# THE UNION OF INDIA v. KISHORILAL GUPTA AND BROS

- **Citation:** [1960] 1 S.C.R. 493
- **Court:** Supreme Court of India
- **Decided:** 1960
- **Bench:** Jafer !:Mam, A. K. Sarkar, K. SuBBA RAO
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/the-union-of-india-v-kishorilal-gupta-and-bros-1784
- **Pages:** 34

## Headnote

Contract--Arbitration clause-Cancellation of contract-Settlement of disputes by mutual agreement-Arbitration clause, if survives-Award based on such clause-Validity;
The respondents entered into thre~ several contracts with
the appellant, for the fabrication and supply of diverse military
stores, each of which contracts 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 contained. 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 instalments 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 and further undertook to hypothecate certain properties to secure the due repayment of these moneys. The third settlement contract provided:
"The contracts stand' finally concluded in terms of the settlement and no party will have any further or other claim against
the other."
The respondents paid some of the instalments but failed to
pay the rest. They also failed to create the hypothecation. The
appellant then referred its claims for breach of the three original contracts to arbitration under the •arbitration clauses contained in them. On this reference an award for a total sum of
Rs. 1,16.446-n-5 was made against the respondents in respect of
the appellant's claim on the first and the third original contracts,
the claim in respect of the second original contract having been
abandoned by the appellant, and this award was filed in the
High Court at Calcutta. The respondents applied to the High
Court for a declaration that 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 and
for an order setting' aside the award as void and nullity. The
High 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 and the arbitrator had no
jurisdiction to arbitrate under that arbitration clause. It further
63
494
SUPREME COURT REPORTS [1960\l)]
z95~
held that as the award was a single and inseverable award the
whole of it was null and void. In this view the High Court set
The Union of India aside the award.
v.
Held (per Imam and Subba Rao, JJ., Sarkar J .. dissenting),
Kishorilal Gupl• that the third settlement, properly construed, left no manner of
& Bros.
doubt that it was for valid consideration and represented the
common intention of the parties to substitute it for the earlier
contracts between them.
It gave rise to a new cause of action by
obliterating the earlier cocytracts and the parties could look to it
alone for the enforcement of their claims. There could, therefore, be no question that the arbitration clause which, whether a
substantive or a collateral term, was nevertheless an integral
part of the said contracts, must be deemed to exist along with
them as a result of the said settlement.
Hirji Mulji v. Cheong Yue Steamship Company, [1926]
A.C. 502 and Heyman v. Darwin Ltd., [1942] l All E.R. 337,
referred to.
Tolaram Nathmull v. Birla Jute Manufacturing Co. Ltd.,
I.L.R. (1948) 2 Cal. 171, distinguished.
Held, further, that it was well settled that the parties to an
original contract could by mutual agreement enter intoa new
contract in substitution of the old one.
Payana Reena Saminathan v. Pana Lana Palaniappa, [1914]

## Text

_Characters 0–39,987 of 75,691. This is a partial read: ask again with offset=39987 for what follows._

S.C.R.
SUPREME COURT REPORTS
THE UNION OF INDIA
v.
KISHORILAL GUPTA AND BROS.
493
(.JAFER !:MAM, A. K. SARKAR and K. SuBBA RAO, JJ.)
Contract--Arbitration clause-Cancellation of contract-Settlement of disputes by mutual agreement-Arbitration clause, if survives-Award based on such clause-Validity;
The respondents entered into thre~ several contracts with
the appellant, for the fabrication and supply of diverse military
stores, each of which contracts 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 contained. 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 instalments 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 and further undertook to hypothecate certain properties to secure the due repayment of these moneys. The third settlement contract provided:
"The contracts stand' finally concluded in terms of the settlement and no party will have any further or other claim against
the other."
The respondents paid some of the instalments but failed to
pay the rest. They also failed to create the hypothecation. The
appellant then referred its claims for breach of the three original contracts to arbitration under the •arbitration clauses contained in them. On this reference an award for a total sum of
Rs. 1,16.446-n-5 was made against the respondents in respect of
the appellant's claim on the first and the third original contracts,
the claim in respect of the second original contract having been
abandoned by the appellant, and this award was filed in the
High Court at Calcutta. The respondents applied to the High
Court for a declaration that 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 and
for an order setting' aside the award as void and nullity. The
High 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 and the arbitrator had no
jurisdiction to arbitrate under that arbitration clause. It further
63
494
SUPREME COURT REPORTS [1960\l)]
z95~
held that as the award was a single and inseverable award the
whole of it was null and void. In this view the High Court set
The Union of India aside the award.
v.
