Holding

An arbitration clause survives the termination of the contract for the purpose of adjudicating disputes arising out of it, and the lower court lacked jurisdiction; thus the arbitration proceeding was valid.

Summary

The appellant, Indian Drugs & Pharmaceuticals Ltd., entered into a contract with respondent No.2 for filling medicine vials, which was terminated on 1 April 1984. After discovering defects in the vials in 1985, the appellant sought reimbursement and invoked the arbitration clause (clause 19) to refer the dispute to an arbitrator appointed by its Chairman and Managing Director. Respondent No.2 challenged the appointment under Section 33 of the Arbitration Act, 1940, and the lower courts held the arbitration clause inoperative after termination, also questioning jurisdiction and limitation. The Supreme Court held that an arbitration clause remains operative for disputes arising out of a contract even after its termination, unless the contract is rescinded or replaced, and therefore clause 19 survived. It also ruled that the Subordinate Judge lacked jurisdiction under Section 20 of the CPC and that the arbitration was not barred by limitation. The appeal was allowed, leaving the matter to the appointed arbitrator.

Issues considered

Whether the arbitration clause remained operative after the contract was terminated on 1 April 1984.
Whether the arbitration clause could be invoked for a dispute concerning quantity and specification of the vials.
Whether the Subordinate Judge at Coimbatore had jurisdiction to entertain the application under Section 33 of the Arbitration Act, 1940.
Whether the arbitration reference was barred by limitation.

Legislation cited

Subjects

arbitration clausecontract terminationjurisdictionlimitationArbitration Act 1940Civil Procedure Codecontract lawdispute resolution

Judgment

MIS INDIAN DRUGS AND PHARMACEUTICALS LTD. A
v.
MIS INDO SWISS SYNTHETICS GEM MANUFACTURING CO.
LTD. AND ORS.

NOVEMBER 14, 1995
B
[K. RAMASWAMY AND B.L. HANSARIA, JJ.)

Arbitration-Arbitration clause-Operative only if contract in exist-
ence-Tennination of contract-Contract subsists for certain purposes-Ar-
bitration clause operates in respect of these purposes. C
The appellant entered into an agreement with respondent No. 2
whereunder the respondent was to undertake filling of vials with medicine.
The agreement was for the period from 1.4.1982 to 31.3.1984 and it was
terminated w.e.f. 1.4.1984. During the subsistence of the agreement accord-
ing to the appellant, some work undertaken by the respondent was not in D
terms of the agreement. After the defect came to the notice of the appellant,
it called upon the respondent to reimburse the loss. The respondent
disputed the claim whereupon by invoking clause 19 of the agreement, the
appellant referred the dispute to respondent No. 3 who had been appointed
by the Chairman and Managing Director of the appellant in exercise of E
power conferred by clause 19.

Respondent No. 2 challenged the appointment by filing an applica-
tion uls 33 of the Arbitration Act, 1940, alleging that clause 19 of the
agreement could not be invoked to refer the matter to arbitration. The
application was allowed which was challenged by the appellant. The High F
Court upheld the order of Sub-ordinate Judge. Hence this appeal.

The respondent mainly urged that as the appellant itself had ter-
minated the agreement w.e.f. 1.4.1984, the arbitration clause, which was a
part of the agreement, had ceased to be operative after 1.4.1984; that clause
19 visualised arbitration on 'any difference about the quality of the G
material', whereas in the present case the dispute was about the vials filled
up with less quantity and not as per specification and that as the appellant
had for the first time required the respondent to reimburse the supposed
loss '.>y its letter of 10.11.1987, which was after about 4 years of the supply,
the. invocation of arbitration clause was apparently barred by limitation H
189
190 SUPREME COURT REPORTS [1995] SUPP. 5 S.C.R.

A and that respondent No. 3 might not be required to arbitrate in as much
as he being an appointee of the Chairman and Managing Director of the
appellant himself, respondents might not be fairly examined.

