AIR Online 12/09/24, 12:33 AM

License & Printed By : Dr Ram Manohar Lohiya National Law University |

https://www.aironline.in | 12/9/2024

AIR 1959 SUPREME COURT 1362

Supreme Court Of India
(From Calcutta : AIR 1953 Cal 642) 21st May, 1959.

HON'BLE JUDGE(S): S. JAFER IMAM, AJIT KUMAR SARKAR, K. SUBBA RAO , JJJ
THE UNION OF INDIA V. KISHORILAL GUPTA AND BROS

Civil Appeal No. 250 of 1955,, decided on 21/05/1959

(A) Constitution of India , Art.136— Special leave not to be granted when appeal lies to
other Court.
It cannot be contended that the Supreme Court has no jurisdiction 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
when an appeal lay to another Court the Supreme Court should not give special leave and
thereby short-circuit the legal procedure prescribed. (Para 2, 20)

Anno : AIR Com. Const. of Ind., Art, 136, N. 10.

(B) Deed - Construction - When the words are clear and unambiguous there is no scope for
drawing upon hypothetical considerations or supposed intentions of the parties.
(Para 6)
(C) Contract Act (9 of 1872) , S.62— Contract stating that earlier contracts would be finally
concluded in norms of the new.
(Per majority, Sarkar J. Contra).
Where the clause in a settlement in express terms declared that the earlier contracts should be
finally concluded in terms of the settlement and no party would have any claim against the
other:
Held that the substituted agreement. gave a new cause of action and obliterated, the earlier
ones. (Para 6)

Anno : C. J.I. Contract Act, S. 62, N. 2, 5.

(D) Contract Act (9 of 1872) , S.62— Substituted contract - Arbitation clause in old contract
- Arbitration clause goes with the old contract.
(Per majority, Sarkar J. Contra)
An arbitration clause is a collateral term of a contract as distinguished from its substantive

https://www.aironline.in/WW/fullContentByCitationSearch.html Page 1 of 21
AIR Online 12/09/24, 12:33 AM

terms; but none the less it is an integral part of it. If an arbitration clause is couched in widest
terms, 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 superseded
or not by a new contract between the parties, such a dispute must fall outside the arbitration
clause, for, if it is superseded, the arbitration clause falls with it. (Para 9, 10)

Anna : C.J.I. Contract Act, S. 62, N. 5.

(E) Deed - Construction - Description of property intended to be hypothecated
notSC1363made clear in the document - Flaw does not invalidate document or suspend its
operation till defect is rectified or ambiguity is clarified.
(Para 6)

Case Referred : Chronological Paras

('48) ILR (1948) 2 Cal 171, Tolaram Nathmull v. Birla Jute Manufacturing Co. Ltd.
Para No.( 9 )

(1914) 1914 AC 618 : 41 Ind App 142 (PC), Payana Reena Saminathan v. Pana Lana Palaniappa
Para No.( 5 )

(1918) 1918 AC 1 : 87 LJ KB 145, Morris v. Baron and Co Para No.( 5 )

(1926) 1926 AC 497 : 95 LJ PC 121, Hirji Mulji v. Cheong Yue Steamship Co.
Para No.( 9 )

(1933) 1933-2 KB 616 : 102 LJKB 775, British Russian Gazette and Trade Outlook Ltd. v. Associated News papers Ltd.
Para No.( 5, 26 )

(1942) 1942-1 All ER 337 : 1942 AC 356, Heyman v. Darwins Ltd. Para No.( 9, 23, 29 )

Name of Advocates

Mr. H. N. Sanyal, Addl. Solicitor-General of India, and Mr. B. Sen, Senior Advocate (M/s. R. H.
Dhebar and T. M. Sen, Advocates, with them), for the Appellant; Mr. C. B. Aggarwala, Senior
Advocate (Mr. Sukumar Those, Advocate with him), for Respondents. The following Judgment
of Imam and Subba Rao, JJ. was delivered by

1. SUBBA RAO, J. :This appeal by special leave raises the question of survival of an arbitration
clause in a contract after the said contract is superseded by a fresh one. The respondent-firm,
styled as "Kishorilal Gupta and Brothers", entered into the following three contracts with the
Governor-General-in-Council through the Director General of Industries and Supplies, hereinafter
called the Government: (i) contract dated April 2, 1943, for 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 :

https://www.aironline.in/WW/fullContentByCitationSearch.html Page 2 of 21
AIR Online 12/09/24, 12:33 AM