Held (per Imam and Subba Rao, JJ., Sarkar J .. dissenting),
Kishorilal Gupl• that the third settlement, properly construed, left no manner of
& Bros.
doubt that it was for valid consideration and represented the
common intention of the parties to substitute it for the earlier
contracts between them.
It gave rise to a new cause of action by
obliterating the earlier cocytracts and the parties could look to it
alone for the enforcement of their claims. There could, therefore, be no question that the arbitration clause which, whether a
substantive or a collateral term, was nevertheless an integral
part of the said contracts, must be deemed to exist along with
them as a result of the said settlement.
Hirji Mulji v. Cheong Yue Steamship Company, [1926]
A.C. 502 and Heyman v. Darwin Ltd., [1942] l All E.R. 337,
referred to.
Tolaram Nathmull v. Birla Jute Manufacturing Co. Ltd.,
I.L.R. (1948) 2 Cal. 171, distinguished.
Held, further, that it was well settled that the parties to an
original contract could by mutual agreement enter intoa new
contract in substitution of the old one.
Payana Reena Saminathan v. Pana Lana Palaniappa, [1914]
A.C. 618: Norris v. Baron and Company, [1918] A.C. land British
Russian Gazette and Trade Outlook Ltd. v. Associated Newspaper,
Limited, [1933] 2 K.B. 616, referred to.
Per Sarkar, J.-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.
An accord and satisfaction is only a ·method of discharge of
a contract. It does not annihilate the contract but only makes
the obligation arising fro~ it unenforceable.
An arbitration clause stands apart froμi the rest of the
contract in .which it is contained. It does not impose on the one
pl\rty 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 arising from the contract,
does not affect an arbitration clause contained in it.
Heyman v. Darwins [1942] A.C. 356 and British Russian
Gazette and Trade Outlook Ltd. v. Associated Newspapers Ltd. [1933]
2 K.B. 616, referred to.
'
.
The settlement of February 22, 1949, did not, 'in the circumstances of the case, amount to an accord and satisfaction.
Civu. APPELLATE JURISDICTION: Civil Appeal No.
250of1955.
S.C.R.
SUPREME COURT REPORTS
495
Appeal by special leave from the
order dated February 11, 1953, of the
Court, in Award No. 254 of 1949.
judgment and
z959
Calcutta High T'- u -. - 1 _ _,.
-
mono [,...•a
H. N. Sanyal, Additional Solicitm·-General of India,
B. Sen, R. H. Dhebar and T. M. Sen, for the
appellant.
0. B. Aggarwala and Sukumar Ghose, for the respondent.
1959. May 21. The judgment of Jafer Imam and
Subba Rao, JJ., was delivered by Subba Rao, J.
Sarkar, J., delivered a separate judgment.
v.
K islwrilal Gupta
IS- Bros.
SUBBA RAO J.-This appeal by 'special leave raises
SubbaRao J.
the question of survival of an arbitration clause in a
contract after the said contra.ct is superseded by .a
fresh one. The respondent-firm, styled as " Kishorilal
Gupta & Brothers", entered into the following three
contracts
with
the
Governor-General-in-Council
through the Director General oflndustries and Supplies,
hereinafter called the Government : (i) contract dated
April 2, 1943, foi: the supply of 43,000 "Ladles Cook" ;
(ii) contract dated September 15, 1944, for the supply
of 15,500 "Bath Ovals"; and (iii) contract dated
September 22, 1944, for the supply of 1,00,000 "Kettles
Camp". Each of the said contracts contained an
arbitration clause, the material part of which was as
follows:
" In the event of any question of dispute arising
under these conditions or any special ·conditions of
contract or in connection with this contract (except
as to any matters the decision of which is specially
provided for by these conditions) the same shall be
referred to the award of an arbitrator to be nominated by the purchaser and an arbitrator to be
nominated by the contractor ........ "
Under the terms of the said three contracts, the
Government supplied certain raw-materials to the
respondents and the latter also delivered some of the
goods to the former. On May 21, 1945, the contract
dated April 2, 1943, hereinafter called the first contract,
was cancelled by the Government. The Government
496
SUPREME COURT REPORTS [1960(1)]
z959
also demanded cerlain sums towards the price of the
~·-u -. -,, 1 a· materials supplied by them to the respondents. On
""~ ttionoJ
n io
v
the same day, the Government cancelled the contract
Ki•horil~ Gupta dated September 15, 1944, hereinafter called the second
.s- B,..,
contract, and made a claim on the respondents for the
price of the raw-materials supplied to them. The
Svbba Raa J.
respondents made a counter-claim against the Government for compensation for breach of the contract. On
March 9, 1946, the Government cancelled the contract
dated September 22, 1944, hereinafter called the third
contract.
