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TMI Blog1959 (5) TMI 37X X X X Extracts X X X X X X X X Extracts X X X X ..... barao, K., Imam, Syed Jaffer And Sarkar, A.K.,JJ. JUDGMENT The judgment of Jafer Imam and Subba Rao, JJ., was delivered by Subba Rao, J. Sarkar, J., delivered a separate judgment. SUBBA RAO J.-This appeal by special leave raises the question of survival of an arbitration clause in a contract after the said contract is superseded by a fresh one.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 of Industries and Supplies, hereinafter called the Government :- (i) contract dated April 2, 1943, for 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lement of the first contract, 'the contract should stand finally determined Only payment of the amount agreed to be paid to the Government by the contractor, under the settlement of the second contract, the contract stood finally determined on the date of the settlement itself. The third contract was settled on February 22, 1949, and the material 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 materials 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-I/ 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 pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hi 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 declara- tion that the arbitration agreement was no longer in existence. That application was dismissed by Banerjee, J., of the said High Court on the ground that it was not maintainable as the two other partners of the respondent-firm were not made parties to the said proceeding. But in the course of the judgment, the learned Judge made some observation on the merits of the case. Thereafter the Government filed their statement of facts before the arbitrator and the respondents filed a counter- affidavit challenging the arbitrator's jurisdiction and also the correctness of the claims 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 the first and the third contracts and gave liberty to the Government to recover the amount due to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argument. If 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 application for revoking the leave was made five years after the grant of special leave and the learned 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 the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o rely upon its terms to bring out its contingent character. If so, the only two outstanding questions are: (i) what is the legal effect of the contract dated February 22, 1949, on the earlier contracts ? ; and (ii) 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 ([1914] A.C. 618 622). 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 plea ding as " accord and satisfaction by a substituted agreement ". No matter wha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 Law of Contract, 3rd Edn., at p. 453: "The modern rule is, then, that if what the creditor has accepted in satisfaction is merely his 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 upon th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntract, 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 of 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 amounts 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 and that the respondents should retain all the material, partly fabricated and fully fabricated stores lyin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 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 have, therefore, no doubt that the contract dated February 22, 1949, was for valid consideration and the common intention of the parties was that it should be in substitution of the earlier ones and the parties thereto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on Arbitration ", 16th Edn., p. 63, the following test is laid down to ascertain whether an arbitration clause survives after the contract is deter- mined: " 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 is determined with it, or by something arising out of the contract, in which case the arbitration clause. remains effective and can be enforced." The Judicial Committee in Hirji Mulji v. Cheong Yue Steamship Company ([1926] A.C. 497,502) gives another test at p. 502: "That a person before whom a complaint is brought cannot invest 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. For 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 decision of the House of Lords in Heyman v. Darwine Ltd .( [1942] 1 All ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mple, by frustration. In such cases it is the performance of the contract that has come to an end." The learned Law Lord commented on the view expressed by Lord Dunedin at p. 344 thus:- "The reasoning of Lord Dunedin applies equally to both cases. It is, in my opinion, fallacious to say that, because the contract has " come to an end " before performance begins, the situation, so far as the arbitration clause is concerned, is the same as though the contract had never been made. In such case a binding contract was entered into, with a valid submission to arbitration contained in its arbitration clause, and, unless -the language of the arbitration clause is such as to exclude its application until performance has begun, there seems no reason why the arbitrator's jurisdiction should not cover the one case as much as the other." Lord Macmillan made similar observations at p. 345: "If it appears that the dispute is as to 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion is rightful, the contract is ended by the rescission; but only as far as concerns future performance. It remains alive for the awarding of damages, either for previous breaches, or for the breach which constitutes the repudiation. That is only a particular form of contract breaking and would generally, under an ordinary arbitration clause, involve a dispute under the contract like any other breach of contract." This decision is not directly in point; but the principles laid down therein are of wider application than the actual decision involved. If an arbitration clause is couched in widest terms as in the present case, the dispute, whether there is frustration or repudiation of the contract, will be covered by it. It is not because the arbitration clause survives, but because, though such repudiation ends the liability of the parties to perform the contract, it does not put an end to their liability to pay damages for any breach of the contract. The contract is still in existence for certain purposes. But where the dispute is whether the said contract is void ab initio, the arbitration clause cannot operate on those disputes, for its operative force depends upon the existen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contract has no legal existence, the arbitration clause also 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 in connection with it. As the contract subsists for certain purposes, the arbitration clause operates in respect of these purposes. We have 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. We have also 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. In this view, the judgm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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-1/90 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 be 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 due. If the instalments defaulted exceed two in number, the Government will have the right to demand the entire balance 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 the Security to be offered by the firm, in terms of the settlement or otherwise. 