"In the event of any question of dispute arising under these conditions or any special conditions of
contract or in connection with this contract (except as to any matters the decision of which is
specially provided for by these conditions) the same shall be referred to the award of an arbitrator
to be nominated by the purchaser and an arbitrator to be nominated by the contractor ............."
Under the terms of the said three contracts, the Government supplied certain raw-materials to the
respondents and the latter also delivered some of the goods to the former. On May 21, 1945, the
contract dated April 2, 1943, hereinafter called the first contract, was cancelled by the
Government. The Government also demanded certain sums towards the price of the materials
supplied by them to the respondents. On the same day, the Government cancelled the contract
dated September 15, 1944, hereinafter called the second contract, and made a claim on the
respondents for the price of the raw-materials supplied to them. The respondents made a counter-
claim against the Government for compensation for breach of the contract. On March 9, 1946, the
Government cancelled the contract dated 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 contained 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 or payment of the amount mentioned in clause (1) shall stand finally
determined."
The recitals in the settlement of the second contract are as follows:
"(1) The contractor expressly agrees to pay to the Government the sum of Rs. 36,276. If D. G. I
and S has recovered any amount under the contract out of the sum due credit will be given to the
contractor.
(2) The contract stands finally determined and no party will have any further claim against the
other."
One prominent difference in the phraseology used in the two settlements may be noticed at this
stage. While under the settlement of the first contract, the contract should stand finally determined
only on payment of the amount agreed to be paid to the Government by the contractor, under the
settlement of the second contract, the contract stood finally determined on the date of the
settlement itself. The third contract was settled on February 22, 1949,
and the material 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 materials received against the contract and their claims for

https://www.aironline.in/WW/fullContentByCitationSearch.html Page 3 of 21
AIR Online 12/09/24, 12:33 AM

compensation for cancellation of the same contract.

2.The firm will retain all surplus partly fabricated 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-1/90 dated 2nd April 1943 in
monthly instalments for Rs. 5,000 only for the first three months first instalment being payable on
10th March 1949 and further instalments of Rs. 9,000 per month till the entire dues payable to
Government are paid.

4.In the event of default of any monthly instalments interest will be charged by Government on
the amount as defaulted at the rate of 6 per cent per annum from the first day of the month in
which the instalment shall be due. If the instalments defaulted exceed two in number the
Government will have the right to demand the entire balance of the money payable by the firm
together with interest thereon at the rate abovementioned on that balance and take such steps to
recover from them from the security to be offered.

5.In order to prove cover for the money payable to the Government the firm undertakes to
hypothecate their moveable and immovable property in Bamangachi Engineerng Works together
will all machinery, sheds and leasehold interest in land measuring about 5.75 acres in Mouja
Bamangachi in Howrah. The firm further undertakes to execute the necessary stamped documents
for the purpose as drafted by the Government Solicitor at Calcutta.

6.The contracts stand finally concluded in terms of the settlement and no party will have further
or other claim against the other."
Broadly speaking, this settlement was a comprehensive 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 October 28, 1948,
and January 17, 1949, the respondents paid a total sum of Rs. 9,000 to the Government under the
first two settlements of the contracts. Between March 10, 1949, and October 81, 1949, the
respondents paid a total sum of Rs. 11,000 in installments 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 payable 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 respondents demanding
the payment of Rs. 1,51,723 payable to them under the three onginal 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 respondents did not cooperate in the scheme of
arbitration and instead Kishori Lal Gupta as sole proprietor of the respondent-firm made an
application under S. 33 of the Arbitration Act, 1940; in the Original Side of the High Court of

https://www.aironline.in/WW/fullContentByCitationSearch.html Page 4 of 21
AIR Online 12/09/24, 12:33 AM

Calcutta for a declaration that the arbitration agreement was no longer in existence. That
application was dismissed by Banerjee J. of the said High Court on the ground that it was not
maintainable as the two other partners of the respondent-firm were not made parties to the said
proceeding. But in the course of the judgment, the learned Judge made some observation on the
merits of the case. Thereafter the Government filed their statement of facts before the arbitrator
and the respondents filed a counter-affidavit challenging the arbitrator's jurisdiction and also the
correctness of the claims made by the Government. On July 31, 1951, the arbitrator made an
award in favour of the Government for a total sum of Rs. 1,16,446-11-5 in respect of the first and
the third contracts and gave liberty to the Government to recover the amount due to them under
the second contract in a suit. The award was duly filed in the High Court, and, on receiving the
notice, the respondents filed an application in the High Court for setting aside the award and in
the alternative for declaration that the arbitration clause in the three contracts ceased to have any
effect and stood finally determined by the settlement of the disputes between the parties.
Bachawat J. held that the first contract was to be finally determined only on payment in terms of
the, settlement, and, as such payment was not made, the original contract and its arbitration clause
continued to exist. As regards the third
contract, the learned Judge came to the conclusion that by the third settlement, there was accord
and satisfaction of the original contract and the substituted agreement discharged the existing
cause of action and therefore the arbitrator had no jurisdiction to entertain any claim with regard
to that contract. As the award on the face of it was a lump sum award, the learned Judge held that
it was not severable and therefore the whole award was bad. In the result, he gave the declaration
that the arbitration clause contained in the contract dated September 27, 1944, for "Kettles Camp"
had ceased to exist since the settlement contract 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.
2. At the outset, a preliminary objection taken by Shri Aggarwal, the learned Counsel for the
respondents, may be disposed of. The learned Counsel contends that the special leave granted by
this Court should be revoked on the ground that an appeal lay against the order of the learned
Judge to an appellate bench of the same High Court both under Cl. 15 of the Letters Patent and S.
39 of the Arbitration Act. It is not, and cannot be, contended that this Court has no jurisdiction 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 prescribed. There is much force in this argument. If 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 application for revoking the leave
was made five years after the grant of special leave and the learned Counsel could not give any
valid reason to explain this inordinate delay. In the circumstances, if we revoked the special leave,