Under that contract there were mutual
claims-by the Government for the raw-material
supplied to the contractors and by the latter for
compensation for breach of contract. The disputes
under the three contracts were amicably settled. The
outstanding disputes under the first and the second
contracts were settled on September 6, 1948, and two
separate documents were executed to evidence the said
settlement. As the decision, to some extent, turns
upon the comparative study of the recitals in the said
documents of settlement, it will be convenient to read
the material part of the recitals contained therein.
The settlement in respect of the first contract contained the following reCitals :
"(1) The contractor expressly agrees to pay the
Government the sum of'Rs. 3,164-8 as. only on this
contract.
(2) The contract on payment of the amount mentioned in clause (1) shall stand finally determined."
The recitals in the settlement of the second contract
are as follows :
"(1) The ccmtract9r expreHsly agrees to pay to
the Government the sum of tis. 36,276. If D. G. I.
&. S. has recovered any amount under the contract
out of the sum due credit will be given to the contractor.
(2) The contract stands finally determined and no
party will have any further claim against the
oth-er."
One prominent difference in the phraseology used in
the two settlements may be noticed at this stage.
S.C.R.
SUPREME COURT REPORTS
497
While under the settlement of the first contract, the
z959
contract should stand finally determined only on pay-Th ri .-11 4.
d
b
"d
h G
t
nion o
n ••
ment of the a.mount agree to e pa1 to t e
overnv.
ment by the contractor, under the settlement of the Kisllorilal Gupta
second contract, the contract stood finally determined
& Bros.
on the date of the settlement itself. The third contract
was settled on February 22, 1949, and the material
Subba Rao J.
part of the recitals therein is as follows :
"(1) The firm will pay a sum of Rs. 45,000 in full
and final settlement of the amount due to the
Government in respect of raw mat.erials received
against the contract and their claims for compensation for cancellation of the same contract.
(2) The firm will retain all surplus partly fabricated and fully fabricated stores lying with them.
(3) The firm agrees to pay the abovementioned
sum of Rs. 45,000 only together with the sums owing
by them to the Government under the settlements
reached in two other cases A/T Nos. MP/75762/R-61/
78 dated 15th September 1944 and MP/50730/8/R-l/
90 dated 2nd April 1943 in monthly instalments for
Rs. 5,000 only for the first three months, first instalment being payable on 10th March, 1949, and further
instalments of Rs. 9,000 per month till the entire
dues payable to Government are paid.
(4) In the event of default of any monthly instalments interest will b~ charged by Government on the
amount as defaulted at the rate of 6% per annum
from the first day of the month in which the instalment shall be due.
If the instalments defaulted
exceed two in number the Government will have the
right to demand the entire ~ala.nee of the money
payable by the firm together with interest thereon
at the rate abovementioned on that balance and
take such steps to recover from them from the
security to be offered.
(5) In order to provide cover for the money p'ayable to the Government the firm undertakes to
hypothecate their moveable and immoveable property in Bamangachi Engineering Works together
with all machinery sheds and leasehold interest in
498
SUPREME COURT REPORTS [1960(1))
I959
The Union of India
land measuring about 5·75 acres in Mouja Bamungachi in Howrah. The firm further undertakes to
execute the necessary stamped documents for the
v.
K ishorilal Gupta
&Bros.
Subbo Rao].
purpose as drafted by the Government Solicitor at
Calcutta.
(6) The contracts stand finally concluded in terms
of the settlement and no party will have further or
other claim against the other."
Broadly speaking, this settlement was a comprehensive one including therein the earlier settlements and
providing for the recovery of the amounts agreed to
be paid under the said two earlier settlements. The
concluding paragraph is more analogous to that of
the settlement of the second contract rather than that
of the first.