5. In order to provide cover for the monies payable to the Government the firm undertakes to hypothecate their movable and immoveable property in Bamangachi Engineering Works, together with all machinery sheds and lease-hold interest in land measuring about 5.75 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of its claim on the ladles cook and kettles camp contracts. Being aggrieved by the award, the respondent Kishorilal Gupta, who is a partner of the contractors' firm, made an application to the High Court at Calcutta in its Original Jurisdiction 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 settlements earlier referred to and for an order setting aside the award as void and a nullity. I wish to draw attention here to the fact that the application was really concerned with the contracts for ladles cook and kettles camp. It had nothing to do with the bath ovals' contract for the appellant withdrew its claim under it from arbitration and no award was made in respect of it. So in this appeal we are not really concerned with that contract. Bachawat, J., who heard the application held that the contract for ladles cook had not been abrogated by the settlement in respect of it for -reasons which it is unnecessary to state here as this part of the decision of the learned Judge has not been challenged before us. a We have therefore to proceed on the basis that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claims referred to arbitration were not within the arbitration clauses. What is in dispute in this case is whether the 'arbitration clause had ceased to exist as a result of settlement. In considering the question it is not necessary however to concern ourselves with the settlements regarding the ladles cook contract or the bath ovals contract. The bath ovals contract is not the subject matter of the award. As regards the ladles cook contract, the Court below has held that settlement did not affect the relative arbitration clause and that decision has not been challenged before us. The real question that we have to consider is whether the settlement of February 22, 1949, altogether put out of existence the arbitration clause in the kettles camp contract. If it did, the arbitration in this case was clearly without jurisdiction and the award resulting from it a nullity, for on that basis there would be no arbitration agreement under which an arbitration could be held. An arbitration agreement, of course, is the creature of an agreement and what is created by agreement may be destroyed by agreement. Lord Macmillan considered it elementary " that the parties to a contract may agree t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... difficult to conceive of an obligation arising from a contract unles the contract existed. An accord and satisfaction which secures a release from such an obligation 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 nonperformance 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. It would clearly appear from the terms of the settlement that it dealt with remedies for the breach of the kettles camp contract. Clause (1) shows that the parties were making cross-claims against each other for breach of that contract and these were settled by mutual agreement upon the term that the contractors would pay to the appellant Rs. 45,000. Clauses (3), (4) and (5) state how this sum was to be paid and how the payment of it was to be secured. Clause ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion in favour of the other but embodies an agreement that if any dispute arises with regard to the obligations which the one party has undertaken to the other, such dispute shall be settled by arbitration. A dispute whether the obligations under a contract have been discharged by an accord and satisfaction is no less a dispute regarding the obligations under the contract. Such a dispute has to be settled by arbitration if it is within the scope of arbitration clause and either party wants that to be done. That cannot be unless the' arbitration clause survives the accord and satisfaction. If that dispute is not within the arbitration clause, there can of course be no arbitration, but the reason for that would not be that the arbitration clause has ceased to exist but that the dispute is outside its scope. I am not saying that it is for the arbitrator to decide whether the arbitration clause is surviving ; that may in many cases have to be decided by the Court. That would depend on the form of the arbitration agreement and on that aspect of the matter it is not necessary to say anything now for the question does not arise. In my view therefore an accord and satisfaction does not d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of intention. And where, as in the present case, the agreement is expressed in writing, the question is one of construction of a document. So much is well settled. The question then is, Is it the proper construction of the settlement of February 22, 1949, that the appellant agreed to accept the promise of the contractors to pay the moneys and create the security in discharge of their obligations ? Or is it the proper construction that the contractors were not to be discharged till they had carried out their promises contained in the settlement. The High Court held, accepting the respondent's contention, that el. (6) of the settlement showed that the appellant had accepted the promise of the contractors to pay the moneys and to execute a hypothecation bond in full discharge of their obligations under the contract. That clause states that " The contracts stand finally concluded in terms of the settlement." It is said that these words show that it was intended to accept the promise of the contractors and thereupon to give them a discharge from their obligations under the contract. Now it seems to me that the words " stands finally concluded in terms of the settlement " do not ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sfaction; if it did not, the appellant's claim for damages could not be confined to the amount mentioned in the settlement, I have already said that in my opinion it did not amount to an accord and satisfaction. So there was no error apparent on the face of the award. It further seems to me that it is not open to the respondent to contend that the award is liable to be set aside as disclosing the error mentioned above on the face of it. I do not find that such a case was made in the application out of which this appeal arises. It was said that the case had been made in paragraphs 34 and 35 of the respondent's petition to the High Court. I do not think it was there made. These paragraphs refer to the arbitrator's decision that he had jurisdiction to arbitrate as the settlement had not destroyed the arbitration clause and the contention there made was that this decision was erroneous on the face of it. This has nothing to do with the question that the award was wrong on the face of it as it awarded a sum in excess of the amount fixed by the settlement. Whether the arbitrator was right or not in his decision that the arbitration clause had not been superseded is irrelevant for that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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