https://www.aironline.in/WW/fullContentByCitationSearch.html Page 5 of 21
AIR Online 12/09/24, 12:33 AM

the appellant would be prejudiced for if this objection had been taken at the earliest point of time
the appellant would have had the opportunity to prefer a Letters Patent appeal to the appellate
bench of the 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.
3. Now coming to the merits, the main contentions of the parties may be stated at the outset. The
argument of the Additional Solicitor-General for the appellant may be summarised in the
following propositions : (1) The jurisdiction of the arbitrator depends upon the scope of the
arbitration agreement or submission; (2) its scope would depend upon the language of the
arbitration clause; (3) if the arbitration agreement in question is examined, it indicates that the
dispute whether the original contracts have come to an end or not is within its scope; (4) on the
facts of the case, there had been no novation or substitution of the original contracts; and (5) if
there had been a novation of the original contracts, the non-performance of the terms of the new
contract revived the original contracts and therefore the parties to the original contracts could
enforce their terms including the arbitration clause. The submission of Shri Aggarwal, Counsel
for the respondents may be stated thus : (1) Upon the facts of the case, there had been a recession
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 contracts; (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.
4. 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 its; nor need we consider the question whether the settlement contract 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 or contracts, for the validity of the said contract is not questioned by
either party and indeed both rely upon it - one to contend that it wholly
superseded the earlier ones and the other to rely upon its terms to bring out its contingent
character. If so, the only two outstanding questions are: (i) what is the legal effect of the contract
dated February 22, 1949, on the earlier contracts? ; and (ii) does the arbitration clause in the
earlier contracts survive after the settlement contract?
5. 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 agreement; 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, 1914
AC 618 at P. 622. Lord Moulton defined the legal incidents of a substituted contract in the

https://www.aironline.in/WW/fullContentByCitationSearch.html Page 6 of 21
AIR Online 12/09/24, 12:33 AM

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 of a new agreement. The consequence is that when such an accord and
satisfaction takes place the prior rights of the parties are extinguished. They have in fact been
exchanged for the new rights; and the new agreement becomes a new departure, and the rights of
all the parties are fully represented by it."
The House of Lords in Morris v. Baron and Co., 1918 AC 1 at p. 26, in the context of a contract
for sale of goods brought out clearly the distinction between a contract which varies the terms of
the earlier contract and a contract which rescinds the earlier one, in the following passage at p. 26
:
"In the first case there are no such executory clauses in the second arrangement as would enable
you to sue upon that alone if the first did not exist; in the second you could sue on the second
arrangement alone, and the first contract is got rid of either by express words to that effect, or
because, the second dealing with the same subject-matter as the first but in a different way, it is
impossible that the two should be both performed."
Scrutton L. J. in British Russian Gazette and Trade Outlook Ltd. v. Associated Newspapers, Ltd.,
1933-2 KB 616 at pp. 643, 644, after referring to the authoritative text-books on the subject,
describes the concept of "accord and satisfaction" 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 consideration, 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 executor . .. . . . . . . . . . . . . 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 Law of Contract, 3rd Edn, at p. 453 :
"The modern rule is, then, that if what the creditor has accepted in satisfaction is merely his
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 agreement is made.

https://www.aironline.in/WW/fullContentByCitationSearch.html Page 7 of 21
AIR Online 12/09/24, 12:33 AM

