Full Judgment Text
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PETITIONER:
DAMODAR VALLEY CORPORATION
Vs.
RESPONDENT:
K. K. KAR
DATE OF JUDGMENT12/11/1973
BENCH:
REDDY, P. JAGANMOHAN
BENCH:
REDDY, P. JAGANMOHAN
DWIVEDI, S.N.
CITATION:
1974 AIR 158 1974 SCR (2) 240
1974 SCC (1) 141
CITATOR INFO :
RF 1989 SC 839 (18)
ACT:
Arbitration Act, 1940 (10 of 1940)-Repudiation of contract-
If arbitration clause perishes with repudiation.
HEADNOTE:
On the respondents failure to fulfil the terms of the
contract, the appellant repudiated it and imposed certain
penalties in accordance with the terms of the contract. The
appellant later waived the penalties and paid certain sum3
due to the respondent. The appellant claimed that these
payments, including the return of the deposit money finally
settled the claims of the respondent. The respondent on the
other land.claimed from the appellant certain sums including
damages for ’repudiation of the contract. The appellant not
having agreed the respondent appointed an arbitrator whom he
later named as the sole arbitrator. The validity of the
appointment of the sole arbitrator was challenged by the
appellant under ss. 9(b) and 33 of the Indian Arbitration
Act, 1940. The arbitration clause in the contract was to
the effect that in Cass of in dispute "upon"’ or "in
relation to’ or "in connection with" the contract the matter
shalt be referred to arbitration. The Subordinate Judge
permitted the appellant to adduce evidence to establish
whether the contract was put an end to by final payment and
whether the arbitration clause contained in tin contract
perished with it. The High Court in revision set aside the
order of the Subordinate Judge and dismissed the application
of the appellant In toto.
It was contended that since there had been a full and final
settlement under the contract, the rights and obligations
under the contract did not subsist and consequently the
arbitration clause also perished along with the settlement
HELD : (i) Where in a contract there is an arbitration
clause, notwithstanding the Plea that there was a full and
final settlement between the parties, that dispute can be
referred to the arbitration’s. The High Court was in error
in directing the dismissal of the appellant’s petition in
toto. The question whether there has been a full and final
settlement of a claim under the contract Is itself a dispute
arising ’upon’ or ’in relation to’ or ’in connection with’
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the contract. These words are wide enough to cover the
dispute sought to be referred. On the facts of this case
when the appellant refused to accept the goods, the
respondent could claim damages for breach of contract. Such
a claim for damagesis a dispute or difference which arises
between the respondent and appellantand is, upon" or "in
relation to" or "in connection with"the contract.
[248C:243C-D]
A contract is the creature of an agreement between the
parties and where the parties under the terms of the
contract agree to incorporate an arbitration clause that
clause stands apart from the rights and obligations under
that contract, as it has been incorporated with the object
of providing a machinery for the settlement of disputes
arising in relation to or in connection with that contract.
The questions of unilateral repudiation of the rights and
obligations under the contract or of a full and final
settlement of the contract relate to the performance or
discharge of the contract. Far from putting an end to the
arbitration clause, they fall within the purview of it. A
repudiation by one party alone does not terminate the
contract. It takes two to end it and hence it follows that
as the contract subsists for the determination of the rights
and obligations of the parties. the arbitration clause also
survives. [243F-G]
(ii)In cases where the dispute between the parties is that
the contract itself did not subsist either as a result of
its being substituted by a new contract or by rescission or
alteration. that dispute could not be referred to the
arbitration as the arbitration clause itself would perish if
the averment was found to be valid. As the very
Jurisdiction of the arbitrator is dependent upon the
existence of the arbitration clause under which he is
appointed, the parties have no right to invoke a clause
which perishes with the contract. [244B-C]
241
(iii) The contract being concensual, the question whether
the arbitration clause survives or perishes would depend
upon the nature of the controversy: and if* effect upon the
existence or survival of the contract itself. Where the
binding nature of the contract is not disputed, but a
difference has arisen between the parties thereto as to
whether there has been a breach by one side or the other or
whether one or both the parties have been discharged from
further performance such differences are "upon" or "in
relation to" or "in connection with the contract. That a
contract has come to an end by frustration does not put an
end to the contract for all purposes because there may be
rights and obligations which had arisen earlier when it had
not come to an end, as it is only the future Performance of
the contract that has come to an end. A dispute as to the
binding nature of the contract cannot be determined by
resort to arbitration clause because the arbitration clause
itself stands or falls according to the determination of the
question in dispute. [244D-F]
The question whether the termination was valid or not and
whether damages were recoverable for such wrongful
termination did not affect the arbitration clause or the
right of the respondent to invoke it for appointment of an
arbitrator.
