Case: The Union Of India Vs. Kishorilal Gupta And Bros

1. 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by special leave raises the question of survival of an arbitration clause in a contract after the said contract is superseded by a fresh one.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 and 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 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 also demanded certain sums towards the price of the materials supplied by them to the respondents. On the same day, the Government cancelled the contract dated September 15, 1944, hereinafter called the second contract, and made a claim on the respondents for the price of the raw-materials supplied to them. The 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 or 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 contractor expressly agrees to pay to the Government the sum of Rs. 36,276. If D. G. I and 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 other."One prominent difference in the phraseology used in the two settlements may be noticed at this stage. While under the settlement of the first contract, the contract should stand finally determined only on 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-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 cent 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 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 them from the security to be offered.5. In order to prove cover for the money payable to the Government the firm undertakes to hypothecate their moveable and immovable property in Bamangachi Engineerng Works together will all machinery, sheds and leasehold interest in land measuring about 5.75 acres in Mouja Bamangachi in Howrah. The firm further undertakes to execute the necessary stamped documents for the 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 October 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 81, 1949, the respondents paid a total sum of Rs. 11,000 in installments 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 onginal 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 cooperate 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 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 arbitrators 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 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 award on the face of it was a lump sum award, the learned Judge held that it was not severable and therefore the whole award was bad. In the result, he gave the declaration that the arbitration clause contained in the contract dated September 27, 1944, for "Kettles Camp" had ceased to exist since the settlement contract 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.

Reasoning:
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.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 oldonly argument in this direction, namely, that it is impossible to attribute any intention to the Government to take a mere promise on the part of the respondents to hypothecate their properties "as satisfaction" and therefore it should be held that the intention of the parties was that there would be no satisfaction till such a document was executed, does not appeal toare concerned 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 sustain 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 in. validates 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 onesand if there was a valid defence for 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 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.The following principles relevant to the present case emerge from the aforesaid discussion: (1) An arbitration clause is a collateral term of a contract as distinguished from its substantive terms; but none the less it is an integral part of it; (2) however comprehensive the terms of an arbitration clause may be, the existence of the contract is a necessary condition for its operation, it perishes with the contract; (3) the contract may be non est in the sense that it never came 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; (5) in the former case, if the original 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 ended, but the contract is still in existence for certain purposes in respect of disputes arising under it on in connection with it. As the contract subsists for certain purposes, the arbitration clause operates in respect of these purposes.11. 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 judgement of the High Court is correct.