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 performance of a substituted consideration in satisfaction,
or he may agree to accept the promise of such performance. In the former there is no satisfaction
until performance, and the debtor remains liable upon the original claim until the satisfaction is
executed. In the latter, if the promise be not performed, the plaintiff's remedy is by action for the
breach of the substituted agreement, and he
has no right of resort to the original claim." From the aforesaid authorities it is manifest that a
contract may be discharged by the parties thereto by a substituted agreement and thereafter the
original cause of action arising under the earlier contract is discharged and the parties are
governed only by the terms of the substituted contract. The ascertainment of the intention of the
parties is essentially a question of fact to be decided on the facts and circumstances of each case.
6. We have already given the sequence of events that led to the making of the contract dated
February 22, 1949. To recapitulate briefly, the original three contracts were cancelled by the
Government on May 21, 1945, and March 9, 1946, respectively. Under the first contract, the
Government 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. The disputes under the first two contracts were settled on the
same day. As the claim was only on the part of the Government, the amount due to them was
ascertained at Rs. 3,164-8-0 and the contract was expressly agreed to be finally determined on
payment of that amount. The express terms of the settlement leave no room to doubt that the
contract was to be 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 consideration
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 of 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 amounts 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 crystallised and a suitable procedure designed

https://www.aironline.in/WW/fullContentByCitationSearch.html Page 8 of 21
AIR Online 12/09/24, 12:33 AM

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 and that the respondents should retain all the material,
partly fabricated and fully fabricated stores lying with them. Clauses 3, 4 and 5 provide for the
realisation of the entire amounts covered by the three settlements. Under cl. 3 the respondents
agreed to pay the total amount payable under the three settlements in monthly instalments for the
first three months commencing from March 10, 1949, at a sum of Rs. 5,000 and thereafter at a
sum of Rs. 9,000 per month till the entire amount was paid. Clause 4 prescribed that in case of
default of any monthly instalment interest would be charged at the rate of 6% per annum and if
the instalments defaulted exceeded two in number the Government was given the right to realise
the entire amount payable under the three contracts with interest not only from the security but
also otherwise. Under cl. 5 it was stipulated that the respondents should hypothecate their
moveable and immoveable properties described thereunder to provide cover for the moneys
payable 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 justification for the contention that the substituted contract should either come into force after
the hypothecation bond was executed or that it should cease 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 whereunder 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 recovery 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, namely, that it is impossible to attribute any intention to the Government to take a mere
promise on the part of the respondents to hypothecate their properties "as satisfaction" and
therefore it should be held that the intention of the parties was that there would be no satisfaction
till such a document was executed, does not appeal to us. We are concerned 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
intended to be hypothecated was not made clear and therefore the presumed intention was to
sustain 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 in. validates 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 for the enforcement of the new contract in whole or in part, the party affected
must take the consequences. We have, therefore, no doubt that the contract dated February 22,

https://www.aironline.in/WW/fullContentByCitationSearch.html Page 9 of 21
AIR Online 12/09/24, 12:33 AM

1949, was for valid consideration and the common intention of the parties was that it should be in
substitution of the earlier ones and the parties thereto should thereafter look to it alone for
enforcement of their claims. As the document does not disclose any ambiguity, no scrutiny of the
subsequent conduct of the parties is called for to ascertain their intention.

7.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.

8.Uninfluenced by authorities or case law, the logical outcome of the earlier discussion would be
that the arbitration clause perished with the original contract. Whether the said clause was a
substantive term or a collateral one, it was none the less an integral part of the contract, which had
no existence de hors the 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 agreement. 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, including the arbitration clause. The case-law 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.

9.We shall now notice some of the authoritative statements 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 such a
clause will apply even if the dispute involve an assertion that circumstances had arisen whether
before or after the contract had been partly performed 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 determined:
"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 is determined with it, or by something arising
out of the contract, in which case the arbitration clause remains effective and can be enforced.
" The Judicial Committee in Hirji Mulji v. Cheong Yue Steamship Co., 1926 AC 497 at p. 502
gives another test at p. 502:
''That a person before whom a complaint is brought cannot invest himself with arbitral
jurisdiction 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. For this purpose a contract that has

https://www.aironline.in/WW/fullContentByCitationSearch.html Page 10 of 21
AIR Online 12/09/24, 12:33 AM

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 arbitration effuse in the context of a dispute
arising on the question of repudiation of a contract is found in the decision of the
House of Lords in Heyman v. Darwine Ltd., 1942-I All ER 337 at pp. 343-345, 347, 350. There a
contract was repudiated by one party and accepted as such by the other. The dispute arose in
regard to damages under a number of heads covered by the contract. The arbitration clause
provided that any dispute between the parties in respect of the agreement or any of the provisions
contained therein or anything arising thereout should be referred to arbitration. The House of
Lords held that the dispute was one within the arbitration clause. In the speeches of the Law
Lords a wider question is discussed and some of the relevant principles have been succinctly
stated. Viscount Simon L.C. observed the p. 343 thus:
"An arbitration clause is a written submission, agreed to by the parties to the contract, and like
other written submissions to arbitration, must be construed according to its language and in the
light of the circumstances in which it is 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 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 differences 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 the arbitral 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 expressed 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 arbitration clause, and, unless the language of the arbitration clause is such as to exclude its
application until performance has begun, there seems no reason why the arbitrator's jurisdiction
should not cover the one case as much as the other".