The appellant submitted relying on Union of India v. Kishorilal Gupta
& Bros., (1960) 1 SCR 493, that when a question of breach of contract is
B raised after the termination of the contract, it is the performance of the
contract that comes to an end on termination of the contract, but the same
remains in existence for certain purposes in respect of disputes arising
under it or in connection with it and therefore, the arbitration clause
operates in respect of these purposes; that the Court of Sub-ordinate
c Judge at Coimbatore had no jurisdiction to entertain the application u/s
33 of the Arbitration Act; that the cause of action to claim damage really
accrued by July, 1985 as the complaint from the customers, particularly
Defence Department, came to be known by the appellant in early 1985
whereupon the matter was taken up with the respondent and the tests
ultimately were done in July, 1985.
D
The questions raised for determination were (i) whether the arbitra-
tion clause remained in existence by 1988 when the arbitrator was ap-
pointed on the face of termination of the agreement by the appellant w.e.f.
1.4.1984; (ii) whether the arbitration clause, if held to be operative, could
E be invoked for the purpose at hand and (iii) whether the Court of Sub-or-
dinate Judge at Coimbatore had jurisdiction to entertain the application
u/s 33 of the Arbitration Act?

Allowing the appeal, this Court
F
HELD : 1.1. An arbitration clause, howsoever comprehensive in
terms, can be operative only if the contract is in existence. However, when
a question of breach of contract, inter alia, is raised after the termination
of the contract, it is the performance of the contract that comes to an end
on termination of the contract, but the same remains in existence for
G certain purposes in respect of disputes arising under it or in connection
with it. In the instant case, clause 19 dealing with arbitration did survive
despite the contract having come to an end w.e.f. 1.4.1984. The arbitration
clause would perish in case where either there is substitution of a new
contract, or rescission or alteration of the original contract. The present
H was apparently and admittedly not such a case. [194-G.H; 195-H-G]
INDIAN DRUGS AND PHARMACEUTICALS v. INDO SWISS SYNTHETICS GEM MFG. CO. 191

Union of India v. Kishorilal Gupta & Bros, [1960] 1SCR493, relied A
on.

Damodar Valley Corporation v. KK Kar, [1974] 2 SCR 240, distin-
guished.

1.2. Section 20 of the Code of Civil Procedure permits assumption B
of jurisdiction by that Court where the opposite party carries on business
and not the petitioner or plaintiff. The Court was not right while stating
that the petitioner having business at Coimbatore, the Court there had
jurisdiction. The fact of mere reply to the notice of the appellant issued
from Coimbatore did not give rise to any part of 'cause of action' within C
the jurisdiction of Coimbatore Court. Therefore, Coimbatore Court had
no jurisdiction. [196-D-F]

13. The complaint from the customers, particularly Defence Depart-
ment, came to be known by the appellant in early 1985 whereafter the
matter was taken up with the respondent and the test ultimately were done D
in July, 1985. The cause of action to claim damages really accrued in July,
1985 and the claim was thereafter made by a letter of November, 1987
followed by appointment of arbitrator in May, 1988. The arbitration was
thus not 'manifestly barred'. [197-G-H]

1.4. The arbitration clause stated categorically that the difference/ E
dispute shall be referred to an arbitrator appointed by the Chairman and
Managing Director of appellant company. This provision in the arbitration
clause could not be given a go-bye merely at the askance of the respondent
unless he challenged its binding nature in an appropriate proceedings.
[198-B-C] F
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 10275 of
1995.

From the Judgment and Order dated 28th July, 1992 of the High
Court of Judicature at Madras in Civil Revn. Peto. No. 2190/89. G
M.K. Banerjee, A.G., O.C. Mathur and Mrs. Meera Mathur for the
Appellants.

Ashok Desai, Naga Subramanian, Ms. lndu Malhotra and Ms. Shruti
Pandey for the Respondent. H
192 SUPREME COURT REPORTS (1995] SUPP. 5 S.C.R.

A The Judgment of the Court was delivered by

HANSARIA, J. Special leave granted.

