S.C.R. SUPREME COURT REPORTS

THE UNION OF INDIA

v.

KISHORILAL GUPTA AND BROS.

493

(.JAFER !:MAM, A. K. SARKAR and K. SuBBA RAO, JJ.)

Contract--Arbitration clause-Cancellation of contract-Settle­

ment of disputes by mutual agreement-Arbitration clause, if sur­

vives-Award

based on such

clause-Validity;

The respondents entered into thre~ several contracts with

the appellant, for the fabrication and supply

of diverse military

stores, each

of which contracts contained an arbitration clause.

Before the contracts had been fully executed disputes arose

between the parties, one alleging

that the other was committing

a breach

of the contract. The parties then entered into three

fresh contracts on successive dates purporting to settle these

dis­

putes on the terms therein contained. By the first two of

these settlement contracts the respondents agreed to pay to the

appellant certain moneys in settlement respectively

of the

dis­

putes relating to the first two original contracts. By the last

of these settlement contracts the respondents agreed to pay to

the appellant in specified instalments certain moneys in settle­

ment

of the disputes relating to the third original contract as

also the moneys which had then become due on the first two

settlement contracts and had not been paid and further under­

took to hypothecate certain properties to secure the due repay­

ment

of these moneys. The third settlement contract provided:

"The contracts stand' finally concluded in terms of the settle­

ment and

no party will have any further or other claim against

the

other."

The respondents paid some of the instalments but failed to

pay the rest. They also failed to create the hypothecation. The

appellant then referred its claims for breach

of the three origi­

nal contracts to arbitration under the •arbitration clauses con­

tained in them.

On this reference an award for a total sum of

Rs.

1,16.446-n-5 was made against the respondents in respect of

the appellant's claim on the first and the third original contracts,

the claim in respect

of the second original contract having been

abandoned by the appellant, and this award was filed in the

High Court

at

Calcutta. The respondents applied to the High

Court 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 settlement contracts and

for

an order setting' aside the award as void and nullity. The

High

Court held that the first original contract had not been

abrogated by the settlement in respect of it,

but the third original

contract and the arbitration clause contained in

it had ceased to

exist as a result

of the last settlement and the arbitrator had no

jurisdiction to arbitrate under

that arbitration clause.

It further

63

494 SUPREME COURT REPORTS [1960\l)]

z95~ held that as the award was a single and inseverable award the

whole of it was null and void. In this view the High Court set

The Union of India aside the award.

v. Held (per Imam and Subba Rao, JJ., Sarkar J .. dissenting),

Kishorilal Gupl• that the third settlement, properly construed, left no manner of

& Bros. doubt that it was for valid consideration and represented the

common intention of the parties to substitute it for the earlier

contracts between them. It gave rise to a new cause of action by

obliterating the earlier cocytracts and the parties could look to it

alone for the enforcement of their claims. There could, there­

fore, be no question that the arbitration clause which, whether a

substantive or a collateral term, was nevertheless an integral

part of the said contracts, must be deemed to exist along with

them as a result of the said settlement.

Hirji Mulji v. Cheong

Yue Steamship Company, [1926]

A.C. 502 and Heyman v. Darwin Ltd., [1942] l All E.R. 337,

referred to.

Tolaram

Nathmull v. Birla Jute Manufacturing Co. Ltd.,

I.L.R. (1948) 2 Cal. 171, distinguished.

Held, further, that it was well settled that the parties to an

original contract could by mutual agreement enter intoa new

contract in substitution of the old one.

Payana Reena

Saminathan v. Pana Lana Palaniappa, [1914]

A.C. 618: Norris v. Baron and Company, [1918] A.C. land British

Russian Gazette and Trade Outlook Ltd.

v.

Associated Newspaper,

Limited,

[1933] 2 K.B. 616, referred to. Per Sarkar, J.-The award was valid and could not be set

aside as the third settlement neither expressly put an end to the

arbitration clause nor, considered as an accord and satisfaction,

did it have that effect.

An accord

and satisfaction is only a ·method of discharge of

a contract.

It does not annihilate the contract but only makes

the obligation arising

fro~ it unenforceable.

An arbitration clause stands

apart

froµi the rest of the

contract in .which it is contained. It does not impose on the one

plty an obligation in favour of the other; it only embodies an

agreement that if any dispute arises with regard to any obliga­

tion which one party has undertaken to the other, such dispute

shall

be settled by arbitration. An accord and satisfaction,

which is concerned with the obligations arising from

the contract,

does

not affect an arbitration clause contained in it.

Heyman v. Darwins [1942] A.C. 356 and British Russian

Gazette and Trade Outlook Ltd. v. Associated Newspapers Ltd. [1933]

2 K.B. 616, referred to. ' .

The settlement of February 22, 1949, did not, 'in the circum­

stances of the case, amount to an accord and satisfaction.

Civu. APPELLATE JURISDICTION: Civil Appeal No.

250of1955.

S.C.R. SUPREME COURT REPORTS 495

Appeal

by special leave from the

order dated February 11, 1953, of the

Court, in Award No. 254 of 1949.

judgment

and z959

Calcutta High T'-u -. -

1

_ _,.

-mono [,...•a

H. N. Sanyal, Additional Solicitm·-General of India,

B. Sen, R. H. Dhebar and T. M. Sen, for the

appellant.

0. B. Aggarwala and Sukumar Ghose, for the respond­

ent.

1959. May 21.

The judgment of Jafer Imam and

Subba Rao, JJ., was delivered by Subba Rao, J.

Sarkar, J., delivered a separate judgment.

v.

K islwrilal Gupta

IS-Bros.

