pay to the appellant Rs.
45,000. Clauses (3), (4) and (5) state how this sum was to
be paid and how the payment of it was to be secured. Clause
(6) provides that the contract stands finally concluded in
terms of the settlement. The parties therefore were only
intending to decide the dispute as to cross-claims made on
the basis of the breach of the contract. So they were
assuming the existence of the contract, for there could be
no breach of it unless it existed.
Now I come to the nature of an arbitration clause. It is
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well settled that such a clause in a contract stands apart
from the rest of the contract. Lord Wright said in Heyman’s
case (1) that an arbitration clause " is collateral to the
substantial stipulations of the contract. It is merely
procedural and ancillary, -it is a mode of settling
disputes.................... All this may be said of every
agreement to arbitrate, even though not a separate bargain,
but one incorporated in the general contract." Lord
Macmillan also made some very revealing observations on the
nature of an arbitration clause in the same case. He said
at pp. 373-4:
" I venture to think that not enough attention has been
directed to the true nature and function of an arbitration
clause in a contract. It is quite distinct from the other
clauses. The other clauses
(1) [1942] A.C. 356, 371.
522
set out the obligations which the parties undertake towards
each other hinc inde, but the arbitration clause does not
impose on one of the parties an obligation in favour of the
other. It embodies the agreement of both -the parties that,
if any dispute arises with regard to the obligations which
the one party has undertaken to the other, such dispute
shall be settled by a tribunal of their own constitution.
And there is this very material difference, that whereas in
an ordinary contract the obligations of the parties to each
other cannot in general be specifically enforced and breach
of them results only in damages, the arbitration clause can
be specifically enforced by the machinery of the Arbitration
Act.The appropriate remedy for breach of the agreement to
arbitrate is not damages, but its enforcement."
It seems to me that the respective nature of accord and
satisfaction and arbitration clause makes it impossible for
the former to destroy the latter. An accord and
satisfaction only releases the parties from the obligations
under a contract but does not affect the arbitration clause
in it, for as Lord Macmillan said, the arbitration clause
does riot impose on one of the parties an obligation in
favour of the other but embodies an agreement that if any
dispute arises with regard to the obligations which the one
party has undertaken to the other, such dispute shall be
settled by arbitration. A dispute whether the obligations
under a contract have been discharged by an accord and
satisfaction is no less a dispute regarding the obligations
under the contract. Such a dispute has to be settled by
arbitration if it is within the scope of arbitration clause
and either party wants that to be done. That cannot be
unless the’ arbitration clause survives the accord and
satisfaction. If that dispute is not within the arbitration
clause, there can of course be no arbitration, but the
reason for that would not be that the arbitration clause has
ceased to exist but that the dispute is outside its scope.
I am not saying that it is for the arbitrator to decide
whether the arbitration clause is surviving ; that may in
many cases have to be decided by the Court. That would
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depend on the form of the arbitration agreement and on that
aspect of the matter it is not necessary to say anything now
for the question does not arise.
In my view therefore an accord and satisfaction does not
destroy the arbitration clause. An examination of what has
been called the accord and satisfaction in this case shows
this clearly. From what I have earlier said about the terms
of the settlement of February 22, 1949, it is manifest that
it settled the disputes between the parties concerning the
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breach of the contract for kettles camp and its
consequences. All that it said was that the contract had
been broken causing damage and the claim to the damages was
to be satisfied " in terms of the settlement ". It did not
purport to annihilate the contract or the arbitration clause
in it. I feel no doubt therefore that the arbitration
clause subsisted and the arbitrator was competent to
arbitrate. The award was not, in my view, a nullity.
The position is no different if the matter is looked at from
the point of view of s. 62 of the Contract Act. That
section is in these terms:
" Section 62. If the parties to a contract agree to
substitute a new contract for it, or to rescind or alter it,
the original contract need not be performed."
The settlement cannot be said to have altered the original
contract or even to have rescinded it. It only settled the
dispute as to the breach of the contract and its
consequences. For the same reason it cannot be said to
substitute a new contract for the old one. As 1 have
earlier stated it postulates the existence of the contract
and only decides the incidence of its breach.
It remains now to express my views on the question whether
the settlement of February 22,1949, amounted to an accord
and satisfaction. I have earlier stated that an accord
and satisfaction is the purchase of a release from an
obligation under a contract. This release is purchased by
an agreement which is the accord. But this agreement like
all other agreements must be supported by consideration.
