TaxTMI 
TaxTMI 
1959 (5) TMI 37
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....s 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 Sep....
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....P/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 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 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 provide cover for the money pay. able to the Government the firm undertakes to hypothecate their moveable and immoveable property in Bamangachi Engineering Works together with all machinery sheds and leasehold interest in land measuring about 5.75 acres in Mouja Bamungachi in Howrah. The firm further undertakes to execute the necessary stamped documents fo....
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....lso 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 c....
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....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 of the Additional Solicitor-General for the appellant may be summarized in the following propositions: (1) The jurisdiction of the arbitrator depends upon the scope of the arbitration agreement or submission; (2) its scope would depend upon the language of the arbitration clause; (3) if the arbitration agreement in question is examined, it indicates that the dispute whether the original contracts have come to an end or not is within its scope; (4) on the facts of the case, there had been no novation or substitution of the original contracts; and (5) if there had been a novation of the original contracts, the non-perform- ance of the terms of the new contract revived the original contracts and therefore the parties to the original contracts could enforce their terms including the arbitration clause. The submission of Shri Aggarwal, Counsel for the respondents,may be stated thus : (1) Upon the facts of th....
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....es 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 what were the respective rights of the parties inter se they are abandoned in consideration of the acceptance by all of a new agreement. The consequence is that when such an accord and satisfaction takes place the prior rights of the parties are extinguished. They have in fact been exchanged for the new rights; and the new agreement becomes a new departure, and the rights of all the parties are fully represented by it. " The House of Lords in Norris v. Baron and Company ([1918] A.C. 1. 26) in the context of a contract for sale of goods brought out clearly the distinction between a contract which varies the terms of the earlier contract and a contract which rescinds the earlier one, in the following passage at p. 26: "In the first case there are no such executory clauses in the second arrangement as would enable you to sue upon that alone if the first did not exist; in the second you could sue on the sec....
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....racts, 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 the original claim until the satisfaction is executed. In the latter, if the promise be not performed, the plaintiff's remedy is by action for the breach of the substituted agreement, and he has no right of resort to the original claim. " From the aforesaid authorities it is manifest that a contract may be discharged by the parties thereto by a substituted agreement and thereafter the original cause of action arising under the earlier contract is discharged and the parties are governed only by the terms of the substituted contract. The ascertainment of the intention of the parties is essentially a question of fact to be decided on the facts and circumstances of each case. We have already given the sequence of events that led to the making of the contract dated February 22, 1949. To recapitulate briefly, the original three contracts were cancelled. by the Government on May 21, 1945, May 21, 1945....
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....d 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 lying with them. Clauses 3, 4 and 5 provide for the realisation of the entire amounts covered by the three settlements. Under cl. 3 the respondents agreed to pay the total amount payable under the three settlements in monthly instalments for the first three months commencing from March 10, 1949, at a sum of Rs. 5,000 and thereafter at a sum of Rs. 9,000 per month till the entire amount was paid. Clause 4 prescribed that in case of default of any monthly instalment interest would be charged at the rate of 6% per annum and if the instalments defaulted exceeded two in number the Government was given the right to realise the entire amount payable under the three contracts with interest not only from the security but also otherwise. Under cl. 5 it was stipulated that the respondents should hypothecate their moveable and immoveable properties described thereunder to provide cover for the moneys payable ....
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....ract 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. If so, the next question is whether the arbitration clause of the original contracts survived after the execution of the settlement contract dated February 22, 1949. The learned Counsel for the appellant contends that the terms of the arbitration clause are wide and comprehensive, and any dispute on the question whether the said contract was discharged by any of the ways known to law came within its fold. Uninfluenced by authorities or case-law, the logical outcome of the earlier discussion would be that the arbitration clause perished with the original contract. Whether the said clause was a substantive term or a collateral one, it was none the less an integral part of the co....
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....at 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 E.R. 337, 343-345, 347, 350) There a contract was repudiated by one party and accepted as such by the other. The dispute arose in regard to damages under a number of heads covered by the contract. The arbitration clause provided that any dispute between the parties in respect of the agreement or any of the provisions contained therein or anything arising thereout should be referred to arbitration. The House of Lords held that the dispute was one within the arbitration clause. In the speeches of the Law Lords a wider question is discussed and some of the relevant principles have been succinctly stated. Viscount Simon L.C. observed at p. 343 thus:- "An arbitration clause is a written submission, agreed to by the parties to the contract, and, like other written submissions to arbitration, must be construed according to its language and in the light of the circumstances in which it is ma....
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.... "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 greater includes the less. Further, a claim to set aside a contract on such grounds as fraud, duress or essential error cannot be the subject matter of a reference under an arbitration clause in the contract sought to be set aside. Again, an admittedly binding contract containing a general arbitration clause may stipulate that in certain events the contract shall come to an end. If a question arises whether the contract has for any such reason come to an end, I can see no reason why the arbitrator should not decide that question. It is clear, too, that the parties to a contract may agree to bring it to an end to all intents and purposes and to treat it as if it had never existed. In such a case, if there be an arbitration clause in the contract, it perishes with the contract. If the parties substitute a new contract for the contract which they have abrogated, the arbitration clau....
