Case: ZENITH DRUGS &amp; ALLIED AGENCIES PVT. LTD. REPRESENTED BY ITS MANAGING DIRECTOR, SHRI UDAY KRISHNA PAUL Vs. M/S. NICHOLAS PIRAMAL INDIA LTD

The appellant is a Company registered under the Companies Act, 1956 and is involved with various types of agency businesses including that of clearing and forwarding agents, freight contractors, etc. M/s Rhone Poulene India Limited (RPIL) vide agreement dated 01.05.1997 appointed the appellant Company as its clearing and forwarding agent for a period of three years. Clause 17 of the agreement dated 01.05.1997 contains arbitration clause. The agreement was renewed for a further period from 01.04.2001 to 31.03.2002. 3. RPIL vide its letter dated 20.07.2001 informed the appellant that their Company is getting merged with respondent Company- Nicholas Piramal India Ltd. (NPIL) and that pursuant to the merger, RPIL shall cease to exist as a legal entity and therefore, with effect from three months from the date of the letter, the subsisting clearing and forwarding agency agreement shall stand terminated in terms of the provisions of the agreement. The Bombay High Court in Company Application No.252 of 2001 passed the order dated 27.09.2001 inter alia approving amalgamation of RPIL with the respondent Company. The appellant by its letter dated 25.07.2001 objected to the unilateral decision of the respondent Company to terminate the clearing and forwarding agency agreement and requested the respondent to maintain status-quo with respect to the agency until the issue is resolved through negotiations. RPIL vide its letter dated 03.09.2001 informed the appellant that they are unable to accede to the request for withdrawing the termination letter. For all practical purposes, the clearing and forwarding agency agreement dated 01.05.1997 thus stood terminated. 4. The appellant filed Title Suit No.241 of 2001 inter alia praying for declaration that the contract between the appellant and RPIL-defendant No.1 was valid, subsisting, legal and continuing and for further declaration that defendants cannot terminate the appellant as clearing and forwarding agents in any manner in case of merger with the respondent Company. In the said suit, the parties have compromised the matter and on the basis of compromise deed dated 11.12.2001 jointly filed by the parties, Civil Judge, Senior Division, Guwahati vide its order dated 24.12.2001 decreed the Title Suit No.241 of 2001 on compromise as per the terms and conditions embodied in the compromise deed. In terms of the said compromise, respondent has made the payment of Rs.23,50,000/- to the appellant and also as a part of compensation package appointed the appellant as its stockist for their products at Guwahati and Agartala. 5. 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. Differences arose between the parties on the alleged diversion of stocks by the appellant?s employee in the year 2002. The respondent filed criminal complaint in C.R. Case No.1446 of 2002 before the Chief Judicial Magistrate, Kamrup for the offences punishable under Sections 420, 406, 409 and 403 IPC read with Section 34 IPC. The respondent had also filed an application under Section 151 CPC praying for setting aside/recalling of compromise decree dated 24.12.2001 on the ground that the compromise decree was obtained by appellant by false inducement and misrepresentation and the same is vitiated on account of fraud. 6. On 30.04.2003, appellant had filed Money Suit No.73 of 2003 claiming compensation for rupees twenty crores. In the suit, the appellant inter alia alleged that due to intentional acts of omission and commission by respondent, the appellantplaintiff had suffered huge financial loss as well as loss of goodwill and reputation in the market. On 15.06.2004, relying upon Clause 17 of the agreement dated 01.05.1997, the respondent filed an application under Section 8 of the Arbitration and Conciliation Act, 1996 (for short ?the Act?) praying for referring the parties to arbitration in Money Suit No.73 of 2003. The trial court vide order dated 19.02.2005 dismissed the application filed under Section 8 of the Act by holding that the earlier suit in Title Suit No.241 of 2001 filed by the appellant was decreed on compromise between the parties and therefore, in view of the law laid down in Nathani Steels Ltd. v. Associated Constructions 1995 Supp.(3) SCC 324, the respondent-defendant cannot invoke the arbitration clause pertaining to the same dispute and the suit was directed to be proceeded. The respondent filed Civil Revision Petition No.31 of 2005 before the High Court challenging the order of the trial court dated 19.02.2005. The High Court vide impugned order allowed the revision petition and referred the dispute to arbitration. The High Court held that even before the merger of RPIL with the respondent which was approved by the Bombay High Court on 27.09.2001, the appellant instituted Title Suit No.241 of 2001 on the ground of illegal termination of contract, which suit resulted in a compromise decree. Observing that the existence of arbitration clause has been admitted by the appellant Company, the High Court held that in view of the decision reported in Konkan Railway Corporation Ltd. and Another v. Rani Construction Pvt. Ltd. (2002) 2 SCC 388  and other decisions, the Civil Court has no jurisdiction to decide whether the subject matter of the suit attracted the arbitration clause or not. The High Court further held that under Section 16 of the Act, whether arbitration clause applied to the subject matter of the suit or not is for the arbitrator to decide on its own jurisdiction. Being aggrieved, the appellant has preferred this appeal.

Court's reasoning:
13. 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.14. The parties can be referred to arbitration in an application filed under Section 8 of the Act only if the subject matter of the action before the judicial authority relates to dispute which is the subject matter of the arbitration agreement. As per Section 8 of the Act, the following conditions have to be satisfied for referring the parties to) there is an arbitration agreement; (ii) a party to the agreement brings an action in the court against the other party; (iii) subject-matter of the action is the same as the subject-matter of the arbitration agreement;?(iv) the opposite party applies to the judicial authority for referring the parties to arbitration before it submits his first statement on the substance of theapplication 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.Though some of the claims in the Money Suit No.73 of 2003 relate to the loss allegedly sustained by the appellantplaintiff due to termination of the agreement dated 01.05.1997, other claims relate to the loss said to have been caused to the appellant-plaintiff subsequent to the compromise.As discussed earlier, by the agreement dated 01.05.1997, the appellant was appointed as clearing and forwarding agent of RPIL for the entire north-eastern region; whereas under thecompromise memo, the appellant has been appointed as stockist of the respondent Company at Guwahati and Agartala which is entirely a different appointment though, as part of compensation package. Clause 17 of the agreement dated 01.05.1997 cannot be invoked regarding the agreement of the parties to appoint the appellant as stockist for Guwahati and Agartala pursuant to the compromise. 21. It is also pertinent to note that the respondent has challenged the compromise decree alleging that it has been obtained by inducement and fraud. In view of the allegations of fraud levelled by the respondent that the compromise decree is vitiated by fraud, the parties cannot be referred to arbitration. Observing that where there are allegations of fraud which are so complicated that it becomes absolutely essential that such complex issues can be decided only by the Civil Court on apprehension of the evidence adduced by thethe 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.22. As discussed earlier, 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 setA. Ayyasamy v. A. Paramasivam and Others (2016) 10 SCC 386 , it was held as under:-……..It is only in those cases where the court, while dealing with Section 8 of the Act, finds that there are very serious allegations of fraud which make a virtual case of criminal offence or where allegations of fraud are so complicated that it becomes absolutely essential that such complex issues can be decided only by the civil court on the appreciation of the voluminous evidence that needs to be produced, the court can sidetrack the agreement by dismissing the application under Section 8 and proceed with the suit on merits. It can be so done also in those cases where there are serious allegations of forgery/fabrication of documents in support of the plea of fraud or where fraud is alleged against the arbitration provision itself or is of such a nature that permeates the entire contract, including the agreement to arbitrate, meaning thereby in those cases where fraud goes to the validity of the contract itself of the entire contract which contains the arbitration clause or the validity of the arbitration clause itself…….?.