DAMODAR VALLEY CORPORATION versus K.K.KAR

I.--On an application under ss. 9(b) sod Arbitration Act 10 of 1940-hcreinaftcr called 'the Act'-

p. 241, margin C

propriety of a reference to the arbitration of the sole r the Subordinate Judge, Aliporc permitted the appellant

p. 241, margin C

eviocnce to establish whether the contract was put an end _ payment, if it was whether the arbitration clause

p. 241, margin C

contract perish with it. Allain.~t this order tl~e rcs~n­

p. 241, margin C

a revision in the Court o[ Calcutta wbtch while setting ~lide order of the Subordinate Judge dismissed the application lt~. appellant This appeal is by certificate against that cct~ton. . ln order to appreciate the significance of the question which has. ~be a few relevant facts may stated. n:spon- ~~1 entered into a contract with the nppdlant to supply ccrtam quan- ~\\c' ot coal at certain price but as he failed to do so in acc0rdance

p. 241, margin C

m~ of the contra~t, the appellant r.:pudinh:d . the contract.- ~~<ll;l<l~d ccrt:un penalties in accordance with the terms ot the contract

p. 241, margin H

later waived ultimately paid c.:rtain to the rcspou· /~ ~'1;ich were due him fur the supply of .:o;tl. It the c:~.Se

p. 241, margin H

"JlPtllilnt that these payments including the rcturu of lht finally settled the claims of respondent. No Jo~bt tlJ.lt asked to submit his bill ulon~ with a r.:ceipt statmg the payment full final settl~ment of all P~Y-

p. 241, margin H

there was no other claim. Dut respvuJ,;ut . : ,.., - ··- -·- -· _ - ·-··· :SUbmitting hi$ bill did DOt JiVe ~ · r=ipc as desired. The amount of .the bill was, ~ever, plid, after rcocjpt of. which the respondent chumed further irums from the a1lPtllam iDcludinJ damage~ for pudiation of the OOtitract. When the appellant did nOt ·aweo to eom.~ ·ply wiU\ th~ demands the respondent served a notice .of JUs ibtemioo to refer the matter to the arbitration under the arbitration. claUIC tained in tbe contract. By that notice he intimated the appellant he has appointed J. N. Mullick as his arbitrator and requested tho pellant to .1ppoint its own arbitrator. The appellant did not agree to it, whereupon the respondent by a further notice intimated the pellant tha1 the arbitrator nominated by him would be the sole trator fpr adjudicating 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 9(b) and 33 of the Act challenging the validity of the appointment the 3ole arbitrator. In paragraph-16 of the petition the appellant stated:

pp. 241–242, margin H

" ...... all claims and demands as between the petitioner and the contractor standing fully paid and ad1usted there was no dispute in the absence whereof the entire proceeding:i in the· above ease do not lie and the instant case is not main·

p. 242, margin C

tainable .under the Arbitration Act being outside 1ts fold." As stated earlier, the Subordinate Judge held that the app~Uaut could adduce evidence that the contract had come to an end in order . determine that the arbitration clause perished with the contract.

p. 242, margin C

On the pleas raised before the Subordinate Judge, the following questions were considered ~ ( 1 ) Has the Court jurisdiction to decide the points _raised

p. 242, margin C

in paragraph-16 of the appellant's petiUon ? · • · (2) ·Whether the arbitration clause betwet\n the parties would cease to exist with the ~rmination of the agree-

p. 242, margin E

ment; and (3) Whether oral evidence touching the disptt;e in res-· pect of the allee;ed final settlement of the claim would

p. 242, margin E

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.

p. 242, margin E

On these facts the short question for determination is : whece one of the parties refers a dispute or disputes to arbitration and other party takes a plea that there was a final settlement of claims, is the Court, on an apolication under ss. 9(b) and 33 of 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 w~s proved, it would bar a reference to the arbitration inasmuch as the arbitration clause itself would perish.

p. 242, margin G

_The resoondent purported to refer the dispute to arbitration under the foll-owing cla1.1:se of the agreement :

p. 242, margin H

. l ..

p. 242, margin H

VALLEY .'v. 'K. (lagamnohan Reddy> J.) 2-43· · ". : . · . if at any time any question, dispute or difference whatsoever· shall arise betw~n 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 ...... "

p. 243

It appears to us that 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' the contract. These words are wide enough to cover the dispute sought to be referred. The respondent's contention is that the contract has beev 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 or difference which arises between himself and the appellant and is 'upon' or 'in relation to' or 'in connection with' the contract.

