Case Note & Summary
The appellant, Zenith Drugs & Allied Agencies Pvt. Ltd., was appointed as a clearing and forwarding agent by M/s Rhone Poulene India Limited (RPIL) under an agreement dated 01.05.1997, which contained an arbitration clause (Clause 17). RPIL merged with the respondent, Nicholas Piramal India Ltd., and terminated the agreement. The appellant filed Title Suit No.241 of 2001 seeking declarations that the contract was valid and subsisting. That suit was compromised on 11.12.2001, and a compromise decree was passed on 24.12.2001, under which the respondent paid Rs.23,50,000/- and appointed the appellant as a stockist. Subsequently, disputes arose regarding alleged diversion of stocks, and the respondent filed a criminal complaint and sought to set aside the compromise decree on grounds of fraud. The appellant then filed Money Suit No.73 of 2003 claiming Rs.20 crores in compensation for losses caused by the respondent's acts. The respondent filed an application under Section 8 of the Arbitration and Conciliation Act, 1996, seeking reference to arbitration based on Clause 17 of the original agreement. The trial court dismissed the application, holding that the compromise decree superseded the arbitration clause. The High Court reversed this decision, referring the parties to arbitration. The Supreme Court allowed the appeal, holding that the dispute in the money suit arose from the compromise decree, not the original agreement, and therefore the arbitration clause was not applicable. The court emphasized that a compromise decree is a separate contract that extinguishes the original contract, and the arbitration clause cannot be invoked for disputes arising from the compromise. The court also noted that the respondent's challenge to the compromise decree on grounds of fraud was pending, and that issue could not be decided in the Section 8 application. The Supreme Court set aside the High Court's order and restored the trial court's order dismissing the Section 8 application.
Headnote
A) Arbitration Law - Reference to Arbitration - Section 8 of the Arbitration and Conciliation Act, 1996 - Compromise Decree - Once a suit is decreed on compromise, the arbitration clause in the original agreement cannot be invoked for the same dispute, as the compromise supersedes the original contract. The court held that the subsequent money suit based on the compromise is not covered by the arbitration clause. (Paras 11-18) B) Arbitration Law - Scope of Arbitration Clause - Section 7 of the Arbitration and Conciliation Act, 1996 - Dispute Must Relate to Contract - For a reference to arbitration under Section 8, the dispute must relate to the contract containing the arbitration clause. Where the dispute arises from a compromise decree, which is a separate contract, the arbitration clause in the original agreement does not apply. (Paras 14-17) C) Civil Procedure - Compromise Decree - Order 23 Rule 3 CPC - Effect of Compromise - A compromise decree is a contract between the parties and supersedes the original agreement. The court held that the rights and obligations of the parties are governed by the compromise, not the original contract. (Paras 12-13)
Issue of Consideration
Whether the High Court was right in referring the parties to arbitration under Section 8 of the Arbitration and Conciliation Act, 1996, despite the existence of a compromise decree in a previous suit between the same parties concerning the same subject matter.
Final Decision
The Supreme Court allowed the appeal, set aside the impugned order of the High Court dated 26.03.2007, and restored the order of the trial court dated 19.02.2005 dismissing the application under Section 8 of the Arbitration and Conciliation Act, 1996.
Law Points
- Arbitration clause cannot be invoked after compromise decree
- Dispute must relate to contract containing arbitration clause
- Section 8 application not maintainable when dispute arises from compromise decree
- Civil court retains jurisdiction over matters outside arbitration clause