SUBBA RAO J.-This appeal by 'special leave raises SubbaRao J.

the question of survival of an arbitration clause in a

contract after the said contra.ct 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 oflndustries and

Supplies,

hereinafter called the Government : (i) contract dated

April 2, 1943, foi: 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

nomi­

nated 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

496 SUPREME COURT REPORTS [1960(1)]

z959 also demanded cerlain sums towards the price of the

~·-u -. -,,

1

a· materials supplied by them to the respondents. On

""~ ttionoJ n io

v the same day, the Government cancelled the contract

Ki•horil~ Gupta dated September 15, 1944, hereinafter called the second

.s-B,.., contract, and made a claim on the respondents for the

price of the raw-materials supplied to them. The

Svbba Raa J. respondents made a counter-claim against the Govern­

ment 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

contain­

ed 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 on payment of the amount men­

tioned in clause (1) shall stand finally determined."

The recitals in the settlement of the second contract

are as follows :

"(1) The ccmtract9r expreHsly agrees to pay to

the Government the sum of tis. 36,276. If D. G. I.

&. S. has recovered any amount under the contract

out of the sum due credit will be given to the con­

tractor.

(2) The contract stands finally determined and no

party will have any further claim against the

oth-er."

One prominent difference in the phraseology used in

the two settlements may be noticed at this stage.

S.C.R. SUPREME COURT REPORTS 497

While under the settlement of the first contract, the z959

contract should stand finally determined only on pay-Th ri .-

11 4

.

d b

"d h G t nion o n ••

ment of the a.mount agree to e pa1 to t e overn- v.

ment by the contractor, under the settlement of the Kisllorilal Gupta

second contract, the contract stood finally determined & Bros.

on the date of the settlement itself. The third contract

was settled on February 22, 1949,

and the material

Subba Rao J.

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 mat.erials received

against

the contract and their claims for compensa­

tion for cancellation

of the same contract.

(2) The firm will retain all surplus partly fabric­

ated 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-l/

90 dated 2nd April 1943 in monthly instalments for

Rs. 5,000 only for the first three months, first instal­

ment 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 instal­

ments interest will

b~ 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 instal­

ment shall be due. If the instalments defaulted

exceed two in number

the Government will have the

right to demand the entire

~ala.nee 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

p'ay­

able to the Government the firm undertakes to

hypothecate their moveable and immoveable pro­

perty in Bamangachi Engineering Works together

with all machinery sheds

and leasehold interest in

498 SUPREME COURT REPORTS [1960(1))

I959

The Union of India

land measuring about 5·75 acres in Mouja Bamung­

achi in Howrah. The firm further undertakes to

execute the necessary stamped documents for the

v.

K ishorilal Gupta

&Bros.

Subbo Rao].

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 comprehen­

sive 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

Ortober 28, 1948, and January 17, 1949, the respond­

ents paid a total sum of Rs. 9,000 to the Government

under the first two settlements of the contracts. Bet­

ween March 10, 1949, and October 31, 1949, the res­

pondents paid a total sum of Rs. 11,000 in instalments

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

pay­

able 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 respond­

ents demanding the payment of Rs. 1,51,723 payable

to them under the three original 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 res­

pondents did not co-operate in the scheme of arbitr­

ation and instead Kishori Lal Gupta as sole prop­

rietor of the respondent-firm made an application

under s. 33 of the Arbitration Act, 1940, in the Origi­

nal 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

S.C.R. SUPREME COURT REPORTS 499

Banerjee, J., of the said High Court on the ground that r959

it was not maintainable as the two other partners of -

the respondent-firm were not made parties to the said The Union of India

proceeding. But in the course of the judgment, the Kishori;~ 1 Gupta

learned Judge made some observation on the merits &·Bros.

of the case. Thereafter the Government filed their

statement ~ffacts before the arbitrator and the respond-Subba Rao /.

ents filed a counter-affidavit challenging the arbitr-

ator's jurisdiction and also the correctness of the

cla,ims made by the Government. On July 31, 1951,

the arbitrator made an award in favour of the Govern-

ment for a

total sum of Rs. 1,16,446-11-5 in respect

,of

tne first aud 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 alter-

native 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 con-

tract,

the learned Judge came to the conclusion that

by the third settlement, there was accord and satis-

faction

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 a.ward

on

the face of it was a lump sum award, the learned

Judge lield that it was not severable and therefore the

whole award

waw bad. In the result, he gave the

declaration that the arbitration clause contained in the

contract dated September 22, 1944, for "Kettles Camp"

had ceased to exist since the settlement con tract 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.

500 SUPREME COURT REPORTS [1960(1)]

'959 At the outset, a preliminary objection taken by

The Union of India Shri Aggarwal, the learned Counsel for the respond-

v. ents, may be disposed of. The learned Counsel contends

Kishorilal GuP•• that the special leave granted by this Court should be

o;. Bros. revoked on the ground that an appeal Jay against the

order of the learned Judge to an appellate bPnch of

St4bbaRAoj. H h C b h 1 f L

the same ig ourt ot under c . 15 o the etters

Patent and s. 39 of the Arbitration Act. It is not, and

cannot be, contended that this Court has no jurisdic­

tion to entertain an appeal against the order of a Court

when an appeal lies from that order to another Court.