Union of India v. Kishorilal Gupta & Brothers,, [1960] 1
S.C.R. 493 relied.
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JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 851 of 1972.
Appeal from the Judgment and Order dated the 25th January,
1971 of the Calcutta High Court in Civil Rule No. 1683 of
1970.
B. Sen and D. N. Mukherjee, for the appellant.
V. S. Desai and M. M. Kshatriya, for the respondent.
The Judgment of the Court was delivered by
JAGANMOHAN REDDY, J.-on an application under SS. 9(b) and 33
of the Arbitration Act 10 of 1940-hereinafter called ’the
Act challenging the propriety of a reference to the
arbitration of the sole arbitrator, the Subordinate Judge,
Alipore permitted the appellant to adduce evidence to
establish whether the contract was put an end to by final
payment, and if it was whether the arbitration clause con-
tained in the contract will perish with it. Against this
order the respondent filed a revision in the High Court of
Calcutta which while setting aside the order of the
Subordinate Judge dismissed the application filed by the
appellant. This appeal is by certificate against that
decision.
In order to appreciate the significance of the question
which has, to be determined, a few relevant facts may be
stated. The respondent entered into a contract with the
appellant to supply certain quantities of coal at certain
price but as he failed to do so in accordance with the terms
of the contract, the appellant repudiated the contract,
imposed certain penalties in accordance with the terms of
the contract which he later waived and ultimately paid
certain sums to the respondent which were due to him for the
supply of coal. It is the case of the appellant that these
payments including the return of the deposit amount finally
settled the claims of the respondent. No doubt the
respondent was asked to submit his bill along with a receipt
stating that he, received the payment in full and final
settlement of all payment and that there was. no other
claim. But the respondent while
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submitting his bill did not give the receipt as desired.
The amount of the bill was, however, paid, after receipt of
which tile respondent claimed further sums from the
appellant including, damages for repudiation of the
contract. When the, appellant did-not agree to comply with
the demands the respondent served a notice of his intention
to refer the matter to the arbitration under the arbitration
clause contained in the contract. By that notice he
intimated the appellant that he has appointed J. N. Mulick
as his arbitrator and requested the appellant to appoint its
own arbitrator. The appellant did not agree to it,
whereupon the respondent by a further notice intimated the
appellant that the arbitrator nominated by him would be the
sole arbitrator for a vindicating the dispute between the
parties. Soon thereafter the sole arbitrator J. N. Mullick
issued a notice to the appellant and consequently the
appellant had to file an application under ss. 9(b) and 33
of the Act challenging the validity of the appointment of
the sole arbitrator. In paragraph-16 of- the petition the
appellant stated :
.lm15
"........ all claims and demands as between the petitioner
and the contractor standing fully paid and adjusted there
was no dispute in the absence whereof the entire proceedings
in the above case do not lie and the instant case is not
maintainable under the Arbitration Act being outside its
fold."
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As stated earlier, the Subordinate Judge held that the,
appellant could adduce evidence that the contract had come
to an end in order to determine that the arbitration clause
perished with the contract.
On the pleas raised before the Subordinate Judge, the
following questions were considered .
(1) Has the Court jurisdiction to decide the
points raised in paragraph-16 of the
appellant’s petition?
(2) Whether the arbitration clause between
the parties would cease to exist with the
termination of the agreement; and
(3) Whether oral evidence touching the
dispute in respect of the alleged final
settlement of the claim would be admissible in
the proceedings.
