Reportable

IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.6399  OF 2009 (Arising out of SLP(C) No. 21323 of 2007)

The Branch Manager,  M/s. Magma Leasing &Finance Limited & Anr.        …Appellants

Versus   Potluri Madhavilata & Anr.             …Respondents

JUDGEMENT

R.M. Lodha, J.

Leave granted.

2. The core question that falls to be determined in this  

appeal  by  special  leave  is  :  does  the  arbitration  agreement  

survive for the  purpose of resolution of disputes arising under  

or in connection with the contract even if its performance has  

come to an end on account of termination due to  breach ?   

3. MAGMA  Leasing  Limited  Public  United  Company  

(for  short,  ‘MAGMA’)  is  a  financial  institution  engaged in  the

business  of  providing  funds  for  purchase  of  plant  and  

machinery  and  other  assets  by  way  of  hire  purchase.  

Smt. Potluri Madhavilata-respondent no. 1 (hereinafter referred  

to as ‘hirer) entered into an agreement of hire purchase with  

MAGMA for purchase of a motor vehicle (Bolero Camper-AP 16  

TV  1263)  on  January  31,  2005.  As  per  the  terms  of  hire  

purchase  agreement,  the  hirer  was  required  to  pay  hire  

purchase  price  in  46  installments.  It  appears  that  the  hirer  

committed  default  in  payment  of  few  installments  and  as  a  

result thereof, MAGMA seized the said vehicle from the hirer on  

August  6,  2005.  MEGMA  also  sent  a  notice  to  the  hirer  

intimating  her  that  hire  purchase  agreement  has  been  

terminated.  Thereafter  some correspondence  seems to  have  

ensued between the parties.

4. The hirer  then filed a suit  against  MAGMA in the  

Court  of  Senior  Civil  Judge,  Vijayawada seeking recovery of  

possession of the aforesaid vehicle and for restraining  MAGMA  

from transferring the said vehicle.

5. MAGMA,  upon  receipt  of  notice  of  the  aforesaid  

proceedings, made an application (I.A. No. 490 of 2006) before  

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the trial court under Section 8 of the Arbitration and Conciliation  

Act, 1996 (for short ,  ‘Act, 1996’) read with Section 151 of the  

Code of Civil Procedure praying therein that the dispute raised  

in the suit be referred to  an arbitrator and the proceedings in  

the suit be stayed.

6. The hirer contested the aforesaid application on the  

ground  that  the  hire  purchase  agreement  having  been  

terminated, the arbitration agreement does not survive and the  

matter need not be referred to the arbitration.

7. The First Additional Senior Civil Judge, Vijayawada  

vide order dated December 4, 2006 dismissed the application  

made by MAGMA under Section 8 of the Act, 1996.

8. Not  satisfied  with  the  order  of  the  trial  court,  

MAGMA filed a civil revision petition before the High Court of  

Andhra Pradesh.

9. The Division Bench dismissed  the revision petition  

on April  30, 2007 holding  that upon  termination of the hire  

purchase  agreement,   the  arbitration  agreement  does  not  

survive.   The present  appeal by special leave arises from this  

order.  

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10. Despite  service,  hirer  has  not  chosen  to  

appear before this court.   

11. The hire purchase agreement contains the following  

clause for arbitration :

“22. Arbitration : All  disputes,  differences,  claims  and  questions  whatsoever  arising  out  of  this  agreement  between magma and/or its representatives and/or its assigns  on the one hand and the Hirer/s and the Guarantor/s on the  other  hand  touching  and  concerning  these  presents  or  anything herein contained or in any way relating to or arising  from these presents shall be referred to a sole arbitrator to be  appointed  by  Magma  Leasing  Limited.  The  Arbitrator  so  appointed  shall  formulate  his  own  procedure  and  shall  be  entitled to dispense with filing of pleadings or taking of any  evidence and shall be entitled to dispose off the proceedings  in a summary manner.  The Arbitrator  shall  have summary  powers.  The award of such arbitrator so appointed shall be  final  and binding on all  the parties to this agreement.  Such  arbitration proceedings will be at Kolkata. The sole arbitrator  shall pronounce the award as expeditiously as possible after  entering on the reference or within such time as he may deem  expedient. The pronouncement of the award by the arbitrator  in a meeting of the parties fixed after the conclusion of the  arbitration proceedings shall be deemed to be the publication  of the award and shall be construed as the date of receipt of  the award by the Hirer/s/Guarantor/s and Magma. The costs  and expenses of the arbitration proceedings shall be borne by  the Hirer/s/Guarantor/s. The Arbitrator shall hold his sittings at  Kolkata.”  