p. 243, margin C

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 subsi~t and consequently the arbitration clause also perishes along with the settlement. If so, the dispute wheth.er 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 agree· ment between, the parties and where the parties tinder 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 ~ncorpor~ted with the object of providing a machinery for the settlement of disputes arising in relation to or in connection .\•ith that contract. The questions of unilateral repudiation of the rights and obligations under the contract or of a full and final settle· ment 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 th~ 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, ot voidable. As the contract is an outcome of the agreement between the parties it is equally

p. 243, margin C

SUPREME COURT J.EPORTS [ 1974} 2 s.c.tt. open to tho parties thereto to a,-cc to bring it to an end or to trett it as if it never existed. It D1•Y also be open to tho partie. to terminnto 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, si~e the entire contract is put an ooe to, the arbitration clause, which is a part of it, also perishes along with it. Section 62 of the Contract Act incorporate~ this principle when it provides that if ~e parties to a contract agree to substitute a new contract or to rescind or alter it, the original con4"act 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 alteratio•, that dispute cannot be referred to the arbitration as the arbitration clause itself would perish if the avennent is found to be valid. As the very jurisdiction of the arbitrator is . dependent upon the existeucc of the arbitration clause under which he is appointed, the parties have no right to invoke a clause which perishes with the contract.

p. 244

In certain circumstances, it may be that there has been a tenniaation 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.

p. 244, margin C

We have adverted to these several aspects merely to show that contracts being oonsensual, the question whether the arbitration clause survives or perishes would depend upon the nature of the controveril"y and its effect upon the eltistence ·or survival of the contract itse1f. Where the binding nature of the contract is not disputed, but a difference has arisen between the parties thereto as to whether tilere has been a· breach by one side or the other or whether. one or both the parties have been discharged from further performance sud1 di1fetences are "upon" or "in relation to" qr "in connection with·· tho oontr~t. That a ~ontract has come to an end by frustration do.:s not put an end to the contract for all purposes, because there 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 contratt that has come to an end. It is, therefore. clear that a dispute as to the binding nature of the contract cannot be detennined by re&<m to arbitration, because as we have stated earlier, the arbitra· tion clause itself stands or falls according to the determination of the question in dispute. It may be stated that the Privy Council had iD Hirji Mulji v. Cheong Yue Steamship Compcmy ( held 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 determin.:d 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 A.C.

p. 244, margin D

(laganmohan Rtdfly_, l.) - au ..

p. 245

to exist for all purposes save for the enforcement of dabbs · -veited before that date of which there· were none, Were diHeated from in Reyman and another v. Darwins. Ltd.(l), . though Lord Macmillan did not want to express any opinion on this question.

p. 245, margin A

that it may, in Heyman's case{ Lord Macmillan pointed· out pp. 370-371 : · ·

p. 245, margin A

"If it appears that the dispute is whether there has ever. . been a binding contract between the parti.es, such a dispute cannot be covered by an arbitration clause in the challenged oontract. H there has never been a contract at all, there has never been as part of it an agreeme~t to arbitrate. The greater includes the less. Further, a claim to set aside a· contra~t on such grounds as fraud, duress or essential error· • . cannot be the subjec.t-matter of a reference under an arbitra~ tion clause in the contract sought to be set aside. Again, an admittedly .binding oontract containing a. general arbitration clause may stip~ate 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 tl}_~ 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 cl~use in the contract, it perishes with tho oontract. 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 deter· mination of questions under the new agreement. All this is · more or less elementary." ·

p. 245, margin A

The above observations of Lord Macmillan 'as well as the observations of other Law Lords in Heymtln's case(l) were considered by this Cou.rt in T~ Union of India v. Kishorilal Gupta and Bro.r.(a)

p. 245, margin E

where the respondents had entered into three cim~acts with the appellant each of which_ contained a_n arbitration clause. Befqre the contracts had. been fully exec1,1ted, diSputes arose between _the parties, oasc 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· ~n the terms tbereill coa· ta.ined. By the first two of these settlement contracts the responde-nts agreed to pay to the appellant certain moneys in settlement re~pectively of the disputes relating tt> the first iwo original contracts.· By the' last of these settlement contracts the respondents agreed to pav to. the appellant in ~'TJecified instalments certain moneys in settlement ol the disputes relating to the third ori.1dnal contract as also the moneys which had then beco~e due on the first two settlement contracts and had not been paid. This settlement further undertook to hy-pothecate certain properties to secure the due repayment of t.hese moneys. In the end it pcovidec:l as follows:

p. 245, margin E

(1) [1942) A.C. 3S6. A.C. 356.

p. 245, margin H

1 s.c.R.