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....t 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 existence of the contract and its validity. So too, if the dispute is whether the contract is wholly superseded or not by a new contract between the parties, such a dispute must fall outside the arbitration clause, for, if it is superseded, the arbitration clause falls with it. The argument, therefore, that the legal position is the same whether the dispute is in respect of repudiation or frustration or novation is not borne out by these decisions. An equally illuminating judgment of Das, J., as he then was, in Tolaram Nathmull v. Birla Jute Manufacturing Co. Ltd. (I.L.R. [1948] 2 Cal. 171) is strongly relied upon by the learned Counsel for the appellant. There the question was whether an arbitration clause which was expressed in wide terms would take in a dispute raised in that case. It was contended on one side that the contract was void ab intio and on the other side that, even on....
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....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 judgment of the High Court is correct. This appeal fails and is dismissed with costs. SARKAR J.-On different dates in 1943 and 1944, a firm of contractors of the name of Kishorilal Gupta & Brothers entered into three contracts with the appellant to fabricate and supply certain military stores. The first contract was for 43,000 ladles cook, the second for 15,500 bath ovals and the third for 1,00,000 kettles camp. Each of these contracts contained an arbitration clause. The last mentioned contract provided that the appellant would supply materials for the fabrication of the articles to be delivered under it. Before the contracts had been finally executed, disputes arose between the parties. These disputes were settled by mutual agreements which were contained in three separate documents. The settlement in respect of the ladles cook contract which was made on September 6, 1948, ....
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....red 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 acres at 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 any further or other claim against the other. Please acknowledge receipt. Yours faithfully, Sd. R. B. L. Mathur Director of Supplies (Claims) for and on behalf of the Governor General." The contract referred to in cl. (1) of this document is the contract No. MP/75442/R-1/397 mentioned at the top of the letter and concerned the kettles camp. The contracts referred to in cl. (3) are the contracts concerning ladles cook and bath ovals which had been settled earlier but the amounts due in respect of the settlements concerning them had not been paid in full. After the settlement of Febr....
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....ract. 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 the arbitration clause contained in the ladles cook contract continued in force in spite of the settlement in respect of it. The learned Judge however held that the contract for kettles camp including the arbitration clause contained in it had ceased to exist as a result of the settlement of February 22, 1949, and the arbitrator had consequently no jurisdiction to make any award purporting to act under that arbitration clause. He then proceeded to hold that as the award was a single and inseverable award in respect of the claims under the ladles cook as well as the kettles camp contracts, the whole award became invalid. In the result the learned Judge made an order declaring that the arbi- tration clause contained in the kettles camp contract had ceased to exist and setting aside the award as a whole. It is against this judgment that the present appeal has ....
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....om 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 to bring it to an end' to all intents and purposes and to treat it as if it had never existed " and that " In such a case if there be an arbitration clause in the contract it perishes with the contract "-: Heyman v. Darwins ([1942] A.C. 356, 371). Now it is clear that the settlement of February 22, 1949, does not expressly make the arbitration clause nonexistent. It is however said that the settlement of February 22, 1949, operated as an accord and satisfaction and therefore the arbitration clause in the relative original contract was brought to an end by it. It if; said that such a settlement amounts to a substituted agreement which abrogated the original contract and the arbitration clause contained in it perished with it. I venture to think that this view is wrong and originates from a misapprehension of the real nature of accord and satisfaction....
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....act. 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 (6) provides that the contract stands finally concluded in terms of the settlement. The parties therefore were only intending to decide the dispute as to cross-claims made on the basis of the breach of the contract. So they were assuming the existence of the contract, for there could be no breach of it unless it existed. Now I come to the nature of an arbitration clause. It is well settled that such a clause in a contract stands apart from the rest of the contract. Lord Wright said in Heyman's case ([1942] A.C. 356, 371) that an arbitration clause " is collateral to the substantial stipulations of the contract. It is merely procedural and ancillary, -it is a mode of settling disputes.................... All this may be said of every agreement to arbitrate, even though not a separate bargain, but one incorporated in the general contract." Lord Mac....
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....rator 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 destroy the arbitration clause. An examination of what has been called the accord and satisfaction in this case shows this clearly. From what I have earlier said about the terms of the settlement of February 22, 1949, it is manifest that it settled the disputes between the parties concerning the breach of the contract for kettles camp and its consequences. All that it said was that the contract had been broken causing damage and the claim to the damages was to be satisfied " in terms of the settlement ". It did not purport to annihilate the contract or the arbitration clause in it. I feel no doubt therefore that the arbitration clause subsisted and the arbitrator was competent to arbitrate. The award was not, in my view, a nullity. The position is no different if the matter is looked at from the point of view of s. 62 of the Contract Act. That s....
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.... " 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 necessarily mean concluded by the promise of the contractors contained in the settlement. It appears to me to be capable of the meaning that the contract is to stand concluded when its terms have been carried out. The words are not, " stand finally concluded by the terms of the settlement" but they are, "stand finally concluded in terms of settlement ". These terms are that the contractors would pay certain moneys by certain instalments and would secure these payments by a hypothecation bond. So it would appear that the contract was not to be concluded till the terms had been carried out, for otherwise it would not be a conclusion " in terms of the settlement." That seems to me to be also the reasonable interpretation to put on the document in view of the circumstances of the case. The appellant was to receive a substantial sum under the set....