The Subordinate Judge answered these questions in the
affirmative and held that the appellant could adduce
evidence to establish that the contract had come to an end
and that as a consequence the arbitration clause perished
with it.
On these facts the short question for determination is :
where one of the parties refers a dispute or disputes to
arbitration and the other party takes a plea that there was
a final settlement of all claims, is the Court, on an
application under ss. 9(b) and 33 of the, Act, entitled to
enquire into the truth and validity of the averment as to
whether there was or was not a final settlement on the
ground that if that was proved, it would bar a reference to
the arbitration inasmuch as the arbitration clause itself
would perish.
The respondent purported to refer the dispute to arbitration
under the following clause of the agreement
243
"........if at any time any question, dispute
or difference whatsoever shall arise between
the Corporation and the successful tenderer
upon or in relation to, or in connection with
the contract, either party may forthwith give
to the other, notice in writing of the
existence of such question, dispute or
difference, and the same, shall be referred to
the adjudication of two arbitrators, one to be
nominated by the Corporation and the other to
be nominated by the successful tenderer and
the award of the arbitrators shall be final
and binding on the parties and the provisions.
of Indian Arbitration Act, 1940, and of the
Rules thereunder and any statutory
modification thereof shall be deemed to apply
to and be incorporated in this contract
It appears to us that the question whether there has been a
full and &A settlement of a claim under the contract is
itself a dispute arising ’upon’ or ’in relation to’ or ’in
connection with’ the contract. These words are wide enough
to cover the dispute sought to be referred. The
respondent’s contention is that the contract has been
repudiated by the appellant unilaterally as a result of
which he had no option but to accept that repudiation
because if the appellant was not ready to receive the goods
he could not supply them to him or force him to receive
them. In the circumstances, while accepting the
repudiation, without conceding that the appellant had a
right to repudiate the contract, he could claim damages for
breach of contract. Such a claim for damages is a dispute
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or difference which arises between himself and the appellant
and is ’upon’ or ’in relation to’ or.’in connection with’
the contract.
The contention that has been canvassed before us is that as
there has been a full and final settlement under the
contract, the rights and obligations under the contract do
not subsist and consequently the arbitration clause also
perishes along with the settlement. If so, the dispute
whether there has or has not been a settlement cannot be
the subject of an arbitration. There is, in our view, a
basic fallacy underlying this submission. A contract is the
creature of an agreement between the parties and where the
parties under the terms ’of the contract agree to
incorporate an arbitration clause, that clause
stands’--apart from the rights and obligations under that
contract, as it has been incorporated with the object of
providing a machinery for the settlement of disputes arising
in relation to or in connection with that contract. The
questions of unilateral repudiation of the rights and
obligations under the contract or of a full and final
settlement of the contract relate to the performance or
discharge of the contract. Far from putting an end to the
arbitration clause, they fall within the purview of it. A
repudiation by one party alone does not terminate the
contract. It takes two to end it, and hence ’it follows
that as the contract subsists for the determination of the
rights and obligations of the parties, the arbitration
clause also survives. This is not a case where the plea is
that the contract is void, illegal or fraudulent etc., in
which case, the entire contract along with the arbitration
clause is non est, or voidable. As the contract is an
outcome of the agre&nent between the parties it is equally
244
upon to the parties thereto to agree, to bring: it to an end
or to treat it as if it never existed. It may also be open
to the parties to terminate the previous contract and
substitute in its place a new contract or alter the original
contract in such a way that it cannot subsist. In all these
cases, since the entire contract is put an end to, the
arbitration clause, which is a part of it, also perishes
along with it. Section 62 of the Contract Act incorporates
this principle when it provides that if the parties to a
contract agree to substitute a new contract or to rescind or
alter it, the original contract need not be performed.