12. The  House  of  Lords  in  Heyman  and  Another v.  

Darwins  Ltd.1 had  discussed  elaborately  on  the  scope  of  

arbitration  clause  in  the  context  of  a  dispute  arising  on  the  

question of repudiation of a contract. That was a case where  

1 (1942) 1 ALL ER 337

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the contract was repudiated by one party and accepted as such  

by  another.  The  contract  between  the  parties  contained  an  

arbitration  clause providing for  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.  Viscount Simon, L.C.,  summarised the  

legal position with regard to scope of an arbitration clause in a  

contract as follows :

“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.

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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 on the contract  that has come to an end.”   Viscount  Simon,  L.C.  concurred   with  the   view  expressed by Lord Dunedin in Scott & Sons v. Del  Sel, (1923) S.C.(H.L.) 37 and observed:

“………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.”

13. Lord Macmillan, Lord Wright and Lord Porter though  

expressed their views separately but  all of them  agreed with  

the statement  of law summarised  by Viscount Simon, L.C..  

14. In  Union  of  India v.  Kishorilal  Gupta  and  Bros.2,   

Subba Rao, J. (as His Lordship then was) while dealing with the  

question whether the arbitration clause of the original contract  

survived  after  the  execution  of  settlement  of  the  contract  

referred  to  the  judgment   of  House  of  Lords  in   Heyman  

exhaustively and   held :

2 (1960) 1 SCR 493

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“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  nonetheless  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.

We  shall  now  notice  some  of  the  authoritative  statements in the textbooks 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.”

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The  Judicial  Committee  in  Hirji  Mulji v.  Cheong  Yue  Steamship Company {(1926) A.C. 497} 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 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  clause 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) All.E.R.   337}. 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 at 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.

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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.”

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  

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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 pin-points 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.”

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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 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.”

15. In  his  separate  but  concurring   judgment,  A.K.  

Sarkar,  J.  (as  His  Lordship  then  was)  exposited  the  legal  

position thus :

“Now I come to the nature of an arbitration clause. It  is well settled that such a clause in a contract stands apart  from the rest of the contract. Lord Wright said in  Heyman’s  case   that  an  arbitration  clause  “is  collateral  to  the  

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substantial  stipulations  of  the  contract.  It  is  merely  procedural and ancillary, it is a 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 observations 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  clauses. The other clauses set out the obligations which  the parties undertake towards each other  hinc inde, but  the  arbitration  clause  does  not  impose  on  one  of  the  parties an obligation in favour of the other. It embodies  the  agreement  of  both  the  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  obligations  of  the  parties  to  each  other  cannot in general be specifically enforced and breach of  them results 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.”

It seems to me that the respective nature of accord  and satisfaction and arbitration clause makes it 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 does not  impose on one of the parties an obligation in favour of the  other but embodies an agreement 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  arbitration.  A  dispute  whether  the  obligations  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  within  the  arbitration  clause,  there  can  of  course  be  no  

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arbitration,  but  the  reason  for  that  would  not  be  that  the  arbitration clause has ceased to exist but that the dispute is  outside its scope. I am not saying that it is for the arbitrator  to  decide  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.

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  shows 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 arbitration clause in it. I feel  no doubt therefore that the arbitration clause subsisted and  the arbitrator was competent to arbitrate. The award was not  in my view, a nullity.

The position is no different if the matter is looked at  from the point of view of Section 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.”

