Holding

An arbitration clause does not perish upon termination of the contract and, when the conditions of Section 8 are met, the court must refer the parties to arbitration.

Summary

The appellant, Magma Leasing & Finance Ltd., entered into a hire‑purchase agreement with the respondent, Potluri Madhavilata, which contained a broad arbitration clause (clause 22). After the respondent defaulted on instalments, the appellant terminated the agreement, seized the vehicle and the respondent filed a suit for possession. The appellant sought to refer the dispute to arbitration under Section 8 of the Arbitration and Conciliation Act, 1996 read with Section 151 CPC; the trial court dismissed the application and the High Court affirmed, holding that the arbitration clause died with the termination of the hire‑purchase contract. On appeal, the Supreme Court held that termination of a contract does not extinguish an arbitration clause that is framed in wide terms; the clause survives to resolve disputes "in respect of" the contract. Since the pre‑conditions of Section 8 were satisfied, the court was obligated to refer the parties to arbitration. Consequently, the appeal was allowed, the High Court order set aside and the application restored for appropriate arbitration‑referral order.

Issues considered

Does an arbitration clause survive the termination of the underlying contract due to breach?
Whether the court must refer the parties to arbitration under Section 8 of the Arbitration and Conciliation Act, 1996 when the arbitration agreement exists.

Legislation cited

Arbitration and Conciliation Act, 1996s. 16(1)(b), s. 8
Code of Civil Procedure, 1908s. 151
Indian Contract Act, 1872s. 62

Subjects

arbitration clausetermination of contracthire purchaseSection 8separability doctrinecontract breachpossession suit

Judgment

[2009] 14 (ADDL.) S.C.R. 815

THE BRANCH MANAGER, M/S. MAGMA LEASING AND A
FINANCE LIMITED AND ANR.
v.
POTLURI MADHAVILATA AND ANR.
(Civil Appeal No. 6399 of 2009)
B
SEPTEMBER 18, 2009
[TARUN CHATTERJEE AND R.M. LODHA, JJ.]
-4
Arbitration and Conciliation Act, 1996 - s. 8 - Hire
purchase agreement entered into by respondent-hirer with c
appellant-finance company in respect of motor vehicle -
Agreement containing atbitration clause - Default in payment
of installments by respondent - Termination of agreement by
appellant - Vehicle seized from respondent - Respondent
"t
filed suit for recovery of possession of the vehicle - Appellant D
filed application u/s.8 of the Act read with s.151 CPC for
referring the dispute raised in the suit, to an arbitrator -
Application dismissed - Propriety of - Held: Not proper -
Merely because the agreement came to an end by its
termination due to breach, the atbitration clause did not get E
perished nor was it rendered inoperative; rather it survived for
resolution of disputes arising "in respect of' or "with regard to"
or "under" the agreement - On fulfillment of conditions of s.8,
t as in the present case, no option is left to the Court and the
Court has to refer the parties to atbitration. F
Respondent no.1 entered into a Hire purchase
agreement with appellant finance company in respect of
a motor vehicle. The agreement contained an arbitration
clause. Respondent no.1 committed default in payment
of installments. Appellant terminated the agreement and G
... seized the vehicle from respondent no.1. Respondent
no.1 filed suit for recovery of possession of the said
vehicle and for restraining the appellant from transferring
the vehicle. Meanwhile, appellant filed application before
815 H
816 SUPREME COURT REPORTS [2009] 14 (ADDL.) S.C.R.

A the trial court under Section 8 of the Arbitration and
Conciliation Act, 1996 read with Section 151, CPC for
referring the dispute raised in the suit, to an arbitrator. The
application was dismissed. The order was upheld by the
High Court on the ground that the arbitration clause did
B not survive upon termination of the hire purchase
agreement. Hence the present appeal.

Allowing the appeal, the Court

HELD: 1.1. Merely because the contract has come to
c 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.
[Para 18] [833-E-F]
J?, 1.2. In the instant case, clause 22 of the hire '1'

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
E agreement or in any way relating thereto. The hire
purchase agreement having been admittedly entered into
between the parties and the disputes and differences
have since arisen between them, the arbitration clause 22 1
L t
survives for the purpose of their resolution although the
F contract has come to an end on account of its
termination. [Para 19] [833-G-H; 834-A-B]
Union of India v. Kishorilal Gupta and Bros. (1960) 1 SCR
493; National Agricultural Coop. Marketing Federation India
G Ltd. v. Gains Trading Ltd. (2007) 5 SCC 692 and P. Manohar
Reddy & Bros. v. Maharashtra Krishna Valley Development
Corporation And Ors. (2009) 2 SCC 494, relied on.

