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PETITIONER: M/S.INDIAN DRUGS & PHARMACEUTICALS LTD.

       Vs.

RESPONDENT: M/S. INDO SWISS SYNTHETICS GEM MANUFACTURING CO.LTD. & ORS.

DATE OF JUDGMENT14/11/1995

BENCH: HANSARIA B.L. (J) BENCH: HANSARIA B.L. (J) RAMASWAMY, K.

CITATION:  1996 AIR  543            1996 SCC  (1)  54  1995 SCALE  (6)438

ACT:

HEADNOTE:

JUDGMENT:                       J U D G M E N T HANSARIA, J.      Special leave granted. 2.   The appellant entered into an agreement with respondent No.2 (which  was subsequently  amalgamated  with  the  first respondent and  became one  of its  division)  on  13.8.1982 whereunder the  respondent was to undertake filling of vials with medicines.  The  agreement  was  for  the  period  from 1.4.1982  to   31.3.1984,  subject   to  renewal  by  mutual agreement thereafter.  It was also subject to termination by either party  by giving  three months  notice to  the other. Such a  notice was  given by  the  appellant  on  28.12.1983 stating that  the  agreement  would  stand  terminated  with effect  from   1.4.1984.  During   the  subsistence  of  the agreement,  the   respondent  undertook   some  work  which, according  to  the  appellant,  was  not  in  terms  of  the agreement. After  the defect  came  to  the  notice  of  the appellant, which was sometime in the second half of 1985, it called upon  the respondent, by its letter of 10.11.1987, to reimburse the loss which was stated to be a sum of Rs.161.82 lacs. The  respondent  disputed  the  claim  by  its  letter 27.11.1987,  whereupon   by  invoking   clause  19   of  the agreement, the  appellant referred the dispute to respondent No.3 who  had been  appointed by  the Chairman  and Managing Director of  the appellant in exercise of power conferred by clause 19. The appointment was challenged by respondent No.2 by filing  an application under s.33 of the Arbitration Act, 1940, read  with certain  provisions of  the code  of  Civil Procedure,  before   the  Court   of   Sub-ordinate   Judge, Coimbatore, stating,  inter alia,  that  clause  19  of  the agreement could  not be  invoked  to  refer  the  matter  to arbitration. In any case clause 19 did not permit resolution of the dispute of the type raised by the appellant. The Sub- ordinate  Judge   decided  main  issues  in  favour  of  the respondent, which  order was  challenged by the appellant in

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the High  Court of  Judicature at  Madras.  The  High  Court upheld the  order of  Sub-ordinate Judge.  Hence this appeal under Article 136 of the Constitution. 3.   The following  questions arise for determination on the basis of the pleadings of the parties :      (i)  Whether  the   arbitration   clause      remained in  existence by  1988 when the      arbitrator was  appointed on the face of      termination  of  the  agreement  by  the      appellant with effect from 1.4.1984 ?      (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 ?      Apart from  the above,  the first  two respondents have raised the question of limitation also in these proceedings. 4.   We propose  to express  our views on the four questions in the order noted by us. 5.   Whether the arbitration clause remained in existence by      1988 when  the arbitrator  was appointed on the face of      termination of  the agreement  by  the  appellant  with      effect from 1.4.1984?      This is  the real  bone of  the contention  between the parties. Shri  Desai, duly  assisted by  Ms. Indu  Malhotra, strenuously  urged   that  as   the  appellant   itself  had terminated the  agreement with  effect  from  1.4.1984,  the arbitration clause,  which is  a part  of the agreement, had ceased to  be operative  after 1.4.1984.  This contention is seriously disputed by the learned Attorney General appearing for the appellant. 6.   To decide this dispute between the parties, it would be enough to note clauses 17 and 19 of the agreement which read as below :      "17. The  agreement   will  be  for  the      period  from   1.4.1982   to   31.3.1984      subject to  renewal by  mutual agreement      thereafter. The  agreement is subject to      termination by  either party  by  giving      three months notice to other party.      19.  Any    dispute     regarding    the      interpretation or  application  of  this      agreement and  any difference  about the      quality  of   the  material   shall   be      referred to  an arbitrator  appointed by      the Chairman  and Managing  Director  of      IDPL, whose  decision shall be final and      binding on both the parties."                               (emphasis ours) 7.   Learned Attorney  General submitted that, as to when on termination of  an agreement,  arbitration clause would also cease to  be operative,  has been well explained by a three- Judge Bench  of this  Court in Union of India vs. Kishorilal Gupta & Bros., 1960 (1) SCR 493. In that case Subba Rao, J., as he  then was,  speaking for  the majority stated at pages 513 to  514 of  the report that the discussion of the law on the subject led to the emergence of the following principles in this regard :      "(1) An   arbitration    clause   is   a      collateral  term   of  a   contract   as      distinguished   from   its   substantive      terms; but nonetheless it is an integral      part of it;