The provisions of Art. 136 of the Constitution are not

circumscribed by any such limitation. But what is

argued,

in our view legitimately, is that when an

appeal lay to the appellate bench of the

Calcutta High

Court, this Court should not have given special leave

and thereby short-circuited the legal procedure pres­

cribed. There is much force

in this argument.

lf'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 e.pplication for revok­

ing the leave \'\'as made five years after the grant of

special leave and the learnad 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 ap­

pellant would have had the opportunity to prefer a

Letters Patent appeal to the appellate bench of tl;ie

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 argu­

ment of the Additional Solicitor-General for the

S.C.R. SUPREME COURT REPORTS 501

appellant may .be summarized in the following pro- z959

positions: (1) The jurisdiction of the arbitrator depends -. - .

upon

the scope of the arbitration agreement or sub- The

Union of Ind

11

•

mission ; (2) its scope would depend upon the language Kishori;~ 1 Gupt

11

of the arbitration clause ; (3) if the arbitration agree-& Bros.

ment in question is examined, it indicates that the

dispute whether the original contracts have come to Subba Rao J.

an end or not is within its scope; (4) on the facts of

the case, there had Qeen 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 Aggar-

wal, Counsel for

the respondents, may be stated thus :

(1)

Upon the facts of the case, there had been a reces-

sion

of the old contracts and substitution of a new,

legally enforceable

and unconditional contract, which

came into immediate effect;

(2) the new contract can

be legally supported either under

s. 62 or s. 63 of the

Indian Contract Act or under the general law of con-

tracts; (3) the non-performance of the terms of the

new contract did not have the effect of reviving the

rights and obligations under the old contracts as they

did not remain alive for any purpose ; and (6) even if

the arbitration clause did not remain alive after the

new contract, the

-arbitrator was bound to decide the

case in terms of the new contract, and he having not

done so,

the error is apparent on the face of the

record

and therefore the award is liable to be set aside.

So

stated the controversy covers a much wider field

than that necessary to solve the problem presented in

this case. It would, therefore,

be·convenient at this

stage to clear the ground. Subtle distinctions sought

to be made between the provisions of s. 62 and s. 63 of

the Indian Contract Act need not detain us ; nor need

we consider

the question whether the

settlepient con­

tract in question falls under s. 62 or is covered by s. 63

of the Indian Contract Act, or is governed by the

general principles of the law of contracts, for the

validity of the said contract is not questioned by either

64

502 SUPREME COURT REPORTS [1960(1)]

z959 party and indeed both rely upon it-one to contend

Th• u .

11

d. that it wholly superseded the earlier ones and the

nio;

0

n "'other to rely upon its terms to bring out its contingent

m,horilal Gupta character. If so, the only two outstanding questions

& Bros. are: (i) what is the legal effect of the contract dated

February 22, 1949, on the earlier contracts? ; and (ii)

Subba Rao f. 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 agree­

ment; 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 (

1

). 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 pleading 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 Batisfaction 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 arc fully represented by it.

"

The House of Lords in Norris v. Barcrn and Company(•)

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. (1) [1914] A.C. 618, 622. (2) [1918] A.C. 1. 26.

S.C.R. SUPREME COURT REPORTS 503

you to sue upon that alone if the first did not exist; x959

in the second you could sue on the second arrange- TL u . ,

1

d"

1 d h fi

, 'd f . h ne nion o, n "'

ment a one, an t e rst contract is got n o e1t er v.

by express words to that effect, or because, the Kisharilal Gupta

second dealing with the same subject-matter as the & Bras.

first but in a different way, it is impossible that the

two should be both performed. " Subba Rao J.

Scrutton, L.J., in British Russian Gazette and Trade

Outlook Limited v. Associated Newspaper, Limited (

1

),

after referring to the authoritative text-books on the

subject, describes the concept of " accord and satisfac­

tion " thus at p. 643 :

" Accord and satisfaction is the purchase of a

release from

an obligation whether arising under

contract or

tort by means of any valuable

considera­

tion, not being the actual performance of the

obligation itself. The accord is the agreement by

which the obligation is discharged. The satisfaction

is

the consideration which makes the agreement

operative. Formerly

it was necessary that the

consideration should be executed . . . . . . . . . . Later

it was conceded that the consideration might be

executory . . . . . . . . .

The consideration on each side

might be

an executory promise, the two mutual

promises making an agreement enforceable in law,

a contract . . . . . . . . . ' An accord, with mutual

promises

to perform, is good, though the thing be

not performed at the time of action; for the party

has a remedy to compel the performance', that is to

say, a cross action on the contract of accord ...... .

If, however, it can be shown that what a creditor

accepts in satisfaction is merely his debtor's promise

and not the 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 La.w of Contract, 3rd Edn., at p. 453:

"The modern rule is, then, that if what the

creditor has accepted in satisfaction is merely his

ll) [1933] a K.B. 616, 643, 6,H·

TM Union of India

"·

Kishorilal Gupta

cS-B1os.

Subba Rao].

504 SUPREME COURT REPOltTS [1960(1))

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 agree­

ment 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 perform­

ance 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 .

upoI 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

cont.ract 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

t>he intention of the parties is essent.ially a question of

fact to be decided on the facts and circumstances of

each case.

We

have already given the sequence of event.a that

led to the making of the contract dated February 22,

194!). To recapitulate briefly, the original three

contracts were cancelled bv the Government on

May 21, 1945, May 21,

1945, and Match 9, 1946,

respectively. Under the first contract, the Govern­

ment made a claim for the price of the raw-materials

supplied

and there was no counter-claim by the

respondents.

Under the second and third contracts,

there were

counter-claims-the Government claiming

amounts for the raw-materials supplied and the

respondents claiming damages for the breach thereof.

S.C.R. SUPREME COURT REPORTS 505

The disputes under the first two contracts were settled 1959

on the same day. As the claim was only on the part Th u . .11

_~·

c nion OJ 7Htlll

of the Government, the amount due to them was v.

ascertained at Rs. 3,164-8,0 and the first contract was Kishortlal Gupta

expressly agreed to be finally determined on payment .s. Bros.

of that amount. The express terms of the settlement

leave no room to doubt

that the contract was to be

Subba Rao J.

determined only after the payment of the ascertained

amount.

