2009 (9) TMI 592 - SC - Companies Law

Does the arbitration agreement survive for the purpose of resolution of disputes arising under or in connection with the contract even if its performance has come to an end on account of termination due to breach? Whether the trial court must refer the parties to arbitration under section 8 of the Act 1996?

Issues Involved:
1. Whether the arbitration agreement survives for the resolution of disputes after the termination of the contract due to breach.
2. Whether the trial court must refer the parties to arbitration under section 8 of the Arbitration and Conciliation Act, 1996.

Issue-wise Detailed Analysis:

1. Survival of Arbitration Agreement Post-Termination:

The core question in this appeal is whether the arbitration agreement survives for resolving disputes even after the contract's termination due to breach. The hire purchase agreement between MAGMA Leasing Limited and the hirer contained an arbitration clause (Clause 22), which broadly covered all disputes arising out of the agreement. The hirer defaulted on payments, leading MAGMA to seize the vehicle and terminate the agreement. The hirer contested the arbitration application, arguing that the termination nullified the arbitration agreement.

The judgment referenced several precedents, including the House of Lords' decision in *Heyman v Darwins Ltd.* [1942] 1 All ER 337 (HL), which established that an arbitration clause survives the termination of a contract due to breach. The Supreme Court of India in *Union of India v Kishorilal Gupta and Bros.* [1960] 1 SCR 493 and *National Agricultural Coop. Marketing Federation India Ltd. v Gains Trading Ltd.* [2008] 2 Comp LJ 344 (SC) reiterated this principle, stating that an arbitration clause is a collateral term that remains effective for resolving disputes even if the contract's performance has ended. The court emphasized that the arbitration clause in the hire purchase agreement (Clause 22) was framed in the widest terms possible, covering all disputes arising out of the agreement. Therefore, the arbitration clause survives for resolving disputes despite the contract's termination.

2. Referral to Arbitration Under Section 8 of the Arbitration and Conciliation Act, 1996:

The next question addressed was whether the trial court must refer the parties to arbitration under section 8 of the Arbitration and Conciliation Act, 1996. Section 8 mandates that a judicial authority must refer parties to arbitration if the following conditions are satisfied:
(a) Existence of an arbitration agreement.
(b) Action brought to court by one party against the other party to the arbitration agreement.
(c) The subject matter of the suit is the same as the subject matter of the arbitration agreement.
(d) The other party applies for arbitration referral before submitting their first statement on the substance of the dispute.
(e) The application is accompanied by the original arbitration agreement or a duly certified copy.

The court noted that all these conditions were met in the present case. The trial court had erred in not referring the parties to arbitration. The Supreme Court emphasized that section 8 is a legislative command, and once the conditions are satisfied, the court has no discretion but to refer the parties to arbitration.

Conclusion:

The Supreme Court allowed the appeal, setting aside the High Court's order and the trial court's order. The case was remanded to the First Additional Senior Civil Judge, Vijayawada, to pass an appropriate order in light of the observations made. The court reiterated that the arbitration clause survives the termination of the contract due to breach and that the trial court must refer the parties to arbitration under section 8 of the Arbitration and Conciliation Act, 1996.

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