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16. In the case of National Agricultural Coop. Marketing  

Federation  India  Ltd. v.  Gains  Trading  Ltd.3, this  Court  held  

thus:

“6. The  respondent  contends  that  the  contract  was  abrogated  by  mutual  agreement;  and  when  the  contract  came to an end, the arbitration agreement which forms part  of the contract, also came to an end. Such a contention has  never  been  accepted  in  law.  An  arbitration  clause  is  a  collateral  term  in  the  contract,  which  relates  to  resolution  disputes, and not performance. Even if the performance of  the  contract  comes  to  an  end  on  account  of  repudiation,  frustration or breach of  contract,  the arbitration agreement  would  survive  for  the  purpose  of  resolution  of  disputes  arising  under  or  in  connection  with  the  contract.  (Vide  Heyman v.  Darwins  Ltd.[(1942)AC356],  Union  of  India v.  Kishorilal Gupta & Bros (AIR 1959 SC 13) and Naihati Jute  Mills Ltd. v.  Khyaliram Jagannath (AIR 1968 SC 522). This  position  is  now  statutorily  recognised.  Sub-section  (1)  of  Section 16 of the Act makes it clear that while considering  any objection with respect to the existence or validity of the  arbitration agreement, an arbitration clause which forms part  of  the  contract,  has  to  be  treated  as  an  agreement  independent  of  the  other  terms  of  the  contract;  and  a  decision that the contract is null and void shall not entail ipso  jure the invalidity of the arbitration clause.”

17. Recently, in the case  of  P.Manohar Reddy & Bros.  

vs.  Maharashtra Krishna Valley Development Corporation And  

Ors4.,  while  dealing  with  the   argument  of   the   respondent  

therein that  in terms of the contract the claim  for extra work or  

additional work should have been raised during the pendency  

of the contract itself  and  not after it came to an end, this Court  

3 (2007) 5 SCC 692 4 (2009) 2 SCC 494

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considered the concept of separability  of the arbitration clause  

from the contract and made the following observations :     

“27. An arbitration clause, as is well known, is a part  of  the  contract.  It  being  a  collateral  term need not,  in  all  situations, perish with coming to an end of the contract.  It  may survive. This concept of separability of the arbitration  clause is now widely accepted. In line with this thinking, the  UNCITRAL  Model  Law  on  International  Commercial  Arbitration incorporates the doctrine of separability in Article  16(1). The Indian law — the Arbitration and Conciliation Act,  1996,  which is  based on the UNCITRAL Model  Law, also  explicitly  adopts  this  approach  in  Section  16(1)(b),  which  reads as under:

“16.  Competence  of  Arbitral  Tribunal  to  rule  on  its   jurisdiction.—(1) The Arbitral Tribunal may rule on its  own  jurisdiction,  including  ruling  on  any  objections  with  respect  to  the  existence  or  validity  of  the  arbitration agreement, and for that purpose,—

(a) an arbitration clause which forms part of a  contract  shall  be  treated  as  an  agreement  independent of the other terms of the contract; and

(b)  a decision by the Arbitral Tribunal that the  contract is null and void shall not entail ipso jure the   invalidity of the arbitration clause.”

(emphasis supplied)

Modern laws on arbitration confirm the concept.

28.  The  United  States  Supreme  Court  in  a  recent  judgment in Buckeye Check Cashing Inc. v. Cardegna [546  US  460  (2005)] acknowledged  that  the  separability  rule  permits  a  court  “to  enforce  an  arbitration  agreement  in  a  contract that the arbitrator later finds to be void”. The Court,  referring  to  its  earlier  judgments  in  Prima Paint  Corpn. v.  Flood & Conklin Mfg. Co.[18 L.Ed. 2d 1270] and Southland  Corpn. v. Keating [465 US 1 (1984)], inter alia, held:

“Prima  Paint  and  Southland  answer  the  question  presented  here  by  establishing  three  propositions.  First,  as  a  matter  of  substantive  federal  arbitration  law,  an  arbitration  provision  is  severable  from  the  remainder of the contract.”