But under the second settlement, which was a. compromise of disputed claims, a sum of Rs. 36,276

was fixed as

the amount due from the respondents to

the Government, presumably on taking into considera-

tion the conflicting claims and on adjusting all the

amounts ascertained to be due from one to the other.

The parties in express terms agreed that the earlier

contract stood finally determined

and that no party

would have any claim thereunder against the other.

A comparative

study of the terms of the said two

settlement contracts indicates

that under the first

settlement

the original contract continued to govern

the rights of the parties till payment, while under the

second settlement contract, 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 ,£>f 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

a.mounts 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

506 SUPREME COURT REPORTS [1960(1))

'95• and that the respondents should retain all the material,

Th u -. -

1

Ind' partly fabricated and fully fabricated stores lying with

• ni";

0

"'them. Clauses 3, 4 and 5 provide for the realisation

Kishoril~I Gupta of the entire amounts covered by the three settle-

& Bros. ments. Under cl. 3 the respondents agreed to pay

the total amount payable under the three settlements

Subba Rao f. in monthly instalments for the first three months

commencing from March IO, 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

tjle 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

proper­

ties described thereunder to provide cover for the

moneys payable to the Government. Clause 6 in

express terms declared that the contracts should

be finally concluded in terms

of the settlement and

no party would have any claim against the other.

Is there any justificaj;ion for the contention that the

substituted

• contract should either come into force

after the hypothecation bond was executed or that it

should cease to be effective if the said bond was not

executed within a reasonable time from the date of

the settlement? We do not find any justification for

this contention either

in the express terms of the

contract or in the surrounding circumstances

where­

under the document came to be executed. It was a

self-contained document; it did not depend upon the

earlier contracts for its existence or enforcement.

The liability was ascertained

and the mode of

re­

covery was provided for. The earlier contracts were

superseded

and the rights and liabilities of the parties

were regulated thereunder. No condition either

precedent

or subsequent was expressly provided; nor

was there any scope for necessarily implying one or

other either. The only argument in this

direction.

S.C.R. SUPREME COURT REPORTS 507

namely, that it is impossible to attribute any inten-z959

tion to the Government to take a mere promise o!1 The Union of India

the part of the respondents to hypothecate their v.

properties "as satisfaction " and therefore it should [(isltorilal Gupta ·

lbe held that the intention of the parties was that & Bros.

there would be no satisfaction till such a document

was executed, does not appeal to us. We are con-Subba Rao f.

cerned 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 intend-

ed to be hypothecated was not made clear and there-

fore

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

ha,ve, therefore, no doubt that the

contract dated :February 22, 1949, was for valid con-

sideration

and the common

int.ention of the parties

was

that it should be in

sub;.'ltitution of the earlier

ones

and the parties thereto should thereafter look to

it alone for enforcement of their claims. As the docu-

ment 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.

508 SUPREME COURT REPORTS (1960(1)]

z959 Uninfluenced by authorities or case.Jaw, the logical

n u -. -

1 1

d' outcome of the earlier discussion would be that the

' n•o;

0

n •a arbitration clause perished with the original contract.

Kishor11:1 Gupta Whether the said clause was a substantive term or a

<5-Bros. collateral one, it was none the less an integral part of

the contract, which had no existence de hors the

Subba Rao J. contract. It was intended to cover all the disputes

arising under

the conditions of, or in connection with,

the contracts. Though the phraseology was of the

widest amplitude, it is inconceivable that the parties

intended

its survival even after the contract was

mutually rescinded

and substituted by a new

agree­

ment. The fact that the new contract not only did

not provide for the survival of the arbitration clause

but also the circumstance that it contained both

substantive and procedural terms indicates that the

parties gave up the terms of the old contracts, includ­

ing the arbitration clause. The case.Jaw referred

to by the learned Counsel in this connection does not,

in our view, lend support to his broad contention and

indeed the principle on which the said· decisions are

based is a pointer to the contrary.

We shall now notice some

of the authoritative

state­

ments in the text-books and a few of the cases bearing

on the question raised : In Chitty on Contract, 21st

Edn.,

the scope of an arbitration clause is stated thus, at p. 322:

"So that the law must be now taken to be that

when an arbitration clause is unqualified Ruch a

clause will

apply even if the dispute involve an

assertion that circumstances had arisen whether

before or

after the contract had been partly per­

formed which have the effect of discharging one or

both parties from liability, e.g., repudiation by one

· party accepted by the other, or frustration."

In "Russel 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

S.C.R. SUPREME COURT REPORTS 509

is determined with it, or by something arising out r959

of th~ contrac~, in "'hich case the arbitration clause The Union of India ,

remams effective and can be enforced." v. •.

The Judicial Committee in Hirji Mulji v. Cheong Yue Kisho•iltll Gupt•

Steamship Company (

1

) gives another test at p. 502 : .s. Bros.

" That a person before whom a complaint is Subba Rao J.

brought cannot fuvest himself with arbitral jurisdic-

tion 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. F'or

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 arbi­

tration clause in the context of a dispute arising on the

question of repudiation of a contract is found in the

d.ecision of the House of Lords in Heyman v. Darwine

Ltd.(

2

) 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 ht>

construed according to its language and in the light

of the circumstances in which it is made. If the

dispute is as to whether the contract which contains

the clause has ever been entered into at all, that

issue cannot go to arbitration under the clause, for

the party who denies that he has ever entered into

the contract is thereby denying that he has ever

joined

in the submission.

Similarly, if one party to

(I) [1926] A.C. 497, 502.

65

(2) [1942] l All E.R. 337, 343-345, 347, 350.

I959

Thi Union of India

v.