https://www.aironline.in/WW/fullContentByCitationSearch.html Page 11 of 21
AIR Online 12/09/24, 12:33 AM

Lord Macmillan made similar observations at p. 345:

"If it appears that the dispute is as to whether there has ever been a binding contract between the
parties, such a dispute cannot be covered by an arbitration clause in the challenged contract. If
there has never been a contract at all, there has never been as part of it an agreement to arbitrate,
the greater includes the less. Further, a claim to set aside a contract on such grounds as fraud,
duress or essential error cannot be the subject matter of a reference under an arbitration clause in
the contract sought to be set aside. Again, an admittedly binding contract containing a general
arbitration clause may stipulate that in certain events the contract shall come to an end. If a
question arises whether the contract has for any such reason come to an end, I can see no reason
why the arbitrator should not decide that question. It is clear, too, that the parties to a contract
may agree to bring it to an end to all intents and purposes and to treat it as if it had never existed.
In such a case, if there be an arbitration clause in the contract, it perishes with the contract. If the
parties substitute a new contract for the contract which they have abrogated, the arbitration clause
in the abrogated contract cannot be invoked for the determination of questions under the new
agreement. All this is more or less elementary".
These observations throw considerable light on the question whether an arbitration clause can be
invoked in the case of a dispute under a superseded contract. The principle is obvious, if the
contract is superseded by another, the arbitration clause, being a component part of the earlier
contract, falls with it. The learned Law Lord pinpoints the principle underlying his conclusion at
p. 347:
"I am accordingly of opinion that what is commonly 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 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" and the different meanings it
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 would 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 principles 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

https://www.aironline.in/WW/fullContentByCitationSearch.html Page 12 of 21
AIR Online 12/09/24, 12:33 AM

breach of the contract. The contract is still in existence for certain purposes. But where the dispute
is whether the said contract is void ab initio, the arbitration clause cannot operate on those
disputes, for its operative force depends upon the existence of the contract and its validity. So too,
if the dispute is whether the contract is wholly superseded or not by a new contract between the
parties, such a dispute must fall outside the arbitration clause, for, if it is superseded, the
arbitration clause falls with it. The argument, therefore, that the legal position is the same whether
the dispute is in respect of repudiation or frustration or novation is not borne out by these
decisions. An equally illuminating judgement of Das J., as he then was, in Tolaram Nathmull v
Birla Jute Manufacturing Co. Ltd., ILR (1948) 2 Cal 171 is strongly relied upon by the learned
counsel for the appellant. There the question was whether an arbitration clause which was
expressed in wide terms would take in a dispute raised in that case. It was contended on one side
that the contract was void ab initio and on the other side that, even on the allegations in the 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 decide the present question, namely, whether an arbitration clause survived in spite
of substitution of the earlier contract containing the arbitration clause by a fresh one, and
therefore we do not think that it is necessary to express our opinion on the principles called out
and enumerated in that decision.

10.The following principles relevant to the present case emerge from the aforesaid discussion: (1)
An arbitration clause is a collateral term of a contract as distinguished from its substantive terms;
but none the less it is an integral part of it; (2) however comprehensive the terms of an arbitration
clause may be, the existence of the contract is a necessary condition for its operation, 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 cannot operate, for along with the original contract, it is also
void; in the latter case, as the original contract is extinguished by the substituted one, the
arbitration clause of the original contract perishes with it; and (6) between the two falls many
categories of disputes in connection with a contract, such as the question of repudiation,
frustration, breach etc. In those cases it is the performance of the contract that has come to an
ended, but the contract is still in existence for certain purposes in respect of disputes arising under
it on in connection with it. As the contract subsists for certain purposes, the arbitration clause
operates in respect of these purposes.

11.We have held that the three contracts were settled and the third settlement,

contract was in substitution of the three contracts, and, after its execution, all the earlier contracts
were extinguished and the arbitration clause contained therein also perished along with them. We
have also held that the new contract was not a conditional one and after its execution the parties

https://www.aironline.in/WW/fullContentByCitationSearch.html Page 13 of 21
AIR Online 12/09/24, 12:33 AM

should work out their rights only under its terms. In this view, the judgement of the High Court is
correct. This appeal fails and is dismissed with costs.
SARKAR J.:

12.On different dates in 1943 and 1944, a firm of contractors of the name of Kishorilal Gupta and
Brothers entered into three contracts with the appellant to fabricate and supply certain military
stores. The first contract was for 43,000 ladles cook, the second for 15,500 bath ovals and the
third for 1,00,000 kettles camp. Each of these contracts contained an arbitration clause. The last
mentioned contract provided that the appellant would supply materials for the fabrication of the
articles to be delivered under it.