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    (2)  however      comprehensive       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      operation, for  along with  the original      contract, it  is also void, in the 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 purposes  in respect of disputes      arising under  it or  in connection with      it. As the contract subsists for certain      purposes,   the    arbitration    clause      operates in respect of these purposes." 8.   So, an  arbitration clause,  howsoever comprehensive in terms, can be operative only if the contract is in existence (vide point  (2) above).  Under point  No.6, however, it has been stated  that when  a question  of breach  of  contract, inter alia, is raised after the termination of the contract, it is  the performance  of the contract that comes to an end on termination  of the  contract, but  the same  remains  in existence  for  certain  purposes  in  respect  of  disputes arising  under   it  or  in  connection  with  it.  It  was, therefore, stated  under this  point that  as  the  contract subsist  for   certain  purposes,   the  arbitration  clause operates in respect of these purposes. 9.   Shri Desai,  appearing for  the  respondents,  has  not disputed that  the law  laid down in Kishorilal Gupta’s case is still good law, which is apparent from what was stated by a two-Judge  Bench in  Damodar Valley  Corporation vs.  K.K. Kar, 1974  (2) SCR  240, which  decision Shri Desai seeks to rely in  support of his submission. The learned counsel read out to  us that portion of the judgment which finds place at pages 243 to 244, which is as below :      "As the  contract is  an outcome  of the      agreement  between  the  parties  it  is      equally open  to the  parties thereto to      agree to  bring it to an end or to treat      it as  if it  never existed. It may also      be open  to the parties to terminate the      previous contract  and substitute in its      place  a   new  contract  or  alter  the      original contract  in such a way that it      cannot  subsist.  In  all  these  cases,

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    since the  entire contract is put an end      to, the  arbitration clause,  which is a      part of it, also perishes along with it.      Section   62   of   the   contract   Act      incorporates  this   principle  when  it      provides  that   if  the  parties  to  a      contract  agree   to  substitute  a  new      contract or  to rescind or alter it, the      original contract need not be performed.      Where, therefore,  the  dispute  between      the parties is that the contract itself,      does not  subsist either  as a result of      its being  substituted by a new contract      or by  rescission  or  alteration,  that      dispute  cannot   be  referred   to  the      arbitration as  the  arbitration  clause      itself would  perish if  the averment is      found  to   be  valid.   As   the   very      jurisdiction  of   the   arbitrator   is      dependent  upon  the  existence  of  the      arbitration clause  under  which  he  is      appointed, the  parties have no right to      invoke a  clause which perishes with the      contract." 10.  This shows  that the arbitration clause would perish in case where  either there  is substitution of a new contract, or rescission  or alteration  of the  original contract. The present is  apparently  and  admittedly  not  such  a  case. Therefore, what  has been  stated in  this  decision  cannot assist the  respondents. On  the other  hand, the  ratio  of Kishorilal Gupta  squarely applies. We, therefore, hold that clause 19  dealing with  arbitration did survive despite the contract having come to an end with effect from 1.4.1984. 11.  Whether  the   arbitration  clause,   if  held   to  be      operative, could be invoked for the purpose at hand ?      On this,  the contention  of the respondent is that the clause 19  visualises arbitration  on "any  difference about the quality  of the  material", whereas  in the present case the dispute  is about the vials as filled up containing less quantity and not as per specification. As to this, the stand of the  appellant is  that if the quantity would be less and not as per specification, the quality would get affected. We do not  propose to express any opinion on this aspect of the matter. Suffice  to say  in this proceeding that if the case of the appellant be correct the arbitration clause would get attracted. 12.  Whether the  Court of  Sub-ordinate Judge at Coimbatore      had jurisdiction  to entertain  the  application  under      section 33 of the Arbitration Act ?      On the  question of  jurisdiction being  raised by  the appellant, a  queer view  was taken  inasmuch as  the  court stated that  the petitioner  before him  (who is  respondent herein) having  business at  Coimbatore, the court there had jurisdiction. This  has really put section 20 of the Code of Civil Procedure  on its  head, as  it permits  assumption of jurisdiction by  that court where the opposite party carries on business,  and not the petitioner or plaintiff. The other point  urged   to  sustain   jurisdiction   was   that   the respondent’s letter  dated 27.11.1987  had been  issued from Coimbatore. This  fact could not have conferred jurisdiction because the  fact  of  mere  reply  to  the  notice  of  the appellant did not give rise to any part of "cause of action" within  the   jurisdiction  of  Coimbatore  court.  We  are, therefore,  of   the  view  that  Coimbatore  court  had  no jurisdiction.