2. The appellant entered into an agreement with respondent No. 2
(which was subsequently amalgamated with the first respondent and be-
B came one of its division) on 13.8.1982 whereunder the respondent was to
undertake filling of vials with medicines. The agreement was for the period
from 1.4.1982 to 31.3.1984, subject to renewal by mutual agreement there-
after. It was also subject to termination by either party by giving three
months notice to the other. Such a notice was given by the appellant on
c 28.12.1983 stating that the agreement would stand terminated with effect
from 1.4.1984. During the subsistence of the agreement, the respondent
undertook some work which, according to the appellant, was not in terms
of the agreement. After the defect came to the notice of the appellant,
which was sometime in the second half of 1985, it called upon the respon-
dent, by its letter of 10.11.1987, to reimburse the loss which was stated to
D be a sum of Rs. 161.82 lacs. The respondent disputed the claim by its letter
27.11.1987, whereupon by invoking clause 19 of the agreement, the appel-
lant referred the dispute to respondent No.3 who had been appointed by
the Chairman and Managing Director of the appellant in exercise of power
conferred by clause 19. The appointment was challenged by respondent
E No. 2 by filing an application under S.33 of the Arbitration Act, 1940, read
with certain provisions of the Code of Civil Procedure, before the Court
of Sub-ordinate Judge, Coimbatore, stating, inter alia, that clause 19 of the
agreement could not be invoked to refer the matter to arbitration. In any
case clause 19 did not permit resolution of the dispute of the type raised
by the appellant. The Subordinate Judge decided main issues in favour of
F the respondent, which order was charged by the appellant in the High
Court of Judicature at Madras. The High Court upheld the order of Sub-
ordinate Judge. Hence this appeal under Article 136 of the Constitution.

3. The following questions arise for determination on the basis of the
G pleadings of the parties :

(i) Whether the arbitration clause remained in existence by 1988 when the
arbitrator was appointed on the face of termination of the agreement by
the appellant with effect from 1.4.1984?

H (ii) Whether the arbitration clause, if held to be operative, could be
INDIAN DRUGS AND PHARMACEUTICALS v. INDO SWISS SYNTHETICS GEM MFG. CO. (HANSARIA, J.] 193

invoked for the purpose at hand? A
(iii) Whether the Court of Sub-ordinate Judge at Coimbatore had jurisdic-
tion to entertain the application under section 33 of the Arbitration Act?

Apart from the above, the first two respondents have raised the
question of limitation also in these proceedings. B
4. We propose to express our views on the four questions in the order
noted by us.

5. Whether the arbitration clause remained in existence by 1988 when
the arbitrator was appointed on the face of termination of the agreement c
by the appellant with effect from 1.4.1984?

This is the real bone of the contention between the parties. Shri
Desai, duly assisted by Ms. Indu Malhotra, strenuously urged that as the
appellant itself had terminated the agreement with effect from 1.4.1984, the D
arbitration clause, which is a part of the agreement, had ceased to be
operative after 1.4.1984. This contention is seriously disputed by the
learned Attorney General appearing for the appellant.

6. To decide this dispute between the parties, it would be enough to
note clauses 17 and 19 of the agreement which read as below: E
"17. The agreement will be for the period from 1.4.1982 to 31.3.1984
subject to renewal by mutual agreement thereafter. The agreement
is subject to termination by either party by giving three months
notice to other party.
F
19. Any dispute regarding the interpretation or application of this
agreement and any difference about the quality of the material shall
be referred to an arbitrator appointed by the Chairman and
Managing Director of IDPL, whose decision shall be final and
binding on both the parties." G
(emphasis ours)

7. Learned Attorney General submitted that, as to when on termina-
tion of an agreement, arbitration clause would also cease to be operative,
has been well explained by a three-Judge Bench of this Court in Union of H
194 SUPREME COURT REPORTS (1995] SUPP. 5 S.C.R.

A India v. Kishorilal Gupta & Bros., [i960] 1 SCR 493. In that case Subba
Rao, J., as he then was, speaking for the majority stated at pages 513 to
514 of the report that the discussion of the law on the subject led to the
emergence of the following principles in this regard :

"(1) An arbitration clause is a collateral term of a contract as
B distinguished from its substantive terms; but nonetheless it is an
integral part of it;

(2) however compensation an arbitration clause may be, the exist-
ence of the contract is a necessary condition for its operation, it
perishes with the contract;
c.
(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
D for it soiely governing their rights and liabilities thereunder;

(5) in the former case, if the original contract has no legal exist-
ence, the arbitration clause also cannot operate, for along with the
original contract, it is also void, in the case, as the original contract
E is extinguished by the substituted one, the arbitration clause of the
original contract perishes with it, and

(6) between the two fall many categories of disputes in connection
with a contract, such as the question of repudiation, frustration,
breach etc. In these cases it is the performance of the contract that
F 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."