Under the final settlement, between
Ortober 28, 1948, and January 17, 1949, the respondents paid a total sum of Rs. 9,000 to the Government
under the first two settlements of the contracts. Between March 10, 1949, and October 31, 1949, the respondents paid a total sum of Rs. 11,000 in instalments
to the Government, though the amounts paid were less
than the amount payable in accordance with the
agreed instalments. Some correspondence
passed
between the Government and the respondents, the
former demanding the balance of the amount payable under the instalments and the latter putting it off
on one ground or other. Finally on August 10,
1949, the Government wrote a letter to the respondents demanding the payment of Rs. 1,51,723 payable
to them under the three original contracts, ignoring
the three settlements. The Government followed that
letter with another one of the same date informing
the respondents that they had appointed Bakshi Shiv
Charan Singh as their arbitrator and calling upon the
respondents to nominate their arbitrator. The respondents did not co-operate in the scheme of arbitration and instead Kishori Lal Gupta as sole proprietor of the respondent-firm made an application
under s. 33 of the Arbitration Act, 1940, in the Original Side of the High Court of Calcutta for a declaration that the arbitration agreement was no longer
in existence. That application was dismissed by
S.C.R.
SUPREME COURT REPORTS
499
Banerjee, J., of the said High Court on the ground that
r959
it was not maintainable as the two other partners of
-
the respondent-firm were not made parties to the said The Union of India
proceeding. But in the course of the judgment, the Kishori;~1 Gupta
learned Judge made some observation on the merits
&·Bros.
of the case.
Thereafter the Government filed their
statement ~ffacts before the arbitrator and the respondSubba Rao /.
ents filed a counter-affidavit challenging the arbitrator's jurisdiction and also the correctness of the
cla,ims made by the Government. On July 31, 1951,
the arbitrator made an award in favour of the Government for a total sum of Rs. 1,16,446-11-5 in respect ,of
tne first aud the third contracts and gave liberty to
the Government to recover the amount due to them
under the second contract in a suit. The award was
duly filed in the High Court, and, on receiving the
notice, the respondents filed an application in the High
Court for setting aside the award and in the alternative for declaration that the arbitration clause in
the three contracts ceased to have any effect and stood
finally determined by the settlement of the disputes
between the parties. Bachawat, J., held that the first
contract was to be finally determined only on payment
in terms of the settlement, and, as such payment was
not made, the original contract and its arbitration
clause continued to exist. As regards the third contract, the learned Judge came to the conclusion that
by the third settlement, there was accord and satisfaction of the original contract and the substituted
agreement discharged the existing cause of action and
therefore the arbitrator had no jurisdiction to entertain
any claim with regard to that contract. As the a.ward
on the face of it was a lump sum award, the learned
Judge lield that it was not severable and therefore the
whole award waw bad. In the result, he gave the
declaration that the arbitration clause contained in the
contract dated September 22, 1944, for "Kettles Camp"
had ceased to exist since the settlement con tract dated
February 22, 1949, and that the entire award was void
and invalid. The present appeal by special leave was
filed by the Government against the said order of the
High Court.
500
SUPREME COURT REPORTS [1960(1)]
'959
At the outset, a preliminary objection taken by
The Union of India Shri Aggarwal, the learned Counsel for the respondv.
ents, may be disposed of. The learned Counsel contends
Kishorilal GuP•• that the special leave granted by this Court should be
o;. Bros.
revoked on the ground that an appeal Jay against the
order of the learned Judge to an appellate bPnch of
St4bbaRAoj.
H h C
b h
1
f
L
the same
ig
ourt ot
under c . 15 o the
etters
Patent and s. 39 of the Arbitration Act. It is not, and
cannot be, contended that this Court has no jurisdiction to entertain an appeal against the order of a Court
when an appeal lies from that order to another Court.
The provisions of Art. 136 of the Constitution are not
circumscribed by any such limitation. But what is
argued, in our view legitimately, is that when an
appeal lay to the appellate bench of the Calcutta High
Court, this Court should not have given special leave
and thereby short-circuited the legal procedure prescribed. There is much force in this argument. lf'the
application for revoking the special leave had been
taken at the earliest point of time and if this Court
was satisfied that an appeal lay to an appellate bench
of the Calcutta High Court, the leave obtained without
mentioning that fact would have been revoked. But
in the present case, the special leave was granted on
March 29, 1954, and the present e.pplication for revoking the leave \'\'as made five years after the grant of
special leave and the learnad Counsel could not give
any valid reason to explain this inordinate delay. In
the circumstances, if we revoked the special leave, the
appellant would be prejudiced, for if this objection
had been taken at the earliest point of time, the appellant would have had the opportunity to prefer a
Letters Patent appeal to the appellate bench of tl;ie
Calcutta High Court. The appellant cannot be made
to suffer for the default of the respondents. In the
circumstances, we did not entertain that application
for revoking the special leave and did not express our
opinion on the merits of the question raised by the
learned Counsel.
Now coming to the merits, the main contentions of
the parties may be stated at the outset. The argument of the Additional Solicitor-General for the
S.C.R.