K isho1'ilal Gupta

cf,. Bros.

Subba Rao].

510 SUPREME COURT REPOR.TS [1960(1)]

the alleged contract is contending that it is void

ab initio (because, for example, the making of such a

contract is illegal), the arbitration clause cannot

operate, for on this view the clause itself is also

void.

If, however, the parties are at one in asserting that

they entered into a binding contract, but a difference

has arisen between them as to whether there has been

a

breach by one side or the other, or as to whether

circumstances have arisen which have discharged one

or both parties from further performance, such differ­

ences should be regarded

as differences which have

arisen

" in respect of", or " with · regard to ",

or" under" the contract, and an arbitration clause

which uses these, or similar, expressions, should be

construed accordingly.

By the law of England (though

not, as I understand, by the law of Scotland) such an

arbitration clause would also confer authority to

assess damages for breach even though it does not

confer upon

the1arbitral body express power to do so.

I do

not agree that an arbitration clause expressed

in such terms as above ceases to have any possible

application merely because

the contract has

"come to

an end", as, for example, 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 expres­

sed

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 arbi­

tration clause, and, unless the language of the arbi­

tration clause is such as to exclude its application

until performance bas begun, there seems no reason

why the arbitrator's jurisdiction should not cover

the one case as much as the

other."

S.C.R SUPREME COURT REPORTS 511

Lord Macmillan made similar observations at p. 345 : r959

"If it appears that the dispute is as to whether The Union of India

there has ever been a binding contract between the v.

parties, such a dispute cannot be covered by an Kislsorilal Gupta

arbitration clause in the challenged contract. If & Bros.

there has never been a contract at all, there has

never been

as part of it an agreement to arbitrate;

Subba Rao J.

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 .-.ee no reason why the arbitrator should not

decide that question. It is clear, too, that the par-

ties

to

a contract may agree t.o 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 arbitra-

tion clause in

the contract, it perishes with the

contract. If the parties substitute a new contract

for

the contract which they have abrogated, the

arbitntion clause in the abrogated contract cannot

be invoked for

the determination of questions under

the new agreement. All this is more or less elemen-tary."

These observations throw considerable light on the

question whether an arbitration clause can be invoked

in

the case

qf a dispute under a superseded contract.

The principle is obvious; if the contract is supersed­

ed by another, the arbitration clause, being a compo­

nent ·part of the earlier contract, falls with it. The

learned Law Lord pin-points the principle underlying

his conclusion

at p. 347: "I am accordingly of opinion that what is com­

monly called repudiation or total breach of a contract,

whether acquiesced in

by the other party or not,

does

not abrogate

a contract, though it may relieve

the injured party of the duty of further fulfilling the

obligations which he has by a contract undertaken

1959

TM Union of Jniia

v.

Kishorilal Gupta

©-Bros.

Subbo Rao

J.

512 SUPREME COURT REPORTS [1960(1))

•

to the repudiating party. The contract is not put

out of existence, though all further performance of

the obligations undertaken by each party in favour

of the other may cease. It survives for the purpose

of measuring the claims arising out of the breach,

and the arbitration clause survives for determining

the mode of their settlement. The purposes of the

contract have failed, but the arbitration clause is not

one of the purposes of the contract."

Lord Wright, after explaining the scope of the word

" repudiation '1' and the different meanings its bears,

proceeded

to state at p.

350 :

" In such a case, if the repudiation is wrongful and

the rescission 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

WO!!ld 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·princi­

ples 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 existence of the contract and its validity. So too,

if the dispute is whether the contract is wholly super­

seded or not by a new contract between the parties,

such a dispute

must fall outside the arbitration clause,

for,

if it is

supl)rseded, the arbitration clause falls with

it. The argument, therefore, that the legal position is

S.C.R. SUPREME COURT H.EPORTS 513

the same whether

the dispute is in respect of repudia- z959

tion or frustration or novation is not borne out by Th

r; -. -

11

dill

these decisions. An equally illuminating judgment of e mo;

0

n

Das, J., as he then was, in Tol,aram Nathm.ull v. Birla J>ishorilalGupla

Jute Manufacturing Go. Ltd.(

1

)

is strongly relied upon

& Bros.

by the learned Counsel for the a.ppellant. There the

question was whether an arbitration clause which was Subba Rao f.

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 initio a.ad on the other side that,

even on the allegations in ihe plaint, the contract

was

not ab initio void. The learned Judge, on the

facts of that

case, held that no case had been made

out for staying the suit and therefore dismissed the

application filed by the defendant for stay of the

suit. The learned Judge exhaustively considered the

case-law on the subject and deduced the principles and

enumerated them at p. 187. The learned Judge was

not called upon to decidtt the present question, namely,

whethor

an arbitration clause su:rvived in spite of sub-

stitution

of the earlier contract containing the arbitra-

tion clause by a fresh one, and therefore we do not

think that it is necessary to express our opinion on the

principles culled out and enumerated in that decision.

The following principles

relev11nt to the present case

emerge from

the aforesaid discussion: (1) An

arbitra­

tion clause is a collateral term of a contract as distin­

guished from its substantive terms ; but none the less

it is an integral part of it; (2) h<>wever comprehensive

the terms of an arbitration clause may be, the existence

of the contract is a necessary condition for its opera­

tion; . 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 can.not operate, for along with the original

contract,

it is also void; in 1;he latter case, as the (1) I.L.R. [1948) s Cal. 171.

514 SUPREME COURT REPORTS [1960(1))

x959 original contract is extinguished by the substituted

The u -. -

1

d' one, the arbitration clause of the original contract

m';,

0 1

"

••perishes

with it; and (6) between the two falls many

Kishorilal Gupta categories of disputes in connection with a contract,

<f.. Bro.<. ~uch as the question of repudiation, frustration, breach

etc. In those cases it is the performance of the contract

Subba Rao J. 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.