8. So, an arbitration clause, howsoever comprehensive in terms, can
G be operative only if the contract is in existence (vide point (2) above).
Under point No. 6, however, it has been stated that when a question of
breach of contract, inter alia, is raised after the termination of the contract,
it is the performance of the contract that comes to an end on termination
of the contract, but the same remains in existence for certain purposes in
H respect of disputes arising under it or in connection with it. It was,
INDIAN DRUGS AND PHARMACEUTICALS v. INDO SWISS SYNTIIETICS GEM MFG. CO. [HANSAR!A, J.) 195

therefore, stated under this point that as the contract subsists for certain A
purposes, the arbitration clause operates in respect of these purposes.

9. Shri Desai, appearing for the respondent, has not disputed that
the law laid down in Kishorilal Gupta's case is still good law, which is
apparent from what was stated by a two-Judge Bench in Damodar Valley
Corporation v. KK Kar, [1974] 2 SCR 240, which decision Shri Desai seeks B
to rely in support of his submission. The learned counsel read out to us
that portion of the judgment which finds place at pages 243 to 244, which
is as below:

"As the contract is an outcome of the agreement between the C
parties it is equally open to the parties thereto to agree to bring it
to an end or to treat it as if it never existed. It may also be open
to the parties to terminate the previous contract and substitute in
its place a new contract or alter the original contract in such a way
that it cannot subsist. In all these cases, since the entire contract
is put an end to, the arbitration clause, which is a part of it, also D
perishes along with it. Section 62 of the Contract Act incorporates
this principle when it provides that if the parties to a contract agree
to substitute a new contract or to rescind or alter it, the original
contract need not be performed. Where, therefore, the dispute
between the parties is that the contract itself, does not subsist
either as a result of its being substituted by a new contract or by E
rescission or alternation, that dispute cannot be referred to the
arbitration as the arbitration clause itself would perish if the
averment is found to be valid. As the very jurisdiction of the
arbitrator is dependent upon the existence of the arbitration clause
under which he is appointed, the parties have no right to invoke a F
clause which perishes with the contract."

10. This shows that the arbitration clause would perish in case where
either there is substitution of a new contract, or rescission or alteration of
the original contract. The present is apparently and admittedly not such a
case. Therefore, what has been stated in this decision cannot assist the G
respondents. G_n the other hand, the ratio of Kisho1ilal Gupta squarely
applies. We, therefore, hold that clause 19 dealing with arbitration did
survive despite the contract having come to an end with effect from
1.4.1984.

11. Whether the arbitration clause, if held to be operative, could be H
196 SUPREME COURT REPORTS [1995] SUPP. 5 S.C.R.

A invoked for the purpose at hand?

On this, the contention of the respondent is that the clause 19
visualises arbitration on "any difference about the quality of the material",
whereas in the present case the dispute is about the vials as filled up
containing less quantity and not as per specification. As to this, the stand
B of the appellant is that if the quantity would be less and not as per
specification, the quality would get affected. We do not propose to express
any opinion on this aspect of the matter. Suffice to say in this proceeding
that if the case of the appellant be correct the arbitration clause would get
attracted.
c
12. Whether the Court of Sub-ordinate Judge at Coimbatore had
jurisdiction to entertain the application under Section 33 of the
Arbitration Act?

OJJ the question of jurisdiction being raised by the appellant, a queer
D view was taken inasmuch as the Court stated that the petitioner before him
(who is respondent herein) having business at Coimbatore, the Court there
had jurisdiction. This has really put Section 20 of the Code of Civil
Procedure on its head, as it permits assumption of jurisdiction by that
Court where the opposite party carries on business, and not the petitioner
E or plaintiff. The other point urged to sustain jurisdiction was that the
respondent's letter dated 27.11.1987 had been issued from Coimbatore.
This fact could not have conferred jurisdiction because the fact of mere
reply to the notice of the appellant did not give rise to any part of "cause
of action" vA.thin the jurisdiction of Coimbatore Court. We are, theref~re,
of the view that Coimbatore Court had no jurisdiction.
F
13. Was the reference to the arbitrator barred by limitation?