p. 245, margin H

"The contracts stand finally concluded in terms of the settlement and na. party will have any further or other Claim

p. 246

against the other." On a question whether the arbitration clauses in the original contraets had ceased to have any effect and the contracts stood finally determined as a result of the settlement contracts, the Calcutta Hiib 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, as such the arbitrator had no jurisdiction to arbitrate under. that arbitration clause. Imam and Subba Rao, JJ., (Sarkar, J., disseQting) confirmed the Hi&h ·Court's decision. They held that the three contracts were settled and the third settlement contract was in substitution of th~ three contracts; and, after its execution, all the earlier contracts were extinguished and the arbitra· tion 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 ~t their rights only wtder its terms. Sark_ar, J., however, hc;ld that the award wa.~ valid and could not be set aside as the third settlement neither expressly put ail 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 jsnpose 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 obligati~n which one party has undertaken to the other, such dispute shall' 9e 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. 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 substituted with the result that the arbitration clause did not survive, rhe principle of law that where the parties put an end to the contract a,~ if it had never existed and substitute it. with a new contract governing the rights -and obligations of the parties thereunder, the nrbitration clause also peris~s along with it, .was accepted as coqect by all the learned Judges.

p. 246

After a review oi the relevant case law, Subba Rao, J., as he then was, speaking for the majority enunciated the followini principles: "(1) An arbitration clause is a collateral term of a contract as distinguished from its substanti~e terms; but none tho Jess it is an integral part of it; (2) however comprehensive th~ terms of nn arbitration clause may be, the existence of the contract is a 1;1ecessary condition for its operation; it perishes with the contrlct; ( 3) the contract may be non est in the sense that it never cam~ 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; ( S) in the former: case, if the original contract has legal existence, the arbitration clauile also

p. 246, margin F

.... oAM~oAit vALt.EY .coRP. ·v.· K. K. KA~ (!agdniri~!Wn Reddy, 1.) 247 cannot operate; for along with the originill rontrac~ it is also void; in the. latter case, . as the original contract is . extinguished · by· .. ·the substituted one; the arbitration claU:Se of the original contract 'perishes· with it; and ( 6) between the two fallS many' categories of disputes · . in connection with ' a contract;· slich · as . the ; question of repudiation, · frustration, breach etc • .In. thos~ 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." In those cases, as we have stated earlier, it is the performance of the . contract that bas come t.P an end ·but: the contract is still in existence·· . for certain purposes in respect of dispute's arising ·under 'it or in

p. 247

connection with· it. · ·.We think as the contract ·subsists for . certain · : purposes. the arbitration clause openites inrespect of those purposes .

p. 247, margin B

. .

p. 247, margin B

Sarkar, J.~ did not dissent from~the propositions enunchi.ted by Subba Rao, J ., but· o~ly 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{ l) · and observed at p. .519 :. "An arbitration agr~ement, 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 th:1t such a clause (arbitration clause) in a· con~act stands· apart from the · . rest of. the contract." It was; however,'pointed out by_ him. that an acoord· 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~xistent. , The contract: is not . annihilated but the. obligations under it cease to be enforceable. Theref-ore it is . that when .an action is brought for th£: appropri:ttl! remedy for non·perfonnance 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 ·

p. 247, margin B

by. accord and satisfaction and, therefore, the plaintiff in the action is. · not entitled to the usual·remedy for the breach. · In the circumstances, he thought that the arbitration clause .did survive to settle. the dispute: as to whether there was or not an accord and satisfaction, . · ·. . . . .

p. 247, margin E

...·, .. '.: .. .. . . · · · In 'thts case, we are not .troubled with the question whether. there ha~ been oovation; 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 contrac;t:/.Whcre,,how~·· ever; as in. this. case,. there a·. termination . of the ··contract due :· to non-performance, the existence. of the coritraci 'has been. assumed for the purposes of such termination~ ·similarly. the question. whethei< · there has been a settlement· of · all ·the claims arising in . connection . with the contract also postulates the< existence: of •the cotitract The principle laid. down bv Sarkar. 1.-; in Kis~orilal Gupta. Rros•s case(2) that accord and satisfac=tion ·does· not put an end to the .arbitration clause was not dissented· to by the majority.:· On . the : oth~r hand .

p. 247, margin F

•. proposition (6) seems to lend weight to the views o1 Sarkar, J. In these circumstances, the question whether the terinination was valid · or not and whether damages are recoverable for such 'WrOngful lennination does not affect the arbitration clause, or the right of the res· pondent to invoke it for appointment of an arbitrator.

pp. 247–248, margin H

While so, we think the ,High Court was in error in directing the dismissal of the appellant's petition in toto. In ~t 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 sectiop. 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 l~ Advocate for the respondent also frankly conceded that .the High Court was net jus~. in dismissing the petition alrogethfr: In the circumstances,. as we ]tave held that where in a con.tnltt tbere is an arbitration clause, ilotwithstanding the plea that. there ·;:~ full and final settlement between the parties, that dispute ··~· referred to the arbitration, the Subonfulate Judge is directed to dispe~e of the petition of the appellant according to law. ·

p. 248, margin A

After this judgment was prepared the t:espondent filed avil 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 chang· ing 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 .accordin~y dismissed the Civil Miscellaneous Petition.

p. 248, margin C

In the result the appeal is partly allowed, but in the clrcwmsuince. without costs. · P.B.R. A.pP«Jl partly allo_w.d.

p. 248, margin B