Where, therefore, the dispute between the parties is that
the contract itself does not subsist either as a result of
it’s being substituted by a now contract or by rescission or
alteration that dispute cannot be referred to the
arbitration as the arbitration ,clause itself would perish
if the averment is found to be valid. As the very
jurisdiction of the arbitrator is dependent upon the
existence of the arbitration clause under which he is
appointed, the parties have no right to invoke a clause
which perishes with the contract.
In certain circumstances, it may be that there has been a
terminal tion of the contract unilaterally and as a
consequence the parties may agree to rescind the contract.
In such a situation the rescission would put an end to the
performance of the contract in futuro, but it may remain
alive for claiming damages either for previous breaches or
for the breach which constituted the termination.
We have adverted to these several aspects merely to show
that ,contracts being consensual, the question whether the
arbitration clause survives or perishes would depend upon
the nature of the controversy and its effect upon the
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existence or survival of the contract itself. Where the
binding nature of the contract is not disputed, but a
difference has arisen between the parties thereto as to
whether there has been ;a breach by one side or the other or
whether one or both the parties have been discharged from
further performance such differences are "upon" or "in
relation to’ or "in connection with" the contract. That a
contract has come to an end by frustration does not put an
end to the contract for all purposes, because there may be
rights and obligations which had arisen earlier when it had
not come to an end, as it is only the future performance of
the contract that has come to an end. It is, therefore,
clear that a dispute as to the binding nature of the
contract cannot be determined by resort to arbitration,
because as we have stated earlier, the arbitration clause
itself stands or falls according to the determination of the
question in dispute. It may be stated that the Privy.
Council had in Hirji Mulji v. Cheong yue Stewnship
Company(1) held that as the authority of a person claiming
arbitral jurisdiction depends on the existence of some
submission to him by the parties of the subject-matter of
the complaint, "a contract that has determined is in the
same position as one that has never been concluded at all.
The observations of Lord Sumner in that case as to the
effect of frustration of the contract before its performance
on the arbitration clause inasmuch as frustration operates
automatically and the contract
(1) [1926] A.C. 407.
2 45
to exist for all purposes save for the enforcement of
claims vested before that date of which there were none,
were dissented from in Heyman and another v. Darwins
Ltd.(1), though Lord Macmillan did not want to express any
opinion on this question. Be that it may, in Heyman’s
case(3) Lord Macmillan pointed out at pp. 370-371 :
"If it appears that the dispute is 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 con-
tract 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 Iess
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elementary."
The above observations of Lord Macmillan as well as the
observations of other Law Lords in Heymams case(1) were
considered by this Court in The Union of India v. Kishorilal
Gupta and Bros.(3) where the respondents bad entered into
three contracts with the appellant each of which- 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 comtained. 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 installments
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. This settlement further undertook to hypothetic
certain properties to secure the due repayment of these moneys.
In the end it provided as follows:
(1) [1942] A.C. 356. (2) [1942]
A.C. 356.
(3) [1960] 1 S.C.R. 493.
246
"The contracts stand finally concluded in
terms of the settlement and no party will have
any further or other claim against the other.
"
On a question whether the arbitration clauses in the
original contracts had ceased to have any effect and the
contracts stood finally deter mined as a result of the
settlement contracts, the Calcutta B Court held that the
first contract had not been abrog by the settlement in
respect of it, but the third original contract the
arbitration clause contained in it had ceased to exist as a
result of the last settlement, as such the arbitrator had no
jurisdiction to arbitrate under that arbitration clause.
Imam and Subba Rao, JJ., (Sarkar, J., dissenting) confirmed
the High Court’s decision, They 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. They further 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. Sarkar, J.,
however, held that 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. He observed that 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 araising from the contract, does not affect an
arbitration clause containaed in it. It will be observed
that while the decision rested on the interpretation of the
settlement clause as to whether the original contracts were
put an end to and in their place, new contracts were
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substituted with the result that the arbitration clause did
not survive, the principle of law that where the parties put
an end to the contract as if it had never existed and
substitute it with a new contract governing the rights and
obligations of the parties thereunder, the arbitration
clause also perishes along with it, was accepted as correct
by all the, learned Judges.
