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Hindustan Paper Corporation v. N.A Mathew

Kerala High Court

Oct 15, 1986

Judgment

Subsequent
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Structured Summary of the Opinion (Kochu Thommen, J.)

Factual and Procedural Background

These two appeals arise from a common order of the learned Subordinate Judge, Kotsayam in O.P. (Arb.) Nos. 33 of 1984 and 85 of 1984 revoking the authority of an arbitrator to be appointed under an arbitration clause contained in the written contract between the parties. The order under challenge was made on the basis of applications filed by the respondent (the contractor) under Section 20 of the Arbitration Act, 1940.

The contractor contended that amounts were due and payable to him by the appellants (the company) for work executed under an Est. Bl agreement and subsequently claimed additional payment for escalation in prices. The company contended there was no arbitrable dispute because the contract had been fully performed and the contractor's claims had been finally settled (final bill paid and accepted).

The learned Subordinate Judge revoked the jurisdiction of the arbitrator (who had not yet been appointed by the designated officer) and allowed the contractor to nominate his own arbitrator. The High Court noted that the learned Judge did not make a proper order under Section 20(4) of the Arbitration Act and should have directed either the filing of the arbitration agreement or refused to do so; if filed, the designated authority should be given the opportunity to appoint the arbitrator before the court exercised the power to appoint one.

The two appeals are recorded as M.F.A. No. 129 of 1986 and M.F.A. No. 130 of 1986. The material facts in both appeals are similar: work was executed and completed; final bills were prepared and payments were made; subsequently the contractor sought additional payment on account of price escalation; the company denied such extra payment and asserted full and final settlement; the contractor then sought appointment of an arbitrator under the arbitration clause and, failing agreement, moved the court under Section 20.

The crucial factual difference is that in M.F.A. No. 130 of 1986 the contractor had executed a written communication (Ext. B 5 dated 23-5-1983) expressly recording that the final bill had been accepted and that there were "no further claims" in respect of that work. No comparable clear written admission of full and final settlement was proved in M.F.A. No. 129 of 1986.

Legal Issues Presented

Whether an arbitration clause continues to operate where the parties have recorded a clear written full and final settlement (i.e., whether the arbitration clause survives when the contract has been mutually extinguished by such written settlement).
Whether the dispute regarding additional payment for price escalation is an arbitrable dispute where there is no clear written memorandum of full and final settlement.
What is the proper procedural course under Section 20 of the Arbitration Act, 1940 — specifically the duty of the court to order the filing of the arbitration agreement and to allow the designated authority an opportunity to appoint an arbitrator before the court appoints one.

Arguments of the Parties

Contractor's Arguments (Respondent)

The contractor claimed amounts were due and payable for work executed under the Est. Bl agreement.
He sought additional payment on account of escalation in prices and demanded appointment of an arbitrator under the arbitration clause.
Accordingly, he petitioned the court under Section 20 for appointment of an arbitrator when the company declined to appoint one.

Company's Arguments (Appellant)

