Case Note & Summary
The dispute arose out of an agreement dated 13.8.1982 between the appellant, M/s. Indian Drugs & Pharmaceuticals Ltd., and respondent No.2, which was subsequently amalgamated with respondent No.1, for filling of vials with medicines. The agreement was for the period 1.4.1982 to 31.3.1984, subject to renewal by mutual agreement, and terminable by either party by three months' notice. The appellant terminated the agreement by notice dated 28.12.1983 effective 1.4.1984. During the subsistence of the agreement, the respondent carried out work allegedly not in accordance with terms; the defects came to notice in the second half of 1985. By letter dated 10.11.1987, the appellant demanded reimbursement of Rs.161.82 lacs, which the respondent disputed by letter dated 27.11.1987. The appellant invoked clause 19 of the agreement and referred the dispute to respondent No.3 appointed by the Chairman and Managing Director. Respondent No.2 challenged the appointment by filing an application under Section 33 of the Arbitration Act, 1940 read with CPC before the Subordinate Judge, Coimbatore, contending that clause 19 could not be invoked and did not cover the dispute. The Subordinate Judge decided main issues in favour of the respondent; the High Court of Madras upheld that order. The appellant appealed to the Supreme Court under Article 136. The main legal issues were: whether the arbitration clause survived termination of the contract; whether the clause could be invoked for the present dispute; whether the Coimbatore court had jurisdiction; and whether the reference was barred by limitation. The appellant argued through the learned Attorney General that the arbitration clause survived termination and covered quantity defects as affecting quality, that Coimbatore court lacked jurisdiction under Section 20 CPC, and that limitation was not barred because cause of action accrued in 1985. The respondents, through Shri Desai and Ms. Indu Malhotra, contended that the arbitration clause perished with the contract, the clause only covered quality of material, Coimbatore court had jurisdiction because petitioner had business there and letter from Coimbatore, and the claim was barred by limitation under Article 137 Limitation Act. The Supreme Court, applying the principles from Union of India v. Kishorilal Gupta & Bros., held that an arbitration clause is collateral but integral and perishes only upon substitution, rescission or alteration of the contract, not on mere termination for performance; hence clause 19 survived termination. On the scope of clause 19, the court did not decide whether quantity defect fell within quality but stated that if appellant's case were correct, the clause would attract. On jurisdiction, the court held that Section 20 CPC requires jurisdiction where the opposite party carries on business, not where the petitioner does, and that mere reply letter from Coimbatore did not give rise to cause of action; thus Coimbatore court lacked jurisdiction. On limitation, the court noted that limitation applies to arbitration and can be raised at any time; it considered rejoinder averments showing complaints in early 1985 and joint inspection in July 1985, which if correct would mean cause of action accrued by July 1985. The provided excerpt ends before the final operative order on limitation and overall relief; however, the court's analysis favoured the appellant on survival and jurisdiction while leaving the limitation determination incomplete.
Headnote
A) Arbitration - Survival of Arbitration Clause - Termination of Contract - Indian Contract Act, 1872, Section 62; Arbitration Act, 1940 - An arbitration clause is a collateral term but integral part of contract; it perishes with the contract only when the contract is substituted, rescinded or altered, but survives termination of performance for disputes arising under or in connection with the contract - Court applied the principles in Union of India v. Kishorilal Gupta & Bros. and held that clause 19 of the agreement survived despite termination with effect from 1.4.1984 because there was no substitution, rescission or alteration - Held that the arbitration clause remained operative (Paras 7-10). B) Arbitration - Scope of Arbitration Clause - Quality of Material - Arbitration Act, 1940 - Clause 19 referred disputes regarding interpretation or application of the agreement and differences about quality of material; dispute concerned vials filled with less quantity and not as per specification - Court did not express any opinion on whether quantity defect fell within 'quality' but stated that if the appellant's case be correct, the arbitration clause would get attracted - Held that the clause could be invoked if facts supported appellant's contention (Para 11). C) Civil Procedure - Jurisdiction - Section 20 Code of Civil Procedure, 1908 - Section 33 Arbitration Act, 1940 application filed before Subordinate Judge Coimbatore - Court observed that Section 20 CPC permits assumption of jurisdiction by the court where the opposite party carries on business, not where the petitioner or plaintiff carries on business; mere reply letter from Coimbatore did not give rise to part of cause of action - Held that Coimbatore court had no jurisdiction (Para 12). D) Limitation - Arbitration Proceedings - Limitation Act, 1963, Article 137 - Plea of limitation can be raised at any time as it relates to jurisdiction to entertain matter - Court referred to Panchu Gopal Bose v. Board of Trustees for Port of Calcutta holding Limitation Act applies to arbitration proceedings - Examined rejoinder averments indicating complaints in early 1985 and joint inspection in July 1985; if correct, cause of action accrued by July 1985 and not November 1987 - Final determination on limitation not available in provided excerpt (Paras 13-15).
Issue of Consideration
(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; (ii) Whether the arbitration clause, if held to be operative, could be invoked for the purpose at hand; (iii) Whether the Court of Sub-ordinate Judge at Coimbatore had jurisdiction to entertain the application under section 33 of the Arbitration Act; (iv) Whether the reference to the arbitrator was barred by limitation
Final Decision
The Supreme Court held that clause 19 arbitration clause survived despite termination of contract with effect from 1.4.1984; the Coimbatore court lacked jurisdiction under Section 20 CPC; the limitation issue was considered but the final operative order on limitation and overall relief is not contained in the provided excerpt.
Law Points
- An arbitration clause is a collateral term but integral part of contract
- arbitration clause perishes with contract only upon substitution
- rescission or alteration
- not upon mere termination for performance
- arbitration clause survives for disputes arising under or in connection with contract after termination
- Section 20 CPC jurisdiction lies where opposite party carries on business
- not where petitioner/plaintiff carries on business
- Limitation Act applies to arbitration proceedings
- Article 137 Limitation Act prescribes three-year limitation for arbitration reference
