2019 (7) TMI 1469 - SC - Companies Law

Reference to Arbitration - Compromise decree - Case of appellant is that the respondents refused to honour the terms and conditions of the compromise decree therefore, the appellant had filed Title Execution case No.4 of 2002 for execution of the compromise decree dated 24.12.2001 - diversion of stock by appellant's employee - it was also alleged that compromise decree was obtained by appellant by false inducement and misrepresentation and the same is vitiated on account of fraud. Whether the High Court was right in referring the parties to arbitration by observing that the appellant- Company admits the existence of arbitration clause in the agreement dated 01.05.1997? Whether the appellant is right in contending that the dispute raised in the Money Suit No.73 of 2003 is not covered by the arbitration clause and cannot be referred to arbitration? HELD THAT - From a reading of the above terms of the compromise deed dated 11.12.2001, it is clear that the parties have substituted a new agreement by way of compromise. As per the agreement dated 01.05.1997, the appellant was the clearing and forwarding agent for the entire north-eastern region; whereas under the terms of the compromise, the appellant has been appointed as stockist of the company only for Guwahati and Agartala and not as clearing and forwarding agent for north-eastern region. The clauses in the compromise memo also clearly state that the appellant handed over all the stocks of goods to the respondent-Company. The appellant had also handed over the entire documents in their possession both used and unused as well as sales tax documents, road permit, C forms from stockists and other documents. When the parties have settled their differences and compromised the matter, in the dispute subsequently arising between the parties, arbitration clause in the prior agreement cannot be invoked. Since the agreement dated 01.05.1997 (agreement for appointing the appellant as clearing and forwarding agent) and the compromise (appointing the appellant as stockist) are different, the arbitration clause in the agreement dated 01.05.1997 cannot be read into the terms of the compromise as per which the parties have entered into a new arrangement and this has not been kept in view by the High Court. The High Court erred in holding that the existence of the arbitration clause has been admitted by the appellant-Company and it is for the arbitrator to decide under Section 16 of the Act whether the arbitration clause applied to the subject matter of the suit or not. An application under Section 8 of the Act can be made only if the subject matter of the suit is also the same as the subject matter of arbitration. In other words, only those disputes which are specifically agreed to be resolved through arbitration can be the subject matter of arbitration; and upon satisfaction of the same, the Court can refer the parties to arbitration - In the present case, the compromise decree does not contain any arbitration clause. The subsequent Suit No.73 of 2003 has been filed by the appellant due to failure of the respondent Company to appoint the appellant as stockist of their products in Guwahati and Agartala and the same has caused substantial loss to the appellant. In the said suit, the appellant also alleged that due to illegal act of the respondent, the appellant has to face the criminal trial unnecessarily due to which the appellant has sustained heavy loss both financially and mentally and also it resulted in loss of goodwill and reputation of the appellant and therefore, the appellant claimed compensation of rupees twenty crores from the respondent. The suit claim is not covered by the arbitration. Since the respondent has raised the plea that the compromise decree is vitiated by fraud, the merits of such a plea could be decided only by the Civil Court upon consideration of the evidence adduced by the parties - there is no arbitration clause relating to the dispute between the parties in not appointing the appellant as stockist and the claim of compensation towards loss of goodwill and reputation. The High Court erred in proceeding under the footing that the dispute falls within the ambit of the agreement dated 01.05.1997 and that the appellant-plaintiff admits the existence of the arbitration clause and the impugned judgment is liable to be set aside. Money Suit No.73 of 2003 shall stand restored to the file of Civil Judge, Senior Division, Kamrup, Guwahati and the trial court shall proceed with the matter in accordance with law - Appeal allowed - decided in favor of appellant.

Summary

Issues Involved:
1. Whether the High Court was right in referring the parties to arbitration by observing that the appellant-Company admits the existence of an arbitration clause in the agreement dated 01.05.1997?
2. Whether the appellant is right in contending that the dispute raised in Money Suit No.73 of 2003 is not covered by the arbitration clause and cannot be referred to arbitration?

Detailed Analysis:

Issue 1: Existence of Arbitration Clause
The High Court referred the parties to arbitration based on the presence of an arbitration clause in the agreement dated 01.05.1997, which appointed the appellant as a clearing and forwarding agent. The clause stated that any dispute arising out of the subject matter or touching upon the agreement would be referred to arbitration. The High Court held that the existence of the arbitration clause was admitted by the appellant and that under Section 16 of the Arbitration and Conciliation Act, 1996, it was for the arbitrator to decide whether the arbitration clause applied to the subject matter of the suit.

However, the Supreme Court found that the parties had entered into a new arrangement through a compromise deed dated 11.12.2001, which did not contain an arbitration clause. The compromise substituted the original agreement, appointing the appellant as a stockist instead of a clearing and forwarding agent. The Supreme Court concluded that the arbitration clause in the original agreement could not be invoked for disputes arising under the new arrangement. Therefore, the High Court erred in referring the parties to arbitration based on the original agreement.

Issue 2: Scope of Arbitration Clause
The appellant contended that the dispute in Money Suit No.73 of 2003, which sought compensation for financial loss, loss of goodwill, and reputation due to the respondent's failure to honor the compromise decree, was not covered by the arbitration clause. The Supreme Court agreed, noting that the subsequent suit was based on events and claims arising after the compromise, which were not related to the original agreement dated 01.05.1997. The claims included loss due to non-appointment as a stockist, mental pressure, and legal proceedings, which did not fall within the ambit of the original arbitration clause.

The Supreme Court emphasized that an application under Section 8 of the Act could only be made if the subject matter of the suit was the same as the subject matter of the arbitration agreement. Since the compromise decree did not contain an arbitration clause and the subsequent claims were unrelated to the original agreement, the disputes could not be referred to arbitration.

Allegations of Fraud
The respondent argued that the compromise decree was obtained through false inducement and fraud, making it void ab initio. The Supreme Court held that serious allegations of fraud, which are complex and require extensive evidence, should be decided by the civil court rather than through arbitration. This further supported the decision to not refer the disputes to arbitration.

Conclusion
The Supreme Court set aside the High Court's order and restored Money Suit No.73 of 2003 to the file of the Civil Judge, Senior Division, Kamrup, Guwahati, directing the trial court to proceed with the matter in accordance with the law. The Supreme Court concluded that the disputes arising from the compromise arrangement and subsequent claims were not covered by the original arbitration clause and should be adjudicated by the civil court.