The company contended there was no arbitrable dispute because the contract was fully and completely performed and the contractor's claims had been finally settled.
Where parties have by mutual consent recorded satisfaction of all claims and full and final payment has been made and accepted, nothing remains to be done under the contract and the arbitration clause does not survive.
The company argued that the dispute raised is effectively as to the very existence of a claim under the contract, not a matter remaining for arbitration.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Union of India v. Kishorilal, A.I.R. 1959 S.C. 1362	Principles that an arbitration clause is collateral and integral to the contract; it requires the existence of the contract to operate; it perishes with the contract where the contract is extinguished by mutual agreement or superseded; but arbitration survives in many categories (repudiation, breach) where disputes still arise under the contract.	The court relied on these principles as decisive: where the contractor had in writing recorded full and final settlement (M.F.A. 130), nothing remained to be done and the arbitration clause had no operation; conversely, absent such clear written settlement (M.F.A. 129), the question remained arbitrable.
Damodar Valley Corporation v. K.K. Kar, (1974) 1 SCC 141 : A.I.R. 1974 S.C. 158	Cited in support of the general doctrinal discussion concerning arbitration clauses and their operation in relation to the underlying contract.	Used as part of the body of authority supporting the court's statements about when arbitration clauses survive or perish; the court grouped it with other authorities to support the legal position adopted.
Maihati Jute Mills v. Khyalirsa, A.I.R. 1968 S.C. 522	Cited among authorities dealing with arbitration clause principles and related questions.	Appears as supporting authority in the court's doctrinal exposition that arbitration clauses are collateral and their operation depends on the continued existence of the contract for the relevant purposes.
Paul Wilson & Co. v. Blumenthal, (1983) 1 All. ER 34	Cited as part of comparative authorities concerning arbitration clause operation.	Referenced by the court as additional authority in the discussion of when arbitration remains available despite termination/repudiation of the contract.
Heyman v. Darwins Ltd., (1942) A.C. 356 (H.L.) : (1942) 1 All ER 337 (H.L.)	Cited among English authorities dealing with arbitration clauses and their survival or operation.	Cited to support the general principle that certain disputes arising after termination remain arbitrable while others do not, as part of the court's survey of authority.
Hirji Mulji v. Cheong Yue Steamship Co., (1926) A.C. 497 (P.C.)	Cited as a precedent relevant to the court's exposition about arbitration clauses and their operation vis-à-vis the underlying contract.	Included in the list of authorities supporting the court's legal framework and applied in explanation of when arbitration clauses survive contractual termination for certain disputes.
Judgment in M.F.A. Nos. 115 & 116 of 1985	Referred to as an internal authority / earlier decision relevant to the topic (no separate citation provided in the text beyond internal reference).	Mentioned by the court as also relevant to the principles discussed; no separate detailed application is set out in the opinion beyond citation.

Court's Reasoning and Analysis

The court's analysis proceeded in a structured manner:

The court identified the key doctrinal principle (drawn principally from Union of India v. Kishorilal and supported by other authorities) that an arbitration clause is collateral to but integral with the contract; its operation presupposes that the contract exists for the purposes of the dispute. If the contract is void ab initio or is mutually and clearly extinguished by the parties (for example by a written full and final settlement), the arbitration clause perishes with it. Conversely, if the contract has merely been repudiated or performed but disputes remain about claims arising under it, the arbitration clause remains operative for those disputes.
The court applied this principle to the facts of the two appeals. In M.F.A. No. 130 of 1986 the contractor had executed Ext. B 5 (dated 23-5-1983) expressly recording that the final bill had been accepted and that there were "no further claims." The court treated this clear written recording of full and final settlement as extinguishing any further contractual claims and therefore as removing the operation of the arbitration clause; consequently the arbitrator had no jurisdiction and the court had no power to appoint one in that case.
By contrast, in M.F.A. No. 129 of 1986 the court found no comparable, clear documentary evidence that the parties had recorded a full and final settlement. Although Ext. B 3 (the final bill signed by both parties) existed, there was no document proving that any cheque paid under that bill was accepted by the contractor in full and final settlement. Because clear evidence of full and final settlement was absent, the court held that the question whether there had been a full and final settlement was itself a matter for the arbitrator and therefore the dispute remained arbitrable.
The court also analysed the procedural errors below: the learned Subordinate Judge had revoked the arbitrator's jurisdiction and allowed the contractor to nominate an arbitrator but had omitted to pass the procedural order required by Section 20(4) of the Arbitration Act. The High Court observed that the proper course was to order filing of the arbitration agreement and to give the designated authority time to appoint the arbitrator in accordance with the agreement; only if that authority refused or failed to do so could the court appoint an arbitrator.
Given the circumstances and a recorded submission by counsel for the company that the arbitration agreement would be filed and that the designated officer would appoint an arbitrator within a month, the High Court directed that the arbitration agreement be filed in the court below and recorded the undertaking about appointment by the designated officer. The court therefore corrected the lower court's omission without remitting the case merely for that limited procedural purpose.

Holding and Implications

Holding:

M.F.A. No. 130 of 1986: Allowed. The court set aside the order under appeal and dismissed the suit because Ext. B 5 constituted a clear written, full and final settlement, and therefore the arbitration clause had no operation and the arbitrator had no jurisdiction.
M.F.A. No. 129 of 1986: Allowed to a limited extent. The court set aside the order under appeal to the extent that it should have directed the filing of the arbitration agreement and given the designated authority an opportunity to appoint the arbitrator. Because there was no clear written full and final settlement in evidence, the question of settlement (and thus arbitrability) remained for the arbitrator to decide.
The appellant (the company) was held entitled to costs throughout in both appeals.