After a review of the relevant case law, Subba Rao, J., as
he then was, speaking for the majority enunciated the
following principles : "(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 ,in
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
abinitio; (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
247
cannot operate, for along with the original contract, it is
also void; in the latter case, as the 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 inconnection with
it. As the contract subsists for certain purposes, the
arbitration clause operates in respect of these purposes."
In those cases, as we have stated earlier, it is the
performance of the con-, tract 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. We think as the contract subsists for certain purposes,
the arbitration clause operates in respect of those
purposes.
Sarkar, J., did not dissent from the propositions enunciated
by Subba Rao, J., but only disagreed with the majority’ on
the effect of the settlement on the arbitration clause. He
also referred to the observations of Lord Macmillan in
Hayman’s case(1) and observed at P. 519 : "An arbitration
agreement, of course, is the creature of an agreement and
what is created by agreement may be destroyed by agreement."
Again at p. 521 he- said : "It is well settled that such a
clause (arbitration clause) in a contract stands apart from
the rest of the contract." It was, however, pointed out by
him that an accord and satisfaction which secures a release
from an obligation arising under a contract, is really,
based on the existence of the contract instead of treating
it as non-existent. 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 non-performance 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. In the circumstances;
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he thought that the arbitration clause did survive to settle
the dispute as to whether there was or was not an accord and
satisfaction.
In this case, we are not troubled with the question whether
there has been notation, rescission or substitution of the
contract, nor have the parties in their pleadings ever
contended that the contract is non est as it has been
substituted by a new contract. Where, however, as in this
case, there was a termination of the contract due to non-
performance, the existence of the contract has been assumed
for the purposes of such termination. Similarly the
question whether there has been a settlement of all the
claims arising in connection with the contract also
postulates the existence of the contract. The principle
laid down by Sarkar, J., in Kishorilal Gupta Bros’s case(2)
that accord and satisfaction does not put an end to the
arbitration clause was not dissented to by the majority. On
the other hand
1. [1942]. A. C. 356. (2)
[1960] 1 S.C.R.493.
4-522SCI/74
248
proposition (6) seems to lend weight to the views of Sarkar,
J In these circumstances, the question whether the
termination was valid or not and whether damages are
recoverable for such wrongful termination does not affect
the arbitration clause, or the right of the respondent to
invoke it for appointment of an arbitrator.
While so, we think the High Court was in error in directing
the dismissal of the appellants petition in toto. In that
petition several other contentions were urged one of which
was that the appointment of J. N. Mullick as the sole
arbitrator should be set aside for nonconformity with the
provisions of S. 9(b) of the Act. It may also be observed
that under the proviso to that section the Court is
empowered to set aside any appointment as a sole arbitrator
made under cause (b) and either on sufficient cause being
shown allow further time to the defaulting party to appoint
an arbitrator or pass such other order as it thinks fit.
The Subordinate Judge did not decide any of the aforesaid
matters, which he should have, been allowed to do. The
learned Advocate for the respondent also frankly conceded
that the High Court was not justified in dismissing the
petition altogether. In the circumstances, as we have held
that where in a contract there is an arbitration clause,
notwithstanding the plea that there was a full and final
settlement between the parties, that dispute can be referred
to the arbitration, the Subordinate Judge. is directed to
dispose. of the petition of the appellant according to law.
After this judgment was prepared the respondent filed Civil
Miscellaneous Petition No. 9566-of 1973 seeking directions
on the ground that the learned counsel who represented him
during the hearing made the above concession that the High
Court was not justified in dismissing the petition
altogether, on a misapprehension of the real facts. The
reasons for further consideration on this aspect were fully
set out in the petition which was placed before us on
November 6, 1973. After hearing the learned counsel for the
respondent we found no justification for giving any
directions or for changing our view that the High Court was
in error in dismissing the petition under s. 9(b) read with
s. 33 of the Act. We accordingly dismissed the Civil
Mscellaneous Petition.
In the result the appeal is partly allowed, but in. the
circumstances without costs.
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P.B.R. Appeal
partly allowed.
249