Heyman and Another v. Darwins Ltd. (1942) 1 ALL ER

H
BRANCH MANAGER, MIS. MAGMA LEASING AND FINANCE 817
LTD. v. POTLURI MADHAVILATA

" 337, referred to. A

2.1. An analysis of Section 8 of the Arbitration and
Conciliation Act, 1996 would show that for its
applicability, the following conditions must be satisfied:
(a) that there exists an arbitration agreement; (b) that 8
action has been brought to the court by one party to the
arbitration agreement 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 C
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. The said Section 8 is in the
form of legislative command to the court and once the
\ pre-requisite conditions as aforestated are satisfied, the D
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. [Paras 22 and 23] [834-F-H; 835-A-B]
E
2.2. 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. [Para 24] [835-8-C] F
Case Law Reference:
(1942) 1 ALL ER 337 referred to Para 12
1960) 1 SCR 493 relied on Para 14
G
; (2007) s sec 692 relied on Para 16
c2oos) 2 sec 494 relied on Para 17

H
818 SUPREME COURT REPORTS [2009] 14 (ADDL.) S.C.R.

A CIVIL APPELLATE JURISDICTION: Civil Appeal No.
6399 of 2009.
..

From the Judgment & Order dated 30.4.2007 of the High
Court of Judicature at Andhra Pradesh in Civil Revisional
Petition No. 551 No. 2007.
B
Rana Mukherjee, Manoj, Aparna Sinha, Abhijat P. Medh
and P. Sinha, for the Appellants.

The Ju.dgment of the Court was delivered by
c R.M. LODHA, J. 1. 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
D or in connection with the contract even if its performance has
'f
come to an and on account-of termination due to breach ?

3. MAGM.A Leasing Limited Public United Company (for
short, 'MAGMA'} is a financial institution engaged in the
E 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 (r;3olero Camper-AP 16 TV 1263)
on January 31, 2005. As per the terms of hire purchase
F
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
G 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
H possession of the aforesaid vehicle and for restraining MAGMA
BRANCH MANAGER, MIS. MAGMA LEASING AND FINANCE 819
LTD. v. POTLURI MADHAVILATA [R.M. LODHA, J.]
from transferring the said vehicle. A

5. MAGMA, upon receipt of notice of the aforesaid
proceedings, made an application (I.A. No. 490 of 2006)
before the trial court under Section 8 of the Arbitration and
Conciliation Act, 1996 (for short , 'Act, 1996') read with Section . B
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 c
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 D
~ 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.
E
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. F
10. Despite service, hirer has not chosen to appear before
this court.

11. The hire purchase agreement contains the following
clause for arbitration : G

"22. Arbitration : All dispµtes, differences, claims and
.J

questions whatsoever arising out of this agreem@nt
between magma and/or its representatives and/or its
assigns on the one hand and the l-lirer/s i.=lnd t~e Guarc:111tor/ H
820 SUPREME COURT REPORTS [2009] 14 (AODL.) $.C.R.

A 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
B 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
c 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 o_r 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
D
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
E Arbitrator shall hold his sittings at Kolkata."

12. The House of Lords in Heyman and Another v.
Darwins Ltd1.)lad discussed elaborately on the scope of
arbitration clause in the context of a dispute arising on the
F question of repudiation of a contract. That was a case where
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
G 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 : ·

H 1. (1942) 1 ALL ER 337.
BRANCH MANAGER, M/S. MAGMA LEASING AND FINANCE 821
LTD. v. POTLURI MADHAVILATA [R.M. LODHA, J.]

t ::. "An arbitration clause is a written submission, A
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 B
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 c
(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 D
"' arisen between them as to whether there has been a
t 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 E
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 F
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 expresse~
G
in such terms as above ceases to have any possibl~
application merely because the contract has "come to ~n
end,'' as, for example, by frustration. In such cases it is th~
performance on the contract that has come to an end."

Viscount Simon, LC. concurred with the view expressed H
-----
822 SUPREMI: COURT REPORTS [2009) 14 (ADDL.) S.C.R. -

A by Lord Dunedin in Scott & Sons v. Del Se/, (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.
B
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
c 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."