But  this  must  be  distinguished  from  the  situation  where the claim itself  was to be raised during the  

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subsistence  of  a  contract  so  as  to  invoke  the  arbitration agreement would not apply.”

18. The  statement  of  law  expounded  by  Viscount  

Simon, L.C. in the case of  Heyman  as noticed above, in our  

view,  equally  applies  to  situation  where  the  contract  is  

terminated by one party on account of the breach committed  

by the other particularly in a case where the clause is framed  in  

wide  and  general  terms.   Merely  because  the  contract  has  

come  to  an  end   by  its  termination  due  to   breach,  the  

arbitration   clause   does  not  get  perished  nor  rendered  

inoperative; rather it survives for resolution of disputes arising  

“in respect of” or “with regard to” or “under” the contract.  This  

is in line  with the earlier  decisions  of this Court, particularly as  

laid down  in Kishori Lal Gupta & Bros.  

19. In the instant case, clause 22 of the  hire purchase  

agreement that provides   for arbitration has been couched in  

widest possible terms as can well be  imagined.  It embraces all  

disputes,  differences,  claims   and  questions  between  the  

parties  arising out of the said agreement  or in any way relating  

thereto.  The hire purchase  agreement having been admittedly  

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entered  into  between  the  parties  and  the  disputes    and  

differences  have since  arisen between them, we hold, as it  

must be, that the arbitration clause 22 survives for the purpose  

of their  resolution although  the contract has come to an end  

on account of  its termination.

20. The next question, an incidental one, that arises  for  

consideration is whether the trial court  must refer  the parties  

to arbitration under Section 8 of the Act, 1996.

21. Section 8 reads thus:

“8.  Power  to  refer  parties  to  arbitration  where  there is an arbitration agreement.—(1) A judicial authority  before which an action is brought in a matter which is the  subject  of  an  arbitration  agreement   shall,  if  a  party  so  applies not later than when submitting his first statement on  the substance  of the dispute, refer the parties to arbitration.

(2) The application referred to in sub-section(1)  shall  not be entertained unless  it is  accompanied by the original  arbitration agreement or a duly certified copy thereof.  

(3)  Notwithstanding  that  an   application  has  been  made under sub-section (1) and that the issue  is pending  before  the  judicial  authority,  an  arbitration  may  be  commenced or continued and an arbitral award made.”   

22. An analysis of Section 8  would  show that for its  

applicability, the following conditions must be satisfied: (a) that  

there  exists  an arbitration agreement; (b) that action has been  

brought to the court by one party  to the arbitration agreement  

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against the other party; (c) that the subject matter of the suit  is  

same as the  subject matter of the arbitration agreement; (d)  

that the other party before he submits  his first statement of the  

substance  of  the  dispute,  moves  the  court  for  referring  the  

parties to arbitration; and (e) that along with the application the  

other  party tenders the original  arbitration agreement  or  duly  

certified copy thereof.

23. Section 8 is in  the form of legislative command to  

the court and once the pre-requisite conditions as aforestated  

are satisfied, the court  must  refer  the parties to arbitration.  

As a matter of fact, on fulfillment  of conditions  of Section 8, no  

option is left to the court and the court  has to refer the parties  

to arbitration.

24. There  is  nothing  on  record  that  the  pre-requisite  

conditions  of  Section  8  are  not  fully  satisfied  in  the  present  

case.   The  trial  court,  in  the  circumstances,  ought  to  have  

referred the parties to arbitration as per arbitration clause 22.

25. In the result, appeal  must succeed and is allowed.  

The impugned order dated April 30, 2007 passed by the High  

Court affirming the order dated December 4, 2006 passed by  

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the First Additional Senior Civil  Judge, Vijayawada is set aside.  

I.A.No.490/2006  in O.S.No.19/2006 is restored to the file of the  

First Additional Senior Civil Judge, Vijayawada for passing  an  

appropriate  order  in  the  light   of  the  observations  made  

hereinabove.  Since the  respondent  has not chosen to appear,  

no order as to  costs.  

……………………J   (Tarun Chatterjee)

…….……………..J         (R. M. Lodha)

New Delhi September 18, 2009.

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