# DAMODAR VALLEY CORPORATION v. K.K.KAR

- **Citation:** [1974] 2 S.C.R. 240
- **Court:** Supreme Court of India
- **Decided:** 1973-11-12
- **Bench:** P. Jaganmohan Reddy, S. N. Dwivedi
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/damodar-valley-corporation-v-k-k-kar-6133
- **Pages:** 9

## Headnote

Arbitration Act, 1940 (10 of 1940)-Repudintion of contract-If arhttr•ti#n
clause perishes with repudiation.
On the respondent's failure to fulfil the terms of the contract, tho appdlaat
repudiated it and imposed certain penalties in accordance with the terms of
tlu: contract.
Th& appellant later waived the penalties and paid certain IUDII
due to the respondent.
The appellant claimed that these payments, includinJ
the return of the deposit money finally settled the claims of the reap«JD<ient.
ne respondent on the other hand claimed from the appellant certain JUIDI,
i•cludin& damages for repudiation of the contract.
The appellant not haviD&:
aJJeed, the respondent appointed an arbitrator whom he later named u th•
sole arbitrator. The validity of the appointment of the ~ole arbitrator was
challenged by the appellant under ss. 9(b) and 33 of the Indian Arbitration Act,
U-40.
The arbitratcon clause in the contract was to the effect that in cue
of a dispute "upon" or "in relation to" or "in connection with" the c:ontraot
the ·matter shall be referred to arbitration.
The Subordinate Jud11e pennitted
tile ·appellant to add1,1ce evidence to establish whether the contract was P!Jt
aJl end to bv . final payment and whether the arbitration clauao contaflled fD
lire (;9Dtract perished with it .. The Hiib Court in revision ·set aside the order
a:f the Subordinate Judao and dism.issed the applicatio~ of the appellant b.
toto.
It was contended that since there had been a full and final settlement nn4er
the contract, the rights and obligations under the contract did not subsist and
comequently the arbitration clause also perished along with the settlement.
HELD: (i) Where in a contract there is an arbitration clause, notwithstand·
ina the plea that there was a full and final settlement ~><;,ween the parties,· aut
dispute can be referred to the arbitration's. The High Court waa in error in
dim."ting the dismissal of the appellant's petition in toto. The question whether
taere bas 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
coutract.
These w!'rds 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 elaim for damages is a dispute or difference which arises between the res·
pendent and appellant and is "upon" or "in relation to" or "in connection with"
the contract.
r248C; 243C·D1
A contract is the creature of an agreement between the parties 8.1ld where
the parties under the terms of the contract agree to incnrpor~te an nrhitration
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 co..,necti('\n .vith
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
re-late 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
nnd hence it foll0ws that as the contract subsists for the determinatio[l of tll.e
riJihl.~ and obligations of the parties. the arbitration clause
also
survives.
r243F·G]
(ii) In cases where the dispute between the parties is that the contraet
itselt 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 arbitra·
tion as the arbitration clause itself would perish if the averment was found tc>
be valid.
As the verv 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