The plea of limitation had not been urged earlier. That, however, is
not material as a plea of limitation can be raised virtually at any point of
G time because it is relatable to jurisdiction to entertain a matter. According
to Shri Desai as the appellant had for the first time required the respondent
to reimburse the supposed loss by its letter of 10.11.1987, which was after
about 4 years of the supply, the invocation of arbitration clause was
apparently barred by limitation, which period could at best at three years
as provided by Article 137 of the Limitation Act, 1963. We are referred in
H this connection to a Bench decision of this Court to which one of us (K.
JNDIAN DRUGS AND PHARMACEtmCALS v. INDO SWISS SYNTHETICS GEM MFG. CO. [HANSARIA, J.] 197

Ramaswamy, J.) was a party - the same being in the case of Panchu Gopal A
Bose v. Board of Trustees for Port of Calcutta, (1993] 4 SCC 338. This
decision has held the Limitation Act applies to arbitration proceedings and
the period visualised by different provisions of the Limitation Act would
decide the question of limitation in an arbitration proceeding.

14. In reply, the learned Attorney General brings to our notice the
B
averments finding place in the Rejoinder of the appellant. We are referred
to the Rejoinder because the plea of limitation was raised for the first time
in the counter-affidavit of the respondent in its para 14. The relevant reply
in the Rejoinder is as below :
c
"It is stated that the respondents were informed of the rejection
of the drugs supplied by them as early as in 1985 on account of
short filling of vials by reference to the complaints received from
the customers particularly Defence Department. Following this,
Shri Chander Sekharan of the Respondent Company visited the D
petitioner's office at Madras on 3.5.1985 and 10.7.1985 for discus-
sions in the matter. It is mutually agreed that a joint inspection of
samples from all the Benches should be conducted in the
laboratory of IDPL at Madras. Accordingly the reference samples
from the respondent's factory were brought for the purpose of joint
inspection to the petitioner's factory at Madras. However, the E
respondent did not sent any representative for participation in the
joint inspection and ultimately after waiting for considerable time,
the petitioner had to undertake inspection and tests on 22.7.1985
by itself and found that the drugs had not been filled as per the
specifications and the weight verification was also not within the F
permissible limit."

15. Thus, the complaint from the customers, particularly Defence
Department, came to be known by the appellant in early 1985 whereafter
the matter was taken up with the respondent and the test ultimately were
done in July, 1985. If these facts be correct, it has to be held that the cause G
of action to claim damages really accrued by July, 1985 which was there-
after made by a letter of November, 1987 followed by appointment of
arbitrator in May, 1988. The arbitration was thus not "manifestly barred"
as contended by Shri Desai. We do not propose to say anything more on
this aspect at this stage. H
198 SUPREME COURT REPORTS (1995) SUPP. 5 S.C.R.

A 16. In the aforesaid premises, we do not find any threshold infirmity
m the invocation of clause 19 and to the reference of the dispute to
respondent No. 3. Shri Desai submits that respondent No. 3 may not be
required to arbitrate inasmuch as he being an appointee of the Chairman
and Managing Director of the appellant himself, respondents' case may not
be fairly examined. He prays that any retired High Court Judge may be
B appointed as an arbitrator by us. We have not felt inclined to accept this
submission, because arbitration clause states categorically that the dif-
ference/dispute shall be referred "to an arbitrator appointed by the Chair-
man and Managing Director of IPDL" (Indian Drugs & Pharmaceutical
Limited) who is the appellant. This provision in the arbitration. clause
c cannot be given a go-bye merely at the askance of the respondent unless
he challenged its binding nature in an appropriate proceeding which he
did not do.

17. In the result, we allow the appeal and leave the appointed
arbitrator to deal with difference/dispute in accordance with law. In the
D facts and circumstances of the case, let the parties bear their own costs.

R.A. Appeal allowed.

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