SUPREME COURT REPORTS
501
appellant may .be summarized in the following proz959
positions: (1) The jurisdiction of the arbitrator depends
-. -
.
upon the scope of the arbitration agreement or sub- The Union of Ind11•
mission ; (2) its scope would depend upon the language Kishori;~1 Gupt11
of the arbitration clause ; (3) if the arbitration agree-
& Bros.
ment in question is examined, it indicates that the
dispute whether the original contracts have come to
Subba Rao J.
an end or not is within its scope; (4) on the facts of
the case, there had Qeen no novation or substitution
of the original contracts; and (5) if there had been a
novation of the original contracts, the non-performance of the terms of the new contract revived the
original contracts and therefore the parties to the
original contracts could enforce their terms including
the arbitration clause. The submission of Shri Aggarwal, Counsel for the respondents, may be stated thus :
(1) Upon the facts of the case, there had been a recession of the old contracts and substitution of a new,
legally enforceable and unconditional contract, which
came into immediate effect; (2) the new contract can
be legally supported either under s. 62 or s. 63 of the
Indian Contract Act or under the general law of contracts; (3) the non-performance of the terms of the
new contract did not have the effect of reviving the
rights and obligations under the old contracts as they
did not remain alive for any purpose ; and (6) even if
the arbitration clause did not remain alive after the
new contract, the -arbitrator was bound to decide the
case in terms of the new contract, and he having not
done so, the error is apparent on the face of the record
and therefore the award is liable to be set aside.
So stated the controversy covers a much wider field
than that necessary to solve the problem presented in
this case. It would, therefore, be·convenient at this
stage to clear the ground. Subtle distinctions sought
to be made between the provisions of s. 62 and s. 63 of
the Indian Contract Act need not detain us ; nor need
we consider the question whether the settlepient contract in question falls under s. 62 or is covered by s. 63
of the Indian Contract Act, or is governed by the
general principles of the law of contracts, for the
validity of the said contract is not questioned by either
64
502
SUPREME COURT REPORTS [1960(1)]
z959
party and indeed both rely upon it-one to contend
Th• u .
11 d. that it wholly superseded the earlier ones and the
nio;
0 n "'other to rely upon its terms to bring out its contingent
m,horilal Gupta character. If so, the only two outstanding questions
& Bros.
are: (i) what is the legal effect of the contract dated
February 22, 1949, on the earlier contracts? ; and (ii)
Subba Rao f.
does the arbitration clause in the earlier contracts
survive after the settlement contract ?
The law on the first point is well-settled. One of the
modes by which a contract can be discharged is by the
same process which created it, i.e., by mutual agreement; the parties to the original contract may enter into
a. new contract in substitution of the old one. The legal
position was clarified by the Privy Council in Payana
Reena Saminathan v. Pana Lana Palaniappa (1).
Lord
Moulton defined the legal incidents of a substituted
contract in the following terms at p. 622:
"The 'receipt' given by the appellants, and
accepted by the respondent, and acted on by both
parties proves conclusively that all the parties
agreed to a settlement of all their existing disputes
by the arrangement formulated in the 'receipt'. It
is a clear example of what used to be well known in
common law pleading as "accord and satisfaction
by a substituted agreement". No matter what were
the respective rights of the parties inter se they are
abandoned in consideration of the acceptance by all
of a new agreement. The consequence is that when
such an accord and Batisfaction takes place the prior
rights of the parties are extinguished. They have
in fact been exchanged for the new rights; and the
new agreement becomes a new departure, and the
rights of all the parties arc fully represented by it. "
The House of Lords in Norris v. Barcrn and Company(•)
in the context of a contract for sale of goods brought
out clearly the distinction between a contract which
varies the terms of the earlier contract and a contract
which rescinds the earlier one, in the following passage
at p. 26:
" In the first case there are no such executory
clauses in the second arrangement as would enable.
(1) [1914] A.C. 618, 622.
(2) [1918] A.C. 1. 26.
S.C.R.
SUPREME COURT REPORTS
503
you to sue upon that alone if the first did not exist;
x959
in the second you could sue on the second arrange- TL u .
, 1 d"
1
d h fi
,
'd f . h
ne
nion o,
n "'
ment a one, an t e rst contract is got n
o e1t er
v.
by express words to that effect, or because, the Kisharilal Gupta
second dealing with the same subject-matter as the
& Bras.
first but in a different way, it is impossible that the
two should be both performed. "
Subba Rao J.
