1995 (11) TMI 435 - SC - Companies Law

Arbitration Clause Survives Termination, Court Rules on Jurisdiction

INDIAN DRUGS & PHARMACEUTICALS LTD. Versus INDO SWISS SYNTHETICS GEM MANUFACTURING CO. LTD.

INDIAN DRUGS & PHARMACEUTICALS LTD. Versus INDO SWISS SYNTHETICS GEM MANUFACTURING CO. LTD. - 1996 AIR 543, 1995 (5) Suppl. SCR 189, 1996 (1) SCC 54, 1995 ... Issues Involved:1. Whether the arbitration clause remained in existence by 1988 when the arbitrator was appointed on the face of termination of the agreement by the appellant with effect from 1.4.1984.2. Whether the arbitration clause, if held to be operative, could be invoked for the purpose at hand.3. Whether the Court of Sub-ordinate Judge at Coimbatore had jurisdiction to entertain the application under section 33 of the Arbitration Act.4. Whether the reference to the arbitrator was barred by limitation.Issue-Wise Detailed Analysis:1. Whether the arbitration clause remained in existence by 1988 when the arbitrator was appointed on the face of termination of the agreement by the appellant with effect from 1.4.1984:The primary contention was whether the arbitration clause survived post-termination of the agreement. The appellant argued that the arbitration clause, being a part of the agreement, ceased to be operative after the termination date. The respondent, however, cited precedents, notably the Union of India vs. Kishorilal Gupta & Bros., which established that an arbitration clause is a collateral term of a contract and can survive the termination of the contract for certain purposes. The court agreed with this precedent, noting that the arbitration clause could still operate for disputes arising under or in connection with the contract, even after its termination. Thus, clause 19 dealing with arbitration survived despite the contract ending on 1.4.1984.2. Whether the arbitration clause, if held to be operative, could be invoked for the purpose at hand:The dispute centered on whether the arbitration clause covered the specific disagreement about the vials containing less quantity than specified. The appellant argued that such a defect affected the quality of the material, thus falling under the arbitration clause. The court did not express a definitive opinion on this matter but indicated that if the appellant's interpretation was correct, the arbitration clause would indeed be applicable.3. Whether the Court of Sub-ordinate Judge at Coimbatore had jurisdiction to entertain the application under section 33 of the Arbitration Act:The appellant challenged the jurisdiction of the Sub-ordinate Judge at Coimbatore. The court noted that the jurisdiction was incorrectly assumed by the Coimbatore court based on the respondent's business location and the issuance of a letter from Coimbatore. The court clarified that jurisdiction should be based on where the opposite party carries on business or where the cause of action arises, not merely on the respondent's location. Consequently, the Coimbatore court was found to lack jurisdiction.4. Whether the reference to the arbitrator was barred by limitation:The issue of limitation was raised, arguing that the arbitration clause was invoked after the permissible period. The appellant countered this by detailing interactions and inspections that occurred in 1985, which delayed the formal claim until November 1987. The court acknowledged that the cause of action accrued by July 1985 and thus, the arbitration reference in May 1988 was not 'manifestly barred' by limitation. The court refrained from making a conclusive determination on this point at this stage.Conclusion:The appeal was allowed, and the appointed arbitrator was left to deal with the dispute in accordance with the law. The court did not accept the respondent's request to appoint a retired High Court Judge as the arbitrator, emphasizing adherence to the arbitration clause's stipulation for an arbitrator appointed by the Chairman and Managing Director of the appellant. Each party was directed to bear its own costs.