13.Before the contracts had been finally executed, disputes arose between the parties. These
disputes were settled by mutual agreements which were contained in three separate documents.
The settlement in respect of the ladles cook contract which as 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 September 6, 1948, the contractors agreed to pay to the
appellant Rs. 36,276 and it provided that "the contract stands finally determined and no party
shall have any further claim against the other". The terms of the settlement of the kettles camp
contract are set out below in full, for, this case depends on them:
"Dated the 22nd February, 1949.
Messrs. Kishorilal Gupta and Bros., Calcutta.
Sub: A. T. No. MP/75442/R-1/397
Dated the 22nd September, 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 Committee of the Directorate General. I hereby
confirm the following terms of settlement arrived at in the meeting. The settlement has received
the approval of Director General of Industries and Supplies, New Delhi.
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 materials received against the contract and their claims for
compensation for cancellation for the same contract.
2. The firm will retain all surplus partly fabricated 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.
MP/75762/R-61/78 dated 15th September, 1944 and MP/50730/8/R-1/90 dated 2nd April, 1943 in
monthly instalments for Rs. 5,000 only for the first three months first instalment being payable on
10th March, 1949 and further instalments of Rs. 9,000 per month till the entire dues payable to
Government are paid.
4. In the event of default of any monthly instalments interest will be charged by Government on

https://www.aironline.in/WW/fullContentByCitationSearch.html Page 14 of 21
AIR Online 12/09/24, 12:33 AM

the amount as defaulted at the rate of 6 per cent per annum from the first day of the month in
which the instalment shall be due. If the instalments defaulted exceed two in number, the
Government will have the right to demand the entire balance of the money payable by the firm
together with interest thereon at the rate abovementioned on that balance and take such steps to
recover from 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 immovable property in Bamangachi Engineering Works, together
with all machinery sheds and lease-hold interest in land measuring about 5.75 acres at Mouja
Bamangachi in Howrah. The firm further undertakes to execute the necessary stamped documents
for the purpose as drafted by the Government Solicitor at Calcutta.
6. The contracts stand finally concluded in terms of the settlement and no party will have any
further or other claim against the other.
Please acknowledge receipt.
Yours faithfully
Sd. R.B.L. Mathur
Director of Supplies (Claims)
for and on behalf of the Governor General". The contract referred to in cl. (1) of this document is
the contract No. MP/75442/R-1/397 mentioned at the top of the letter and concerned the kettles
camp. The contracts referred to in cl. (3) are the contracts concerned 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.

14.After the settlement of February 22, 1949, the contractors made certain payment aggregating
Rs. 11,000, the last payment made being on October 31, 1949. These payments had not 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.

15.In these circumstances, the appellant made a claim against the contractors under the three
original contracts amounting to Rs. 1,52,723 and referred it to arbitration under the arbitration
clauses contained in them. The appellant nominated an arbitrator and called upon the contractors
to nominate the other, the arbitration clause providing that the arbitration shall be by two
arbitrators, one to be nominated by each party. The contractors did not nominate any arbitrator,
contending that the matter had "already been negotiated to a settlement" and that there were "no
outstanding disputes to be referred to arbitration". The appellant then appointed the person
nominated by the Arbitration Act and an arbitration was held by him in which the contractors
joined. In the arbitration proceedings, 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.

https://www.aironline.in/WW/fullContentByCitationSearch.html Page 15 of 21
AIR Online 12/09/24, 12:33 AM

16.Being aggrieved by the award, the respondent Kishorilal Gupta, who is a partner of the
contractors' firm, made an application to the High Court at Calcutta 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 nulity.

17.I wish to draw attention here to the fact that the application was really concerned with the
contracts for ladies cook and kettles camp. It had nothing to do with the bath ovals' contract for
the appellant withdrew its claim under it from arbitration and no award was made in respect of it.
So in this appeal we are not really, concerned with that contract.

18.Bachawat J. who heard the application held that the contract for ladles cook had not been
abrogated by the settlement in respect of it for reasons which it is unnecessary to state here as this
part of the decision of the learned Judge has not been challenged before us. We have therefore to
proceed on the basis that the arbitration clause contained in the ladles cook contract continued in
force in spite of the settlement in respect of it.