Sarkar].

We have held that the three cont.racts were settled

and the third settlement contract was in substitution of

the thrP.e contracts; ,.nd, after its execut~on, all the

earlier contracts were extillguished and the arbitration

dause contained therein also perished along with them.

\Ve have also held that the new contract was not a

conditional

one and after its execution t.he parties

should work out their rights only under its terms. In

this view, the judgment

of the High Court is c-orrect.

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

appel­

lant. to fabricate and supply certain milita.1·y stores.

The first eontraut 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

arbitratfon clause. The last mentioned contract pro­

vided 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 die parties. These disputes

were settfad by mutual agreements which were con­

tained in three separate doeuments. The settlement

in respect of the ladles cook contract which was made

on September 6, 1948, provided that the contractors

would pay to the appellant a sum of Rs. 3,164-8-0 and

on such payment that contract would stand finally

determined. Under the settlement in respect of

the bath ovals contract which also was made on

S.C.R. SUPREME COURT HEPORTS 515

September 6, 1948, the contractors agreed to pay to the z959

appellant Rs. 36,276 and it provided that "the con-h u -. -,

1

d'

. · T e n1on o tJ ia

tract stands finally determmed and no party shall have v. ·

any further claim against the other ". The terms of Kishorilal Gupta

the settlement of the kettles camp contract are set out & Bros.

below in full, for, this case depends on them:

"Dated the 22nd February 1949.

Messrs. Kishorilal Gupta

& Bros., Calcutta.

Subs:-A.T. No.

MP/75442/R-1/397 dated the 22nd

Septem her 1944.

Dear Sir,

Reference discussion held on 5th February 1949

between your Proprietor Mr. Kishorilal Gupta and

General Manager J.B. Breiter and the Claims Com­

mittee of the Directorate General. I herebv confirm

the following terins of settlement arrived at in the

meeting. The settlement has received the approval

of Director General of Industries and Supplies, New

Delhi.

I. 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

compensa­

tion for cancellation for the same contract.

2. The firm will retain all imrplus partly fabric­

ated and fully fabricated stores,. lying with them.

3. The firm agree

to pay the above-mentioned

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. lUP/75762/R-61/78

dated 15th September 1944 and l\'IP/50730/8/R-1/90

dated 2nd April 1943 in monthly instalments for

Rs. 5,000 only for the first three months, first instal­

ment being payable on 10th :March 1949 and fm:ther

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

itt the rate of 6% per

annum from

the first day of

the month in which the

instalment shall due. If the iu.stalments defaulted

Sarkar].

z959

The Union of India

v.

Kishorilal Gupta

& Bros.

Sarkar).

516 SUPREME COURT REPORTS [1960(1)]

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 machinerv sheds and lease-hold interest in land

measuring about 5·75 acres at Mouja Bamangachi

in Howrah. The firm further undertakes to execute

~he 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-l/397 mentioned at the

top of the letter and concerned the kettles camp. The

contracts referred to in cl. (3) are the contracts con­

cerning 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 February 22, 1949, the con­

tractors made certain payments aggregating Rs.

11,000,

the last payment made being on October 31, 1949.

These

payments

had not been made as provided in

cl. (3). The contractors also failed to execute the

hypothecation deed mentioned in cl. (5). Certain

correspondence appears to have taken place but with

no tangible result. The appellant was unable to obtain

payments or the hypothecation deed in terms of the

settlement.

S.C.R. SUPREME COURT REPORTS 517

In these circumstances the appellant made a claim z959

against the contractors under the three original con-

1

•11 u -. -.,

1

d"

. l . e nion OJ n ict.

tracts amountmg to Rs. 1,52,723 and referrea it to v.

arbitration under the arbitration clauses contained in Kishorilal Gupta

them. The appellant nominated an arbitrator and &-Bros.

called upon the contractors to nominate the other, the

Sarkar ].

arbitration clause providing that the arbitration shall

be

by two arbitrators, one to be nominated by each

party. The contractors did not nominate any arbit-

rator, contending

that the matter

had" already been

nel;'Otiated to a settlement " and that there were " no

out.standing disputes

to be referred to arbitration

".

The appellant then appointed the person nominated

by it as the sole arbitrator under the provisions of tho

Arbitration Act

and an arbitration was held by him in

which

the contractors joined. In the arbitration pro-

ceedings, for reasons with which

we are not concerned,

the appellant abandoned its claim in respect of the

bath ovals contract.

On July 31, 1951, the arbitrator

made an award in favour of the appellant in the sum

of Rs. 1,16,446-11-5 in respect of its claim on the ladles

cook

and kettles camp contracts.

Being aggrieved

by the a ward, the respondent

Kishorilal Gupta, who is

a partner of the contractors'

firm, made

an application to the High

Court at Cal­

cutta 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

with­

drew its claim under it from arbitration and no a.ward

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

f6

518 SUPREME COURT RE.PORTS [1960(1)]

x959 of the learned Judge has not been challenged before us.

Th u -:----rm1· We h,ave therefore to proceed on the basis that the

e ni:n of '"arbitration clause contained in the ladles cook contract

Kishoril~l Gupta continued in force in spite of the settlement in respect

& Bros. of it.

Sarkar ].

The learned Judge however held that the contract

for kettles camp including the arbitration clause con­

tained 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 iuseverable 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 J urlge made an order declaring that the arbi­

tration clause contained· in the kettles camp contract

had ceased to exist and setting aside the a ward as a

whole.

