Full Judgment Text
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 6
PETITIONER:
M/S.INDIAN DRUGS & PHARMACEUTICALS LTD.
Vs.
RESPONDENT:
M/S. INDO SWISS SYNTHETICS GEM MANUFACTURING CO.LTD. & ORS.
DATE OF JUDGMENT14/11/1995
BENCH:
HANSARIA B.L. (J)
BENCH:
HANSARIA B.L. (J)
RAMASWAMY, K.
CITATION:
1996 AIR 543 1996 SCC (1) 54
1995 SCALE (6)438
ACT:
HEADNOTE:
JUDGMENT:
J U D G M E N T
HANSARIA, J.
Special leave granted.
2. The appellant entered into an agreement with respondent
No.2 (which was subsequently amalgamated with the first
respondent and became one of its division) on 13.8.1982
whereunder the respondent was to undertake filling of vials
with medicines. The agreement was for the period from
1.4.1982 to 31.3.1984, subject to renewal by mutual
agreement thereafter. It was also subject to termination by
either party by giving three months notice to the other.
Such a notice was given by the appellant on 28.12.1983
stating that the agreement would stand terminated with
effect from 1.4.1984. During the subsistence of the
agreement, the respondent undertook some work which,
according to the appellant, was not in terms of the
agreement. After the defect came to the notice of the
appellant, which was sometime in the second half of 1985, it
called upon the respondent, by its letter of 10.11.1987, to
reimburse the loss which was stated to be a sum of Rs.161.82
lacs. The respondent disputed the claim by its letter
27.11.1987, whereupon by invoking clause 19 of the
agreement, the appellant referred the dispute to respondent
No.3 who had been appointed by the Chairman and Managing
Director of the appellant in exercise of power conferred by
clause 19. The appointment was challenged by respondent No.2
by filing an application under s.33 of the Arbitration Act,
1940, read with certain provisions of the code of Civil
Procedure, before the Court of Sub-ordinate Judge,
Coimbatore, stating, inter alia, that clause 19 of the
agreement could not be invoked to refer the matter to
arbitration. In any case clause 19 did not permit resolution
of the dispute of the type raised by the appellant. The Sub-
ordinate Judge decided main issues in favour of the
respondent, which order was challenged by the appellant in
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 6
the High Court of Judicature at Madras. The High Court
upheld the order of Sub-ordinate Judge. Hence this appeal
under Article 136 of the Constitution.
3. The following questions arise for determination on the
basis of the pleadings of the parties :
(i) Whether the arbitration clause
remained in existence by 1988 when the
arbitrator was appointed on the face of
termination of the agreement by the
appellant with effect from 1.4.1984 ?
(ii) Whether the arbitration clause, if
held to be operative, could be invoked
for the purpose at hand ?
(iii) Whether the Court of Sub-ordinate
Judge at Coimbatore had jurisdiction to
entertain the application under section
33 of the Arbitration Act ?
Apart from the above, the first two respondents have
raised the question of limitation also in these proceedings.
4. We propose to express our views on the four questions
in the order noted by us.
5. Whether the arbitration clause remained in existence by
1988 when the arbitrator was appointed on the face of
termination of the agreement by the appellant with
effect from 1.4.1984?
This is the real bone of the contention between the
parties. Shri Desai, duly assisted by Ms. Indu Malhotra,
strenuously urged that as the appellant itself had
terminated the agreement with effect from 1.4.1984, the
arbitration clause, which is a part of the agreement, had
ceased to be operative after 1.4.1984. This contention is
seriously disputed by the learned Attorney General appearing
for the appellant.
6. To decide this dispute between the parties, it would be
enough to note clauses 17 and 19 of the agreement which read
as below :
"17. The agreement will be for the
period from 1.4.1982 to 31.3.1984
subject to renewal by mutual agreement
thereafter. The agreement is subject to
termination by either party by giving
three months notice to other party.
19. Any dispute regarding the
interpretation or application of this
agreement and any difference about the
quality of the material shall be
referred to an arbitrator appointed by
the Chairman and Managing Director of
IDPL, whose decision shall be final and
binding on both the parties."
(emphasis ours)
7. Learned Attorney General submitted that, as to when on
termination of an agreement, arbitration clause would also
cease to be operative, has been well explained by a three-
Judge Bench of this Court in Union of India vs. Kishorilal
Gupta & Bros., 1960 (1) SCR 493. In that case Subba Rao, J.,
as he then was, speaking for the majority stated at pages
513 to 514 of the report that the discussion of the law on
the subject led to the emergence of the following principles
in this regard :
"(1) An arbitration clause is a
collateral term of a contract as
distinguished from its substantive
terms; but nonetheless it is an integral
part of it;
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 6
(2) however comprehensive 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
operation, for along with the original
contract, it is also void, in the 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 fall many
categories of disputes in connection
with a contract, such as the question of
repudiation, frustration, breach etc. In
these 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."
8. So, an arbitration clause, howsoever comprehensive in
terms, can be operative only if the contract is in existence
(vide point (2) above). Under point No.6, however, it has
been stated that when a question of breach of contract,
inter alia, is raised after the termination of the contract,
it is the performance of the contract that comes to an end
on termination of the contract, but the same remains in
existence for certain purposes in respect of disputes
arising under it or in connection with it. It was,
therefore, stated under this point that as the contract
subsist for certain purposes, the arbitration clause
operates in respect of these purposes.
9. Shri Desai, appearing for the respondents, has not
disputed that the law laid down in Kishorilal Gupta’s case
is still good law, which is apparent from what was stated by
a two-Judge Bench in Damodar Valley Corporation vs. K.K.