## Text

240
DAMODAR VALLEY CORPORATION
v.
K.K.KAR
November 12, 1973
[P. JAGANMOHAN REDDY AND S. N. DWIVEDI, JJ.]
Arbitration Act, 1940 (10 of 1940)-Repudintion of contract-If arhttr•ti#n
clause perishes with repudiation.
On the respondent's failure to fulfil the terms of the contract, tho appdlaat
repudiated it and imposed certain penalties in accordance with the terms of
tlu: contract.
Th& appellant later waived the penalties and paid certain IUDII
due to the respondent.
The appellant claimed that these payments, includinJ
the return of the deposit money finally settled the claims of the reap«JD<ient.
ne respondent on the other hand claimed from the appellant certain JUIDI,
i•cludin& damages for repudiation of the contract.
The appellant not haviD&:
aJJeed, the respondent appointed an arbitrator whom he later named u th•
sole arbitrator. The validity of the appointment of the ~ole arbitrator was
challenged by the appellant under ss. 9(b) and 33 of the Indian Arbitration Act,
U-40.
The arbitratcon clause in the contract was to the effect that in cue
of a dispute "upon" or "in relation to" or "in connection with" the c:ontraot
the ·matter shall be referred to arbitration.
The Subordinate Jud11e pennitted
tile ·appellant to add1,1ce evidence to establish whether the contract was P!Jt
aJl end to bv . final payment and whether the arbitration clauao contaflled fD
lire (;9Dtract perished with it .. The Hiib Court in revision ·set aside the order
a:f the Subordinate Judao and dism.issed the applicatio~ of the appellant b.
toto.
It was contended that since there had been a full and final settlement nn4er
the contract, the rights and obligations under the contract did not subsist and
comequently the arbitration clause also perished along with the settlement.
HELD: (i) Where in a contract there is an arbitration clause, notwithstand·
ina the plea that there was a full and final settlement ~><;,ween the parties,· aut
dispute can be referred to the arbitration's. The High Court waa in error in
dim."ting the dismissal of the appellant's petition in toto. The question whether
taere bas 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
coutract.
These w!'rds 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 elaim for damages is a dispute or difference which arises between the res·
pendent and appellant and is "upon" or "in relation to" or "in connection with"
the contract.
r248C; 243C·D1
A contract is the creature of an agreement between the parties 8.1ld where
the parties under the terms of the contract agree to incnrpor~te an nrhitration
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 co..,necti('\n .vith
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
re-late 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
nnd hence it foll0ws that as the contract subsists for the determinatio[l of tll.e
riJihl.~ and obligations of the parties. the arbitration clause
also
survives.
r243F·G]
(ii) In cases where the dispute between the parties is that the contraet
itselt 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 arbitra·
tion as the arbitration clause itself would perish if the averment was found tc>
be valid.
As the verv 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.
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~A~!ODARVALLEY CORP. v: IC. 1<. KAR (Jagan!noha11 Reddy, J.)
(iii) The contract. being conccnsual, the question whether the arbitration.
"
survives or pensbcs would de~end upon the nature of the controvel'lly and
da~<ct upon the cxistenc~ or SUJ:"tvat of the corytract itself.
Where tho bindliS noture of the contract IS not d•sputed, but a dolicrence bas arisen betwe<:a
~
p~rties thereto as to whether there has been a breach by one side or tile
~her• or whether one or both the parties have been discharged from further ~r
f rm•nce such differences arc "upon" 6r "in relation to" or "in connection With"
,g. c~ntroct. That a contract has come to an end by frustration does not put an.
nd 10 the contract for nil purposes because there may be rights and oblisatioM
I
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S • ·hicb bad arisen earlier when it bad not come to an end, as it is only the future
;.,rtormnnce of the contract that hns come to an end. A. dispute as 1o the bindio• nature of tqc c~>ntroct can1_1ot be determined by resort. lo arbitration clause
~use tbe arbttratoon clause ttsclf stands or falls accordmg to tbe dctennioarion of the que<tion in dispute. f244D·f1
t
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The question whether the termination was valid or not and whether damo:es
.__ rcco,·erahle for such wrongful termination did not nliect the arbitrition
d~use or the right of the respondent to invol;.e it for appointment of an arbitra·
tor.
Union of Indio v. Kitlr"orila/ Gupta & Brothus. [1960) I S.C.R. 493 re\ieli·.
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CIVIL APPELLATE JuRrsorcnoN: Civil Appeal No. 851 of 1972.
Appeal from the Judgment and Order dated the 25th Januaryr
1971 of the Calcutta High Court in Civil Rule No. 1683 of 1970.
B. Sell and D. N. Mukherjee, for the appellant.
V. S. Desai :md M. M. Ksflatriya, for the respondent. ·
The Judgment of the Court was delivered by
JAGANMOHAN REDDY, I.--On an application under ss. 9(b) sod
33 of tne Arbitration Act 10 of 1940-hcreinaftcr called 'the Act'-
dla)leoging the propriety of a reference to the arbitration of the sole
arbttrator, the Subordinate Judge, Aliporc permitted the appellant to·
adduce eviocnce to establish whether the contract was put an end toby_ fin.1l payment, nnd if it was whether the arbitration clause condc
latnCI) in the contract will perish with it.
Allain.~t this order tl~e rcs~n
_ot filed a revision in the !-Ugh Court o[ Calcutta wbtch while setting
~lide tile order of the Subordinate Judge dismissed the application
d
lt~. by the appellant This appeal is by certificate against that
cct~ton.
. ln order to appreciate the significance of the question which has.
~be dcterlll.incd, a few relevant facts may be stated. The_ 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
im h tl.le Itt 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
d.:llc he later waived am! ultimately paid c.:rtain stuns to the rcspou·
1/~ ~'1;ich were due to him fur the supply of .:o;tl.