It is against this judgment that the present appeal

has been filed with leave granted by this

Court. It

was contended on behalf of the respondent that the

leave should not have been granted as the appellant

had a right of appeal to the High Court itself. We

were on this basis asked to revoke the leave. It

appears that there are some cases of the Calcutta High

Court which create a good deal of doubt as to whether

an appeal lay to that High Court from an order of the

kind made in this case. The appellants therefore were

legitimately

in difficulty in deciding whether an appeal

Jay to the High

Court. Again, leave was granted by

this Court as far back as March 29, 1954, and the res­

pondent at no stage earlier than the hearing of the

appeal before us took any objection to that leave. It

is too late now to allow him to do that. So to do

would leave

the appellant entirely without remedy as

an appeal to the High

Court would in any event be

now barred. I feel therefore that no question of

revoking the leave should be allowed to be raised.

It is useful to remind ourselves before proceeding

further that what was referred to arbitration in this

case was a claim by the appellant for damages for

S.C.R. SUPREME COURT REPORTS 519

breach of the contracts said to have been committed z959

by the contractors. That indeed is the respondent'srk ·u -. -,,

1

_.,.

W

. h d h

"t f th" l

· th • nion °

1

,...,a

case. it regar to t e mer1 s o 1s c aim e v.

Court has no concern. But it is import'ant to note that Kishorilal Gupta

those claims were clearly within the arbitration clause & Bros.

in the contracts ; about this there does not appear to

be any dispute. No question therefore arises in this Sarkar J.

appeal that the claims referred to arbitration were

not within the arbitration clauses.

What is in dispute in this case is whether the arbit­

ration clause had ceased to exist as a result of settle­

ment. 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 that settlement

did

not affect the relative arbitration clause and

tha.t

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 agree­

ment, 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 contra.ct may agree to bring it

to an end to a.II 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 peri­

shes with the contra.ct"-: Heyman v. Darwins (1).

Now it is clear that the settlement of February 22,

1949, does not expressly make the arbitration clause

non-existent.

It is however said that the settlement

of February 22, 1949, operated as

an accord and

sa.tisfa.ction and therefore the arbitration cla.use in the

relat~ve original contract was brought to an end by it.

(1) (194:1] A.C. 356, 371.

520 SUPREME COURT REPORTS [1960(1)]

z959 It is said that such a settlement amounts to a substi-

Th u -. -

11

d" tuted agreement which abrogated the original contract

' "'':'.'.

0

"

"'and

the arbitration clause contained in it perished

T<ishorilal Gupta with it.

& Bros. I venture to think that this view is wrong and

originates from a misapprehension of the real nature

Sarkar J. of accord and satisfaction and an arbitration clause in

a contract. It must here be stated that the appellant

disputes that the settlement of February 22, 1949,

amounted to an accord and satisfaction. I will examine

the appellant's contention later and shall for the

present assume that the settlement constituted an

accord and satisfaction.

Now what is an accord and satisfaction ? It is only

a method of discharge of a contract. It ouly means

that the parties are freed from their mutual obligations

under the contract : ·see Cheshire and Fifoot on Cont­

racts, 3rd edn., p. 433. " It is a good defence to an

action for the breach of any contract, whether made

by parol or specialty, that the· cause of action has

been discharged by accord and satisfaction, that is to

say, by an agreement after breach whereby some con­

sideration other than his legal remedy is to be accept­

ed by the party not in fault ": Chitty on Contracts,

21st edn., p. 286. In British Russian Gazette and

Trade Outlook. Ltd. v. Associated Newspapers Ltd. (')

Sorutton, L.J., said, "Accord and satisfaction is the

purchase of the release from an obligation whether

arising under contract or tort by means of any valu­

able consideration, not being the actual performance

of the obligation itself. The accord is the agreement

by which the obligation is discharged. The satisfac­

tion is the consideration which makes the agreement

operative."

The effect of au accord and satisfaction is therefore

to secure a release from an obligation a.rising under a.

contra.ct. Now it is difficult to conceive of an obliga­

tion a.rising from a. contract uules the contract existed.

An accord and satisfaction which secures a release

from

such an obligation is really based on the existence

of the contra.ct instead of treating it

as non-existent.

(r) (1933] 2 K.B. 616, 643-4.

f

J

S.C.R. SUPREME COURT REPORTS 521

The contract is not annihilated but the obligations z959

under it cease to be enforceable. Therefore it is that Th u -. -,,

1

~·

h t . · b ht ~ th · t d e mon °' ""'" w en an ac ion is roug 1or e appropria e reme y v. .

for non~performance of these obligations that an Kisho~ilal Gupia

accord and satisfaction furnishes a good defence. The &-Bros.

defence is not that the contract has come to an end

but that its breach has been satisfied by accord and Sarkar f.

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 settle­

ment 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 (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 mltde

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 (

1

) t,ha.t 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 npt a separate bargain, but one incorporated

in the general contract." Lord Macmillan also made

some

very revealing observations on the nature of an

arbitration clause in the same case. He said at

pp. 373-4: " I venture to think that not enough attention

has been directed to the true nature and function of

an arbitration clause in a contract. It is quite

distinct from

the other clauses. The other clauses

(1) [1942] A.C. 356, 371.

'959

1'/ie Union of India

v.

Kislwn'tal Gupta

& Bros.

Sarkar J.

522 SUPREME COURT REPORTS [1960(1)]

set out the obligations which the parties undertake

towards ea.ch other hinc in</,e, but the arbitration

clause does not impose on one of the parties an

obligation in favour of the other. It embodies the

agreement of both the parties 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 a tribunal of their own

constitu­

tion. And there is this very material difference,

that whereas in an ordinary contract the obligations

of the parties to each other cannot in general be

specifically enforced

and breach of them results only

in damages,

the arbitration clause can be

specifica:lly

enforced by the machinery of the Arbitration Act.