Kar, 1974 (2) SCR 240, which decision Shri Desai seeks to
rely in support of his submission. The learned counsel read
out to us that portion of the judgment which finds place at
pages 243 to 244, which is as below :
"As the contract is an outcome of the
agreement between the parties it is
equally open 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,
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 6
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
its being substituted by a new 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."
10. This shows that the arbitration clause would perish in
case where either there is substitution of a new contract,
or rescission or alteration of the original contract. The
present is apparently and admittedly not such a case.
Therefore, what has been stated in this decision cannot
assist the respondents. On the other hand, the ratio of
Kishorilal Gupta squarely applies. We, therefore, hold that
clause 19 dealing with arbitration did survive despite the
contract having come to an end with effect from 1.4.1984.
11. Whether the arbitration clause, if held to be
operative, could be invoked for the purpose at hand ?
On this, the contention of the respondent is that the
clause 19 visualises arbitration on "any difference about
the quality of the material", whereas in the present case
the dispute is about the vials as filled up containing less
quantity and not as per specification. As to this, the stand
of the appellant is that if the quantity would be less and
not as per specification, the quality would get affected. We
do not propose to express any opinion on this aspect of the
matter. Suffice to say in this proceeding that if the case
of the appellant be correct the arbitration clause would get
attracted.
12. Whether the Court of Sub-ordinate Judge at Coimbatore
had jurisdiction to entertain the application under
section 33 of the Arbitration Act ?
On the question of jurisdiction being raised by the
appellant, a queer view was taken inasmuch as the court
stated that the petitioner before him (who is respondent
herein) having business at Coimbatore, the court there had
jurisdiction. This has really put section 20 of the Code of
Civil Procedure on its head, as it permits assumption of
jurisdiction by that court where the opposite party carries
on business, and not the petitioner or plaintiff. The other
point urged to sustain jurisdiction was that the
respondent’s letter dated 27.11.1987 had been issued from
Coimbatore. This fact could not have conferred jurisdiction
because the fact of mere reply to the notice of the
appellant did not give rise to any part of "cause of action"
within the jurisdiction of Coimbatore court. We are,
therefore, of the view that Coimbatore court had no
jurisdiction.
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 6
13. Was the reference to the arbitrator barred by
limitation ?
The plea of limitation had not been urged earlier.
That, however, is not material as a plea of limitation can
be raised virtually at any point of time because it is
relatable to jurisdiction to entertain a matter. According
to Shri Desai as the appellant had for the first time
required the respondent to reimburse the supposed loss by
its letter of 10.11.1987, which was after about 4 years of
the supply, the invocation of arbitration clause was
apparently barred by limitation, which period could at best
at three years as provided by Article 137 of the Limitation
Act, 1963. We are referred in this connection to a Bench
decision of this Court to which one of us (K.Ramaswamy, J.)
was a party- the same being in the case of Panchu Gopal Bose
vs. Board of Trustees for Port of Calcutta, 1993 (4) SCC
338. This decision has held the Limitation Act applies to
arbitration proceedings and the period visualised by
different provisions of the Limitation Act would decide the
question of limitation in an arbitration proceeding.
14. In reply, the learned Attorney General brings to our
notice the averments finding place in the Rejoinder of the
appellant. We are referred to the Rejoinder because the plea
of limitation was raised for the first time in the counter-
affidavit of the respondent in its para 14. The relevant
reply in the Rejoinder is as below :
"It is stated that the respondents were
informed of the rejection of the frugs
supplied by them as early as in 1985 on
account of short filling of vials by
reference to the complaints received
from the customers particularly Defence
Department. Following this, Shri Chander
Sekharan of the Respondent Company
visited the petitioner’s office at
Madras on 3.5.1985 and 10.7.1985 for
discussions in the matter. It is
mutually agreed that a joint inspection
of samples from all the batches should
be conducted in the laboratory of IDPL
at Madras. Accordingly, the reference
samples from the respondent’s factory
were brought for the purpose of joint
inspection to the petitioner’s factory
at Madras. However, the respondent did
not sent any representative for
participation in the joint inspection
and ultimately after waiting for
considerable time, the petitioner had to
undertake inspection and tests on
22.7.1985 by itself and found that the
drugs had not been filled as per the
specifications and the weight
verification was also not within the
permissible limit."
15. Thus, the complaint from the customers, particularly
Defence Department, came to be known by the appellant in
early 1985 whereafter the matter was taken up with the
respondent and the tests ultimately were done in July, 1985.
If these facts be correct, it has to be held that the cause
of action to claim damages really accrued by July, 1985
which was thereafter made by a letter of November, 1987
followed by appointment of arbitrator in May, 1988. The
arbitration was thus not "manifestly barred" as contended by
Shri Desai. We do not propose to say anything more on this
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 6
aspect at this stage.
16. In the aforesaid premises, we do not find any threshold
infirmity in the invocation of clause 19 and to the
reference of the dispute to respondent No.3. Shri Desai
submits that respondent No.3 may not be required to
arbitrate inasmuch as he being an appointee of the Chairman
and Managing Director of the appellant himself, respondents’
case may not be fairly examined. He prays that any retired
High Court Judge may be appointed as an arbitrator by us. We
have not felt inclined to accept this submission, because
arbitration clause states categorically that the
difference/dispute shall be referred "to an arbitrator
appointed by the Chairman and Managing Director of IPDL"
(Indian Drugs & Pharmaceutical Limited) who is the
appellant. This provision in the arbitration clause cannot
be given a go-bye merely at the askance of the respondent
unless he challenged its binding nature in an appropriate
proceeding which he did not do.
17. In the result, we allow the appeal and leave the
appointed arbitrator to deal with difference/dispute in
accordance with law. In the facts and circumstances of the
case, let the parties bear their own costs.