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13.  Was  the   reference  to   the  arbitrator   barred  by      limitation ?      The plea  of limitation  had not  been  urged  earlier. That, however,  is not  material as a plea of limitation can be raised  virtually at  any point  of time  because  it  is relatable to  jurisdiction to  entertain a matter. According to Shri  Desai as  the appellant  had  for  the  first  time required the  respondent to  reimburse the  supposed loss by its letter  of 10.11.1987,  which was after about 4 years of the  supply,   the  invocation  of  arbitration  clause  was apparently barred  by limitation, which period could at best at three  years as provided by Article 137 of the Limitation Act, 1963.  We are  referred in  this connection  to a Bench decision of  this Court to which one of us (K.Ramaswamy, J.) was a party- the same being in the case of Panchu Gopal Bose vs. Board  of Trustees  for Port  of Calcutta,  1993 (4) SCC 338. This  decision has  held the  Limitation Act applies to arbitration  proceedings   and  the   period  visualised  by different provisions  of the Limitation Act would decide the question of limitation in an arbitration proceeding. 14.  In reply,  the learned  Attorney General  brings to our notice the  averments finding  place in the Rejoinder of the appellant. We are referred to the Rejoinder because the plea of limitation  was raised for the first time in the counter- affidavit of  the respondent  in its  para 14.  The relevant reply in the Rejoinder is as below :      "It is  stated that the respondents were      informed of  the rejection  of the frugs      supplied by  them as early as in 1985 on      account of  short filling  of  vials  by      reference  to  the  complaints  received      from the  customers particularly Defence      Department. Following this, Shri Chander      Sekharan  of   the  Respondent   Company      visited  the   petitioner’s  office   at      Madras on  3.5.1985  and  10.7.1985  for      discussions  in   the  matter.   It   is      mutually agreed  that a joint inspection      of samples  from all  the batches should      be conducted  in the  laboratory of IDPL      at Madras.  Accordingly,  the  reference      samples from  the  respondent’s  factory      were brought  for the  purpose of  joint      inspection to  the petitioner’s  factory      at Madras.  However, the  respondent did      not   sent    any   representative   for      participation in  the  joint  inspection      and   ultimately   after   waiting   for      considerable time, the petitioner had to      undertake  inspection   and   tests   on      22.7.1985 by  itself and  found that the      drugs had  not been  filled as  per  the      specifications    and     the     weight      verification was  also  not  within  the      permissible limit." 15.  Thus, the  complaint from  the customers,  particularly Defence Department,  came to  be known  by the  appellant in early 1985  whereafter the  matter was  taken  up  with  the respondent and the tests ultimately were done in July, 1985. If these  facts be correct, it has to be held that the cause of action  to claim  damages really  accrued by  July,  1985 which was  thereafter made  by a  letter of  November,  1987 followed by  appointment of  arbitrator in  May,  1988.  The arbitration was thus not "manifestly barred" as contended by Shri Desai.  We do  not propose to say anything more on this

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aspect at this stage. 16.  In the aforesaid premises, we do not find any threshold infirmity  in  the  invocation  of  clause  19  and  to  the reference of  the dispute  to respondent  No.3.  Shri  Desai submits  that   respondent  No.3  may  not  be  required  to arbitrate inasmuch  as he being an appointee of the Chairman and Managing Director of the appellant himself, respondents’ case may  not be  fairly examined. He prays that any retired High Court Judge may be appointed as an arbitrator by us. We have not  felt inclined  to accept  this submission, because arbitration   clause    states   categorically    that   the difference/dispute  shall  be  referred  "to  an  arbitrator appointed by  the Chairman  and Managing  Director of  IPDL" (Indian  Drugs   &  Pharmaceutical   Limited)  who   is  the appellant. This  provision in  the arbitration clause cannot be given  a go-bye  merely at  the askance of the respondent unless he  challenged its  binding nature  in an appropriate proceeding which he did not do. 17.  In the  result, we  allow  the  appeal  and  leave  the appointed arbitrator  to  deal  with  difference/dispute  in accordance with  law. In  the facts and circumstances of the case, let the parties bear their own costs.