Implications:

The direct effects of the decision are limited to the parties: in one appeal (No. 130) the claim was held extinguished by a written admission of full and final settlement and the arbitration clause was held inoperative; in the other (No. 129) the matter remains arbitrable and the court ordered procedural steps for appointment of an arbitrator. The opinion applies existing authority (notably Union of India v. Kishorilal) to these facts; it does not purport to lay down a new legal principle beyond the application of those authorities to the factual distinction between a clear written full and final settlement and its absence.

Note: This summary is prepared exclusively from the text of the provided opinion. No facts, arguments, or conclusions have been added beyond those contained in that opinion.

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The Judgment of the Court was delivered by

Kochu Thommen, J.:— These two appeals arise from the common order of the learned Subordinate Judge, Kotsayam in O.P (Arb.) Nos. 33 of 1984 and 85 of 1984 revoking the authority of the arbitrator to be appointed in terms of the arbitration clause contained in the contract in writing between the parties. This order is made on the basis of applications filed by the respondent (the “contractor”) in each of these appeals under S. 20 of the Arbitration Act, 1940.

2. The contention of the contractor was that amounts were due and payable to him by the appellants (the “company”) in respect of work executed by him in accordance with Est Bl agreement. The company stated that there was no arbitrable dispute between the parties as the contract was fully performed and the contractor's claims thereunder had been finally settled. The contractor in either proceeding contended that he was entitled to certain extra payment on account of escalation in price. The reply of the company was that no such extra payment was due or payable once the final bill was paid and the amount was accepted by the contractor in full settlement of all Ms claims. The learned Judge revoked the jurisdiction of the arbitrator, who was yet to be appointed by the designated officer in accordance with the terms of the contract, and allowed the contractor to nominate his own arbitrator. We are surprised that the learned Judge passed no order in either procceding under S. 20(4). He should have disposed of the application either by ordering or not ordering the filing of the arbitration agreement. If he had ordered that the agreement be filed, it was then for the designated authority mentioned under the agreement to appoint the arbitrator. Only if such authority refused to do so, was it open to the court to appoint an arbitrator.

3. The facts in M.F.A No. 129 of 1986 are: Pursuant to Ext. Bl, the contractor commenced execution of the work, He was expected to complete the work on or before 25-3-1979. But by mutual agreement time was extended up to 10-1-1981. The work was completed by him by that time. The final bill signed by both the parties was prepared on 3-7-1982. The entire amount due to the contractor, as per the the final bill was paid. Subsequently the contractor by his letter dated 22-9-1982 asked the company for additional amounts by way of extra rates for the work already done and paid for in terms of Ext. B 3. This additional payment was sought allegedly on the ground that the prices had escalated. This claim was refuted by the company by Ext. B 5 dated 8-12-1982. The contractor then called upon the company by Ext. B 6 dated 22-12-1982 to appoint an arbitrator in terms of the agreement. The company stated by Ext. B 7 dated 14-4-1983 that there was no arbitrable dispute as all claims of the contractor under the contract had been fully and finally settled. Thereupon the contractor moved the court below under S. 20. The facts in M.F.A No. 130 of 1986 are identical except in one respect. Like in M.F.A No. 129 of 1986, so in M.F.A No. 130 of 1986, work was completed; final bill was submitted and paid; subsequently the contractor claimed additional rates allegedly on the ground of escalation of prices; that was refuted by the company; thereupon he demanded that an arbitrator be appointed; the company stated that there was no arbitrable dispute, and, the contractor then moved the court under S. 20. But one crucial difference between the two cases is that in M.F.A 130 of 1986 Ext. B 5 dated 23-5-1983 addressed by the contractor to the company evideaces full and final settlement. This letter states:

“Final bill at the above work recorded from page 62 to 95 of M. Book No. 1902 has been aceepted and certified that there are no further claims as far as this work is concened.

(emphasis supplied)

4. There is no dispute that the claim in question ooocerns the work mentioned in Ext. B 5. It records the full and final settlement of all claims in relation to that work. In the circumstances, in so far as M.F.A No. 130 of 1986 is concerned, the contractor has in writing recorded his full satisfastion. No such clear evidence exists in writing in M.FA No. 129 of 1986. This is the crucial difference between the two cases on which the question of law discussed at the bar turns.