Scrutton, L.J., in British Russian Gazette and Trade
Outlook Limited v. Associated Newspaper, Limited (1 ),
after referring to the authoritative text-books on the
subject, describes the concept of " accord and satisfaction " thus at p. 643 :
" Accord and satisfaction is the purchase of a
release from an obligation whether arising under
contract or tort by means of any valuable consideration, not being the actual performance of the
obligation itself. The accord is the agreement by
which the obligation is discharged. The satisfaction
is the consideration which makes the agreement
operative. Formerly it was necessary that the
consideration should be executed . . . . . . . . . . Later
it was conceded that the consideration might be
executory . . . . . . . . . The consideration on each side
might be an executory promise, the two mutual
promises making an agreement enforceable in law,
a contract . . . . . . . . .
' An accord, with mutual
promises to perform, is good, though the thing be
not performed at the time of action; for the party
has a remedy to compel the performance', that is to
say, a cross action on the contract of accord ...... .
If, however, it can be shown that what a creditor
accepts in satisfaction is merely his debtor's promise
and not the performance of that promise, the
original cause of action is discharged from the date
when the promise is made."
The said observations indicate that an original cause
of action can be discharged by an executory agreement
if the intention to that effect is clear. The modern
rule is stated by Cheshire and Fifoot in their La.w of
Contract, 3rd Edn., at p. 453:
"The modern rule is, then, that if what the
creditor has accepted in satisfaction is merely his
ll) [1933] a K.B. 616, 643, 6,H·
TM Union of India
"·
Kishorilal Gupta
cS- B1os.
Subba Rao].
504
SUPREME COURT REPOltTS [1960(1))
debtor's promise to give consideration, and not the
performance of that promise, the original cause of
action is discharged from the date when the agreement is made.
This, therefore, raises a question of construction
in each case, for it has to 'be decided as a fact
whether it was the making of the promise itself or
the performance of the promise that the creditor
consented to take by way of satisfaction. "
So too, Chitty in his book on Contracts, 31st Edn.,
states at p. 286 :.
"The plaintiff may agree to accept the performance of a substituted consideration in satisfaction,
or he may agree to. accept the promise of such
performance. In the former there is no satisfaction
until performance, and the debtor remains liable .
upoI\ the original claim until the satisfaction is
executed. . In the latter, if the promise be not
performed, the plaintiff's remedy is by action for the
breach of the substituted agreement, and he has no
right of resort to the original claim."
_
From the aforesaid authorities it is· manifest that a
cont.ract may be discharged by the parties thereto by
a substituted agreement and thereafter the original
cause of action arising under the earlier contract is
discharged and the parties are governed only by the
terms of the substituted contract. The ascertainment of
t>he intention of the parties is essent.ially a question of
fact to be decided on the facts and circumstances of
each case.
We have already given the sequence of event.a that
led to the making of the contract dated February 22,
194!). To recapitulate briefly, the original three
contracts were cancelled bv the Government on
May 21, 1945, May 21, 1945, and Match 9, 1946,
respectively.
Under the first contract, the Government made a claim for the price of the raw-materials
supplied and there was no counter-claim by the
respondents. Under the second and third contracts,
there were counter-claims-the Government claiming
amounts for the raw-materials supplied and the
respondents claiming damages for the breach thereof.
S.C.R.
SUPREME COURT REPORTS
505
The disputes under the first two contracts were settled
1959
on the same day. As the claim was only on the part Th u .
.11_~·
c
nion OJ
7Htlll
of the Government, the amount due to them was
v.
ascertained at Rs. 3,164-8,0 and the first contract was Kishortlal Gupta
expressly agreed to be finally determined on payment
.s. Bros.
of that amount. The express terms of the settlement
leave no room to doubt that the contract was to be
Subba Rao J.
determined only after the payment of the ascertained
amount. But under the second settlement, which was
a. compromise of disputed claims, a sum of Rs. 36,276
was fixed as the amount due from the respondents to
the Government, presumably on taking into consideration the conflicting claims and on adjusting all the
amounts ascertained to be due from one to the other.
The parties in express terms agreed that the earlier
contract stood finally determined and that no party
would have any claim thereunder against the other.
A comparative study of the terms of the said two
settlement contracts indicates that under the first
settlement the original contract continued to govern
the rights of the parties till payment, while under the
second settlement contract, the original contract was
determined and the rights and liabilities of the parties
depended thereafter on the substituted contract.
Coming to the third settlement, it was in the pattern
of the second settlement. On the breach ,£>f the third
contract, there were mutual claims, the Government
claiming a large amount for raw-materials supplied to
the respondents, and the latter on their side setting
up a claim for damages. Further, though the earlier
two contracts were settled on September 6, 1948, the
a.mounts payable under the said two settlements were
not paid.