19.The learned Judge however held that the contract for kettles camp including the arbitration
clause contained in it had ceased to exist as a result of the settlement of February 22, 1949, and
the arbitrator had consequently no jurisdiction to make any award proportion to act under that
arbitration clause. He then proceeded to hold that as the award was a single and inseverable award
in respect of the claims under the ladles cook as well as the kettles camp contracts, the whole
award became invalid. In the result the learned Judge made an order declaring that the arbitration
clause contained in the kettles camp contract had ceased to exist and setting aside the award as a
whole.

20.It is against this judgement 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
lay to the High Court. Again, leave was granted by this Court as far back as March 29, 1954, and
the respondent 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.

21.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 breach of the contracts said to have been
committed by the contractors. That indeed is the respondent's case. With regard to the merits of
this claim the Court has no concern. But it is important to note that those claims were clearly
within the arbitration clause in the

https://www.aironline.in/WW/fullContentByCitationSearch.html Page 16 of 21
AIR Online 12/09/24, 12:33 AM

contracts, about this there does not appear to be any dispute. No question therefore arises in this
appeal that the claims referred to arbitration were not within the arbitration clauses.

22.What is in dispute in this case is whether, the arbitration clause had ceased to exist as a result
of settlement. 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 that decision
has not been challenged before us.

23.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 ity, for on
that basis there would be no arbitration agreement under which an arbitration could be held. An
arbitration agreement, of course, is the creature of an agreement and what is created by agreement
may be destroyed by agreement. Lord Macmillan considered it elementary "that the parties to a
contract may agree to bring it to an end to all intents and purposes and to treat it as if it had never
existed" and that "In such a case if there be an arbitration clause in the contract it perishes with
the contract"-1942 AC 356 at p. 371

24.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 satisfaction and therefore the arbitration clause in the relative original
contract was brought to an end by it. It is said that such a settlement amounts to a substituted
agreement which abrogated the original contract and the arbitration clause contained in it perished
with it.

25.I venture to think that this view is wrong and originates from a misapprehension of the real
nature 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.

26.Now what is an accord and satisfaction? It is only a method of discharge of a contract. It only
means that the parties are freed from their mutual obligations under the contract: see Cheshire and
Fifoot on Contracts, 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 consideration other than his legal remedy is to be
accepted by the party not in fault": Chitty on Contracts, 21st edn., p. 286.
In 1933-2 KB 616 at pp. 643-644 Scrutton 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 valuable consideration, not being the actual performance of the

https://www.aironline.in/WW/fullContentByCitationSearch.html Page 17 of 21
AIR Online 12/09/24, 12:33 AM

obligation itself. The accord is the agreement by which the obligation is discharged. The
satisfaction is the consideration which makes the agreement operative".

27.The effect of an accord and satisfaction is therefore to secure a release from an obligation
arising under a contract. Now it is difficult to conceive of an obligation arising from a contract
unless the contract existed. An accord and satisfaction which secures a release from such an
obligation is really based on the existence of the contract instead of treating it as non-existent.
The contract is not annihilated but the obligations under it cease to be enforceable. Therefore it is
that when an action is brought for the appropriate remedy for non-performance of these
obligations that an accord and satisfaction furnishes a good defence. The defence is not that the
contract has come to an end but that its breach has been satisfied by accord and satisfaction and
therefore the plaintiff in the action is not entitled to the usual remedy for the breach.

28.It would clearly appear from the terms of the settlement 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. Clause (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
contact stands finally concluded in terms of the settlement. The parties therefore were only
intending to decide the dispute as to cross-claims made on the
basis of the breach of the contract. So they were assuming the existence of the contract, for there
could be no breach of it unless it existed.

29.Now I come to the nature of an arbitration clause. It is well settled that such a clause in a
contract stands from the rest of the contract. Lord Wright said in Heyman's case, 1942 AC 356
(supra), that an arbitration clause "is collateral to the substantial stipulation of the contract. It is
merely procedural and ancillary, it is mode of settling disputes,................ All this may be said of
every agreement to arbitrate, even though not a separate bargain, but one incorporated in the
general contract." Lord Macmillan also made some very revealing observation also 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 clause which the parties
undertake towards each other hinc inde, but the arbitration clause does not impose on the parties
an obligation in favour of the other. It embodies the agreement of both 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 constitution. And there is this very material difference,
that whereas in an ordinary contract the obligation of the parties to each other cannot in general
be specifically enforced and breach of them result only in damages, the arbitration clause can be
specifically enforced by the machinery of the Arbitration Act. The appropriate remedy for breach
of the agreement to arbitrate is not damages, but its enforcement."