5. It is well settled that unilateral repudiation or rescission of the con tract does not put an end to the operation of the arbitration clause. The object of this clause, which is supplementary and collateral in character, is settlement of disputes arising under the contract. If the con tract is brought to an end by the unilateral action of one of the parties, the claims which arose under the contract are not automatically destroyed. All disputes respecting such claims, whether they relate to performance during the period prior to the repudiation or to damages consequent upon repudi ation, remain arbitrable under the contract and the jurisdiction of the arbi trator remains in full force. On the other hand, if the contract never existed or it was void ab initio; or if the parties have by mutual agreement put an end to the contract by superseding it by another contract; or if they have mutually acknowledged due and complete performance of the contrast, then nothing further remains to be done under the substantive terms of the contract, and the collateral agreement contained in the arbitration clause does not survive the contract. This is the principle adopted by the Supreme Court in Union of India v. Kishorilal, A.I.R 1959 S.C 1362. Subba Rao, J., speakiog for the majority, observed:

“The following principles relevant to the present case emerge from the aforesaid discussion: (1) An arbitration clause is a collateral termof 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 exised, 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 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 has come to an end, but the contract is still in existence for certain pruposes 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”.

6. See Damodar Valley Corporation v. K.K Kar, (1974) 1 SCC 141 : A.I.R 1974 S.C 158; Maihati Jute Mills v. Khyalirsa, A.I.R 1968 S.C 522; Paul Wilson & Co. v. Blumenthal, (1983) 1 All. ER 34; Heyman v. Darwtns Ltd., (1942) A.C 356 (H.L) : (1942) 1 All ER 337 (H.L), Hirji Mulji v. Cheong Yue Steamship Co., (1926) A.C 497 (P.O). See also the judgment in M.F.A Nos. 115 & 116 of 1985.

7. The argument of the company is that the arbitration clause ceased to operate when the contract was duly and completely performed. Shri. M. Ramachandran, appearing for the company, submits that the dispute sought to be raised is not one arising under or in respect of or relating to the contract. The dispute is as to the very existence of the contract. Where the parties have by mutual consent recorded satisfaction of all claims which arose under the contract, and full and final payment has been made and accepted, nothing remains to be done under the contract, and the contract has therefore ceased to exist. In such circumstances, counsel points out, the arbitration clause, though collateral and supplementary, but being an integral part of the contract, has no separate life of its own. This argument is perfectly valid provided the facts support it.

8. In M.F.A No. 129 of 1986 there is no clinching evidence that the parties came to a full and final settlement. We say this notwithstanding Ext. B 3 which is the final bill signed by bath parties. No document has been produced to show that the cheque paid under that bill was accepted by the contractor in full and final settlement. On the other hand, there is such a document in M.F.A No. 130 of 1986, that is Ext. B 5 dated 23-5-1983 which we have set out above. That is a case which squarely falls within the principle relied on by Shri. Ramachandran. Nothing survives in that case. The arbitrator has no jurisdiction. The court has no power to appoint one. M.F.A No. 130 of 1986 is accordingly allowed, and the order under appeal is set aside. The suit shall stand dismissed. Since the full and final settlement in M.F.A No. 129 of 1986 is not in evidence-at any rate not in clear evidence-we are of the view that the question as to full and final settlement is its-If a matter which has to be decided by the arbitrator. Unlike in the other case where the question cannot arise because of the clear and categoric admission of the contractor in writing, hers the question is still at large and is therefore arbitrable along with the other questions raised by the contractor.

9. However, as already stated, the court below did not pass a proper order under S. 20. The court ought to have, in the light of the reasoning which it adopted, directed the filing of the arbitraion agreement and thereupon the designated authority should have been given time to appoint an arbitrator. Only if that authority refused to comply, or failed to comply within reasonable time, with the direction in that behalf, could the court exercise its power to appoint an arbitrator. That is what it ought to have done. However, there is no need to send back the case for that purpose to the court below. Accordingly we order that the appellant shall file the arbitration agreement in the court below. Shri. Ramachandran submits that the arbitration agreement will be filed in the court below forthwith, and within a month from today the designated officer will appoint the arbitrator in terms of the agreement. This submission is recorded. In the circumstances, M.F.A No. 129 of 1986 is allowed to the limited extent indicated above, and to that extent the order under appeal shall stand set aside.

10. The appellant is entitled to costs throughout in both the appeals.

11. Allowed.