It is the c:~.Se
P<liitlc "JlPtllilnt that these payments including the rcturu of th..: de·
lht wnouut finally settled the claims of tl1e respondent. No
Jo~bt
tlJ.lt1lP<Jndc!ll was asked to submit his bill ulon~ with a r.:ceipt statmg
liltn• te recc!vcd the payment in full und final settl~ment of all P~Y-_
•$ and Lilli! there was no other claim. Dut the respvuJ,;ut whtle
. : ... ,.., ..
- ··--.-·- ...,--· .,...;.., _ _ :_ \ - ·-··· --
...
242
[ 1974 ] 2 s.c;.a.
:SUbmitting hi$ bill did DOt JiVe ~
· r=ipc as desired. The amount
A
of .the bill was, ~ever, plid, after rcocjpt of. which the respondent
chumed further .. irums from the a1lPtllam iDcludinJ damage~ for repudiation 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 coli·
tained in tbe contract. By that notice he intimated the appellant that
he has appointed J. N. Mullick as his arbitrator and requested tho ap- · B
pellant to .1ppoint its own arbitrator. The appellant did not agree
to it, whereupon the respondent by a further notice intimated the appellant tha1 the arbitrator nominated by him would be the sole arbitrator 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 ss.
'9(b) and 33 of the Act challenging the validity of the appointment of
C
the 3ole arbitrator. In paragraph-16 of the petition the appellant
stated:
-
" ...... 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·
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 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 petiUon ? · ·. •
·
(2) ·Whether the arbitration clause betwet\n the parties
would cease to exist with the ~rmination of the agreement; and
(3) Whether oral evidence touching the disptt;e in res-·
pect of the allee;ed 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 : whece
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 apolication 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 w~s proved, it would bar a reference to the arbitration
inasmuch as the arbitration clause itself would perish.
_The resoondent purported to refer the dispute to arbitration under
the foll-owing cla1.1:se of the agreement :
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DAMODAR VALLEY CORP'.'v. K. 'K. KAR (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 ...... "
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.
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
•
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.
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.
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 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 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 ( 1) held th01t
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
(1) [1926) A.C. 4<:17.
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DAldODAR VALLEY COR.P. V. 1:. K. KAll (laganmohan Rtdfly_, l.) - au ..
A cetllefl 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.
Bo that it may, in Heyman's case{8)
Lord Macmillan pointed· out
at pp. 370-371 :
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"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·
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. cannot be the subjec.t-matter of a reference under an arbitra~
tion clause in the contract sought to be set aside. Again,
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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."
·
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)
where the respondents had entered into three
cim~acts with the
F 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~pec-
. <; tively 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
H moneys. In the end it pcovidec:l as follows:
(1) [1942) A.C. 3S6.
(3) {19601 1 s.c.R. 49J.
(2) { 1942] A.C. 356.
. ;
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SUPREME COURT REPOllTS
[ 1974] 2 s.c.R.
"The contracts stand finally concluded in terms of the
settlement and na. party will have any further or other Claim
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
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and could not be set aside as the third settlement neither expressly
put ail end to the arbitration clause. nor, considered as an accord · D
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.
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 l'(O legal existence, the arbitration clauile also
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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 .l 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
. c
connection with· it. · ·.We think as the .· contract ·subsists for . certain
· : purposes. the arbitration clause openites inrespect of those purposes .
.
.
.
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
D
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·
E
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 ·
by. accord and satisfaction and, therefore, the plaintiff in the action is.
F · 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, .
· ·.
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•:_
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. · · · 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 ; · ·:
G ·non est as .it has been •substituted by. a new contrac;t:/.Whcre,,how~·· :
ever; as in. this. case,. there VIa$· 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)
H
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 .
. . . 1 •. (19421 A. C. 356,
4-S22SCI174
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· .;
·: (2) [1960]1 S.C.'R. 493 ••
: .. ~· .
·.
248
SUPREME COURT ll!PO.RTS
t 19741. 2 s.ca.
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.
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
A
B
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
C
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 WM ·;:~ . a·
full and final settlement between the parties, that dispute .cBl) ··~· .... .. :
referred to the arbitration, the Subonfulate Judge is directed to dispe~e ··
·
of the petition of the appellant according to law.
·
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
B
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.
•
In the result the appeal is partly allowed, but in the clrcwmsuince.
without costs.
·
P.B.R.
A.pP«Jl partly allo_w.d.