.A, comprehensive settlement, therefore, of
the outstanding claims was arrived at between the
parties, and the· rights and liabilities were attempted
to be crystallized and a suitable procedure designed for
realising the amounts. In full and final settlement of
the amounts due to the Government in respect of the
raw-materials received against the contracts and the
respondents' claim for compensation for cancellation
of the contracts, it was agreed that the respondents
should pay a sum of Rs. 45,000 to the Government
506
SUPREME COURT REPORTS [1960(1))
'95•
and that the respondents should retain all the material,
Th u -. - 1 Ind' partly fabricated and fully fabricated stores lying with
• ni";
0
"'them. Clauses 3, 4 and 5 provide for the realisation
Kishoril~I Gupta of the entire amounts covered by the three settle-
& Bros.
ments. Under cl. 3 the respondents agreed to pay
the total amount payable under the three settlements
Subba Rao f.
in monthly instalments for the first three months
commencing from March IO, 1949, at a sum of
Rs. 5,000 and thereafter at a sum of Rs. 9,000 per
month till the entire amount was paid. Clause 4
prescribed that in case of default of any monthly
instalment interest would be charged at tjle rate
of 6% per annum and if the instalments defaulted
exceeded two in number the Government was given
the right to realise the entire amount payable
under the three contracts with interest not only
from the security but. also otherwise. Under cl. 5
it was stipulated that the respondents should
hypothecate their moveable and immoveable properties described thereunder to provide cover for the
moneys payable to the Government. Clause 6 in
express terms declared that the contracts should
be finally concluded in terms of the settlement and
no party would have any claim against the other.
Is there any justificaj;ion for the contention that the
substituted • contract should either come into force
after the hypothecation bond was executed or that it
should cease to be effective if the said bond was not
executed within a reasonable time from the date of
the settlement? We do not find any justification for
this contention either in the express terms of the
contract or in the surrounding circumstances whereunder the document came to be executed. It was a
self-contained document; it did not depend upon the
earlier contracts for its existence or enforcement.
The liability was ascertained and the mode of recovery was provided for. The earlier contracts were
superseded and the rights and liabilities of the parties
were regulated thereunder. No
condition
either
precedent or subsequent was expressly provided; nor
was there any scope for necessarily implying one or
other either. The only argument in this direction.
S.C.R.
SUPREME COURT REPORTS
507
namely, that it is impossible to attribute any intenz959
tion to the Government to take a mere promise o!1 The Union of India
the part of the respondents to hypothecate their
v.
properties "as satisfaction " and therefore it should [(isltorilal Gupta ·
lbe held that the intention of the parties was that
& Bros.
there would be no satisfaction till such a document
was executed, does not appeal to us. We are conSubba Rao f.
cerned with the expressed intention of the parties and
when the words are clear and unambiguous-they are
undoubtedly clear in this case-there is no scope for
drawing upon hypothetical considerations or supposed
intentions of the parties; nor. are we attracted by the
argument that the description of the properties intended to be hypothecated was not made clear and therefore the presumed intention was to suspend the
rights under the new contract till a valid document
in respect of a definite and specified property was
executed.
Apart from the fact that we are not
satisfied with the argument that the description was
indefinite, we do not think that such a flaw either
invalidates a document or suspends its operation till
the defect is rectified or the ambiguity clarified. The
substituted agreement gave a new cause of action and
obliterated the earlier ones and if there was a valid
defence against the enforcement of the new contract
in whole or in part, the party affected must take the
consequences. We ha,ve, therefore, no doubt that the
contract dated :February 22, 1949, was for valid consideration and the common int.ention of the parties
was that it should be in sub;.'ltitution of the earlier
ones and the parties thereto should thereafter look to
it alone for enforcement of their claims. As the document does not disclose any ambiguity, no scrutiny of
the subsequent conduct of the parties is called for to
ascertain their intention.
If so, the next question is whether the arbitration
clause of the original contracts survived after the
execution of the settlement contract dated February
22, 1949. The learned Counsel for the appellant
contends that· the terms of the arbitration clause are
wide and comprehensive, and any dispute on the
question whether the said contract was discharged by
any of the ways known to law came within its fold.
508
SUPREME COURT REPORTS (1960(1)]
z959
Uninfluenced by authorities or case.Jaw, the logical
n u -. - 1 1 d' outcome of the earlier discussion would be that the
' n•o;
0 n •a arbitration clause perished with the original contract.