30.It seems to that the respective nature of accord and satisfaction and arbitration clause makes it

https://www.aironline.in/WW/fullContentByCitationSearch.html Page 18 of 21
AIR Online 12/09/24, 12:33 AM

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 dose not impose on one of the parties an obligation in
favour of the other but embodies an agreement that if any dispute arise with regard to the
obligation which the one party has undertaken to the other, such dispute shall be settled by
arbitration. A dispute whether the obligation under a contract have been discharged by an accord
and satisfaction is no less a dispute regarding the obligations under the contract. 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 with in the arbitration clause, there can of course be no arbitration clause but
the reason for that would not be that the arbitration clause has ceased to exist but that the dispute
is out side its scope. I am not saying that it is for the arbitrator to decided whether the arbitration
clause is surviving; that may in many cases have to be decided by the Court. That would depend
on the form of the arbitration agreement and on that aspect of the matter it is not necessary to say
anything now for the question does not arise.31. In my view therefore an accord and satisfaction
does not destroy the arbitration clause. An examination of what has been called the accord and
satisfaction in this case show this clearly. From what I have earlier said about the terms of the
settlement of February 22, 1949, it is manifest that it settled the disputes between the parties
concerning the breach of the contract for kettles camp and its consequences. All that it said was
that the contract had been broken causing damage and the claim to the damages was to be
satisfied "in terms of the settlement". It did not purport to annihilate the contract or the arbitrary
clause in it. I feel no doubt therefore that the arbitrator clause subsisted and the arbitrator was
competent to arbitrate. The award was not in my view, a ity.
32. The position is no different if the matter is looked 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 performed."
The settlement cannot be said to have altered the original contract 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 contract for the old one. As I have earlier stated it postulates
the existence of the contract and only decides the incidence of its breach.
33. It remains now to express my views on the question whether the settlement of February 22,
1949, amounted to an accord and satisfaction. I have earlier stated that an accord and satisfaction
is the purchase of a release from an obligation under a contract. This release is purchased by an
agreement which is the accord.
which is the accord. But this agreement like all other agreements must be supported by
consideration. The satisfaction is that consideration. It was formerly thought that the
consideration had to be executed. In other words, the consideration for which the release was
granted had to be received by the releasor before the release could become effective. The later
view is that the consideration may be executory; that the release may become effective the

https://www.aironline.in/WW/fullContentByCitationSearch.html Page 19 of 21
AIR Online 12/09/24, 12:33 AM

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 one 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 construction of a document. So much is well settled.
34. The question then is, Is it the proper construction of the settlement of February 22, 1949, that
the appellant 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 settlement? The High
Court held, accepting the respondent's contention, that CI. (6) of the settlement showed that the
appellant had accepted the promise of the contractors to pay the moneys and to execute a
hypothecation bond in full discharge of their obligations under the contract. That clause states that
"The contracts stands finally concluded in terms of the settlement." It is said that these words
show that it was intended to accept the promise of the contractors and thereupon to give them a
discharge from their obligations under the contract.
35. Now it seems to me that the words "stands finally concluded in terms of the settlement" do
not necessarily mean concluded by the promise of the contractors contained in the settlement. It
appears to me to be capable of the meaning that the contract is to stand concluded when its terms
have been carried out. The words are not, "stand finally concluded by the terms of the settlement"
but they are, "stand finally concluded in terms of settlement." These terms are that the contractors
would pay certain moneys by certain instalments and would secure these payments by a
hypothecation bond. So it would appear that the contract was not to be concluded till the terms
had been carried out, for otherwise it would not be a conclusion "on terms of the settlement".
36. That seems to me be also the reasonable interpretation to put on the document in view of the
circumstances of the case. The appellant was to receive a substantial sum under the 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 finally concluded in terms of the settlement" are so strong as
to impute such as 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 satisfaction. Till the terms of it had been carried
out, the appellant retained all its right under the contract.
37. There was one other point argued on behalf of the respondent which I think I should notice. It
was said that the award was in any event liable to be 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

https://www.aironline.in/WW/fullContentByCitationSearch.html Page 20 of 21
AIR Online 12/09/24, 12:33 AM

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. I have already said that in my opinion it
did not amount to an accord and satisfaction. So there was no error apparent on the face of the
award. It further seems to me that it is not open to the respondent to contend that the award is
liable to be set aside as disclosing the error mentioned above on the face of it. I do not find that
such a case was made in the application 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 arbitration 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 on the face of it as it awarded a sum in
excess of the amount fixed by the settlement. Whether the arbitrator was right or not I his decision
that the arbitration clause had not been superseded is relevant for that is the question that the court
was called upon to decide in the application.
38. In my view therefore the appeal 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
39. In accordance with the opinion of the majority this appeal fails and is dismissed with costs.
Appeal Dismissed

https://www.aironline.in/WW/fullContentByCitationSearch.html Page 21 of 21