The satisfaction
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is that consideration. It was formerly thought that the
consideration had to be executed. In other words, the
consideration for which the release was granted had to be
received by the releaser before the release could become
effective. The later view is that the consideration may be
executory; that the release may become effective before the
consideration has been received by the releaser if he has
agreed to accept the promise of the release to give the
consideration. Whether it is the one or the other depends
on the agreement of the parties. It is a question of
intention. And where, as in the present case, the agreement
is expressed in writing, the question is one of construction
of a document. So much is well settled.
The question then is, Is it the proper construction of the
settlement of February 22, 1949, that the appellant agreed
to accept the promise of the contractors to pay the moneys
and create the security in discharge of their obligations ?
Or is it the proper construction that the contractors were
not to be discharged till they had carried out their
promises contained in the settlement. The High Court held,
accepting the respondent’s contention, that el. (6) of the
settlement showed that the appellant had accepted the
promise of the contractors to pay the moneys and to execute
a hypothecation bond in full discharge of their obligations
under the contract. That clause states that " The contracts
stand finally concluded in terms of the settlement." It is
said that these words show that it was intended to accept
the promise of the contractors and thereupon to give them a
discharge from their obligations under the contract.
Now it seems to me that the words " stands finally concluded
in terms of the settlement " do not necessarily mean
concluded by the promise of the contractors contained in the
settlement. It appears to me to be capable of the meaning
that the contract is to stand concluded when its terms have
been carried out. The words are not, " stand finally
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concluded by the terms of the settlement" but they are,
"stand finally concluded in terms of settlement ". These
terms are that the contractors would pay certain
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moneys by certain instalments and would secure these
payments by a hypothecation bond. So it would appear that
the contract was not to be concluded till the terms had been
carried out, for otherwise it would not be a conclusion " in
terms of the settlement."
That seems to me to be also the reasonable interpretation to
put on the document in view of the circumstances of the
case. The appellant was to receive a substantial sum under
the settlement. It gave the contractors quite a long time
in which to pay it. It bargained for a security to be
furnished to be sure of receiving the payments. The
discharge was to be by the payments. The promise to make
these payments may conceivably in proper circumstances,
itself amount to a discharge. But I wholly fail to see that
when there is an additional promise to secure the payments
by a hypothecation, the parties could have intended that
there would be a discharge before the hypothecation had been
made. It does not seem reasonable to hold that the parties
so intended. Nor do I think that the words " stand finally
concluded in terms of the settlement " are so strong as to
impute such an intention to the parties. These words are
capable of the meaning that the contract was to stand
concluded upon the terms of the settlement being carried out
and, for the reasons just mentioned, that is the proper
meaning to give to those words. In my view, therefore, the
settlement did not amount to an accord and satisfaction.
Till the terms of it had been carried out, the appellant
retained all its rights under the contract.
There was one other point argued on behalf of the respondent
which I think I should notice. It was said that the award
was in any event liable to be set aside inasmuch as it
disclosed an error on the face of it. This error, it was
said, consisted in awarding damages larger than those which
the appellant had agreed to take by the settlement. Now
this depends on whether the settlement amounted to an accord
and satisfaction; if it did not, the appellant’s claim for
damages could not be confined to the amount mentioned in the
settlement,
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I have already said that in my opinion it did not amount to
an accord and satisfaction. So there was no error apparent
on the face of the award. It further seems to me that it is
not open to the respondent to contend that the award is
liable to be set aside as disclosing the error mentioned
above on the face of it. I do not find that such a case was
made in the application out of which this appeal arises. It
was said that the case had been made in paragraphs 34 and 35
of the respondent’s petition to the High Court. I do not
think it was there made. These paragraphs refer to the
arbitrator’s decision that he had jurisdiction to arbitrate
as the settlement had not destroyed the arbitration clause
and the contention there made was that this decision was
erroneous on the face of it. This has nothing to do with
the question that the award was wrong on the face of it as
it awarded a sum in excess of the amount fixed by the
settlement. Whether the arbitrator was right or not in his
decision that the arbitration clause had not been superseded
is irrelevant for that is the question that the Court was
called upon to decide in the application.
In my view therefore the appeal should succeed and the order
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of the High Court set aside. I would order accordingly and
award the costs here and below to the appellant.
ORDER
In accordance with the opinion of the majority this appeal
fails and is dismissed with costs.
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