Kishor11:1 Gupta Whether the said clause was a substantive term or a
<5- Bros.
collateral one, it was none the less an integral part of
the contract, which had no existence de hors the
Subba Rao J.
contract. It was intended to cover all the disputes
arising under the conditions of, or in connection with,
the contracts. Though the phraseology was of the
widest amplitude, it is inconceivable that the parties
intended its survival even after the contract was
mutually rescinded and substituted by a new agreement. The fact that the new contract not only did
not provide for the survival of the arbitration clause
but also the circumstance that it contained both
substantive and procedural terms indicates that the
parties gave up the terms of the old contracts, including the arbitration clause. The case.Jaw referred
to by the learned Counsel in this connection does not,
in our view, lend support to his broad contention and
indeed the principle on which the said· decisions are
based is a pointer to the contrary.
We shall now notice some of the authoritative statements in the text-books and a few of the cases bearing
on the question raised : In Chitty on Contract, 21st
Edn., the scope of an arbitration clause is stated thus,
at p. 322:
"So that the law must be now taken to be that
when an arbitration clause is unqualified Ruch a
clause will apply even if the dispute involve an
assertion that circumstances had arisen whether
before or after the contract had been partly performed which have the effect of discharging one or
both parties from liability, e.g., repudiation by one
· party accepted by the other, or frustration."
In "Russel on Arbitration'', 16th Edn., p. 63, the
following test is laid down to ascertain whether an
arbitration clause survives after the contract is determined:
.
"The test in such cases has been said to be
whether the contract is determined by something
outside itself, in which case the arbitration clause
S.C.R.
SUPREME COURT REPORTS
509
is determined with it, or by something arising out
r959
of th~ contrac~, in "'hich case the arbitration clause The Union of India ,
remams effective and can be enforced."
v.
•.
The Judicial Committee in Hirji Mulji v. Cheong Yue Kisho•iltll Gupt•
Steamship Company (1) gives another test at p. 502 :
.s. Bros.
" That a person before whom a complaint is
Subba Rao J.
brought cannot fuvest himself with arbitral jurisdiction to decide it is plain. His authority depends on
the existence of some submission to him by the
parties of the subject matter of the complaint. F'or
this purpose a contract that has determined is in
the same position as one that has never been
concluded at all. It founds no jurisdiction."
A very interesting discussion on the scope of an arbitration clause in the context of a dispute arising on the
question of repudiation of a contract is found in the
d.ecision of the House of Lords in Heyman v. Darwine
Ltd.(2)
There a contract was repudiated by one party
and accepted as such by the other. The dispute arose in
regard to damages under a number of heads covered
by the contract. The arbitration clause provided that
any dispute between the parties in respect of the
agreement or any of the provisions contained therein
or anything arising thereout should be referred to
arbitration. The House of Lords held that the dispute
was one within the arbitration clause. In the speeches
of the Law Lords· a wider question is discussed and
some of the relevant principles have been succinctly
stated. Viscount Simon L.C. observed at p. 343 thus:
"An arbitration clause is a written submission,
agreed to by the parties to 'the contract, and, like
other written submissions to arbitration, must ht>
construed according to its language and in the light
of the circumstances in which it is made. If the
dispute is as to whether the contract which contains
the clause has ever been entered into at all, that
issue cannot go to arbitration under the clause, for
the party who denies that he has ever entered into
the contract is thereby denying that he has ever
joined in the submission. Similarly, if one party to
(I) [1926] A.C. 497, 502.
65
(2) [1942] l All E.R. 337, 343-345, 347, 350.
I959
Thi Union of India
v.
K isho1'ilal Gupta
cf,. Bros.
Subba Rao].
510
SUPREME COURT REPOR.TS [1960(1)]
the alleged contract is contending that it is void
ab initio (because, for example, the making of such a
contract is illegal), the arbitration clause cannot
operate, for on this view the clause itself is also
void.
If, however, the parties are at one in asserting that
they entered into a binding contract, but a difference
has arisen between them as to whether there has been
a breach by one side or the other, or as to whether
circumstances have arisen which have discharged one
or both parties from further performance, such differences should be regarded as differences which have
arisen " in respect of", or " with · regard to ",
or" under" the contract, and an arbitration clause
which uses these, or similar, expressions, should be
construed accordingly. By the law of England (though
not, as I understand, by the law of Scotland) such an
arbitration clause would also confer authority to
assess damages for breach even though it does not
confer upon the1arbitral body express power to do so.
I do not agree that an arbitration clause expressed
in such terms as above ceases to have any possible
application merely because the contract has "come to
an end", as, for example, by frustration.