The appropriate remedy for breach of the agreement

to

arbitrate is not damages, but its

enforcement."

It seems to me that the respective nature of accord

and satisfaction and arbitration clause makes it·

impossible for the former to destroy the latter. An

accord and satisfaction only releases the parties from

the obligations under a contract but does not affect

the arbitration clause in it, for as Lord Macmillan

said, the arbitration clause does not impose on one of

the parties an obligation 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 contra.ct. 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

S.C.R. SUPREME COURT REPORTS 523

depend on the form of the arbitration agreement and r959

on that aspect of the matter it is not necessary to say

1

.11

~-

d'

th

. .c h t' d t · e Union of In •a

any mg now .ior t e ques ion oes no arise. v.

In my view therefore an accord and satisfaction Kishorilal Gupta

does not destroy the arbitration clause. An examina- & Bros.

tion of what has been called the accord and satisfaction

in

this

ca.se shows this clearly. ]'rom what I have Sarkar J.

earlier said about the terms of the settlement of

February 22, 1949, it is manife8t 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

11-nd 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 section is in these terms :

" Section 62. If the parties to a contract agree

to substitute a new contract for it, or to rescind or

alter it, the original contract need not be per­

formed."

The settlement cannot be said to have altered the

original contra.ct or even to have rescinded it. It only

settled

the dispute

as to the breach of the contract

and its consequences. For the same reason it cannot

be said to substitute a new contra.ct for the ·old one.

As I have earlier

stated it postulates the existence

of the

contra.Qt and only decides the incidence of its

breach.

It remains now to express my views on the question

whether

the settlement of February 22, 1949, amounted

to

an accord and ~tisfa.ction. I have earlier stated

that an accord and satisfaction is the purchase of a

release from an obligation under a contra.ct. This

release is purchased by an agreement.which is the

accord. But this agreement like all other agreements

must be supported by consideration. The satisfaction

524 SUPREME COURT REPORTS (1960(1)]

z

9

s9 is that consideration. It was formerly thought that

Tiu Unicm of India the consideration had to be executed. In other words,

v. the consideration _for which the release was granted

Kishol'ilol Gupta had to be received by the releasor before the release

& Bros. could become effective. The later view is that the

consideration may be executory; that the release may

Sarkar /. become effective before the consideration has been

received

by the releasor if he has agreed to accept the

promise of the releasee to give the consideration.

Whether it is the

on~ or the other depends on the

agreement of the parties. It is a question of intention.

And where, as in the present case, the agreement is

expressed in writing, the question is one of construc­

tion of a document .. So much is well settled.

The question then is, Is it the prpper construction

of the settlement of February 22, 1949, that the appel­

lant 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 settle­

ment. The High Court held, accepting the respondent's

contention, that cl. (6) of the settlement showed that

the appellant had accepted the promise of the contrac­

tors to pay the moneys and to execute a hypotheca­

tion 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 thereup­

on 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 neces­

sarily mean concluded by the promise of the con­

tractors 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

S.C.R. SUPREME COURT REPORTS 525

moneys by certain instalments and would secure these

1

959

payments by a hypothecation bond. So it wou~d The un-::::-Of India

appear that the contract was not to be concluded till v.

the terms had been carried out, for otherwise it would Kishorilal Gupta

not be a conclusion "in terms of the settlement." & Bros.

That seems to me to be also the reasonable inter­

pretation to put on the document in view of the

circumstances of the case. The appellant was to

receive a substantial sum under the settlement. It

gave the contractors quite a long time in which to pay

it. It bargained for a security to be furnished to be

sure

of receiving the payments. The discharge was

to be by the payments. The promise to make these

payments

may conceivably in proper circumstances,

itself

amount to a discharge. But I wholly fail to see

that when there is an additional promise to secure the

payments by a hypothecation, the parties could have

intended that there would be a discharge before the

hypothecation had been made. It does not seem

reasonable

to hold that. the parties so intended. Nor

do I think that the words

"stand finallv concluded in

terms

of the settlement

" are so strong·· as to impute

such

an intention to the

parties. These words are

capable

of the meaning that the contract was to stand

concluded upon the terms of the settlement being

carried

out and, for the reasons just mentioned, that

is the

proper meaning to give to those words. In my

view, therefore, the settlement did not amount to an

accord and Ratisfaction. Till the terms of it had been

carried out,

the appellant retained all its rights under

the contract.

There was one

other point argued ou behalf of the

respondent which l think I should notice. It was said

that the award was in any event liable to he

set aside

inasmuch

as it disclosed an error on the face of it. This

error,

it was said, consisted in awarding damages larger

than those which the appellant had agreed to take by

the settlement. Now this depends on whether the

settlement amounted to

an accord and satisfaction; if

it did not, the appellant's claim for damages could not

be confined

to the amount mentioned in the

settlement.

Sar,~ar ].

526 SUPREME COURT REPORTS [1960(1))

z959 I have already said that in my opinion it did not

T"' u .. ,.,. of India amount to an accord and satisfaction. So there was

v. no error apparent on the face of the award. It further

Kishoril.Z Gupta seems to me that it is not open to the respondent to

<1.Bros. contend that the award is liable to be set aside as dis­

Sarkar].

closing the error mentioned above on the face of it. I

do not find that such a case was made in the applica­

tion

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 arbit­

ration 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 oli"Lhe 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 is the question that the Court was called upon

to decide

in the application.

In my view therefore

tho nppeal should succeed and

the order of the High Court set aside. I would order

accordingly and award the costs here and below to the

appellant.

ORDER

In accordance with the opinion of the. majority this

appeal fails and is dismissed with costs.