Damodar Valley Corporation Vs. K. K.
Kar [1973] INSC 204 (12 November 1973)
REDDY, P. JAGANMOHAN 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 fulfill 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 to .
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 to. 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. 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 appellant and 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 consensual, 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.
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 242
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." 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 there under 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 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 termination 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 future, 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 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
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 determined 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 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, 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 there under, 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;
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 to 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.
P.B.R. Appeal partly allowed.
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