D 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 Viscour.t Simon, LC.. -

14. In Union of India v. Kishorilal Gupta and Bros., 2 Subba
Rao, J. (as His ~ordship then was) while dealing with the
E - question whether the arbitration clause of the original contract
survived after the execution of settlement of the contract referred
to the judgment Qf House of Lords in Heyman exhaustively and
held:
F "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
G contract, which had no existence de hors the contract. It
was intended to cover all the disputes arising under the
conditions of, or lri connection with, the contracts. Though
the phraseology was of the widest amplitude, it is
Inconceivable that the parties intended its survival even
H 2.---
(1960) 1 SCR 493.
BRANCH MANAGER, MIS. MAGMA LEASING AND FINANCE 823
LTD. v. POTLURI MADHAVILATA [R.M. LODHA, J.]
after the contract was mutually rescinded and substituted A
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 partiP~ gave up
' the terms of the old contracts, including the arbitration B
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
c
statements in the te}dbooks 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 0
~
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 E
from liability e.g. repudiation by one party accepted
by the other, or frustration."
In "Russel on Arbitrationn, 16th Edn., p. 63, the following
)>
test is laid down to ascertain whether an arbitration clause
survives after the contract is determined: F
Sr·

"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 G
of the contract, in which case the arbitration· clause
.;.
remains effective and can be enforced."

· The Judicial Committee in Hirji Mu/ji v. Cheong Yue
Steamship Company {(1926) A.G. 497} gives another test
H
824 SUPREME COURT REPORTS [2009] 14 (ADDL.) S.C.R.

A 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
B
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."

c 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.ER.
337). There a contract was repudiated by one party and
D accepted as such by the other. The dispute arose in regard
to damages under a number of heads covered by the 't
~
contract. The arbitration clause provided that any dispute
between the parties in respect of the agreement or any of A
the provisions contained therein or anything arising
E 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, LC. observed at
F 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
A
construed according to its language and in the light
G of the circumstances in which it is made. If the
dispute is 8S 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
H the contract is thereby ~enying that he has ever
)
BRANCH MANAGER, M/S. MAGMA LEASING AND FINANCE 825
LTD. v. POTLURI MADHAVILATA [R.M. LODHA, J.]

joined in the submission. Similarly, if one party to A
~
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. B

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
c
both parties from further performance, such differences
should be regarded as differences which have arisen "in
respect or, 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 D
• 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 bo~y express power to
do so. E
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 F
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 G,
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 H
....

826 'SUPREME COURT REPORTS (2009] 14 (ADDL.) S.C.R.

A 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
i
application until performance ttas begun, there
B seems no reason why the arbitrator's jurisdiction
should not cover the one case as much as the I-
other."

Lord Macmillan made similar observations at p. 345:
t

c "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 been a contract at all, there has never ...'
D been as part of it an agreement to arbitrate; the
i
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 •..---
E 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 <
F 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 witJl the contract.
G
If the parties substitute a new contract for the
contract which they have abrogated, the arbitration .•.
clause in the abrogated contract cannot be invoked r

for the determinati~n of questions under the new
)'=
agreement. All this is more or less elementary."
H
..,
BRANCH MANAGER, MIS. MAGMA LEASING AND FINANCE 827
LTD. v. POTLURI MADHAVILATA [R.M. LODHA, J ..]

These observations throw considerable light on the A
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- B
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 C
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 D
the other may cec:::Je. 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 E
one of the purposes of the contract."

Lord Wright, after explaining the scope of the word
"repudiation" and the different meanings it bears,
proceeded to state at p. 350: F

"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 G
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
H
828 SUPREME COURT REPORTS (2009] 14 (ADDL.) S.C.R.

A 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
8
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
c 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,
D if the dispute is whether the contract is w~clly 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."

E 15. In his separate but concurring judgment, A.K. Sarkar, \'
J. (as His Lordship then was) exposited the legal position thus: j
"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
F case that an arbitration clause "is collateral to the
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
G 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
H directed to the true nature and function of an
BRANCH MANAGER, M/S. MAGMA LEASING AND FINANCE 829
LTD. v. POTLURI MADHAVILATA [RM. LODHA, J.]

arbitration clause in a contract. It is quite distinct A
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 B
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 c
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. 0
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 E
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 F
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 G
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. H
• >

830 SUPREME COURT REPORTS [2009] 14 (ADDL.) s.c.R.''

A If that dispute is not within the arbitration clause, there can
of course be no arbitration, but the reason for that would
not be that the arbitration clause has ceased to exist but
that the dispute is outside it~ scope. I am not saying that
it is for the arbitrator to decide whether the arbitration
B 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.
c 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
D 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".
E 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. _~

F 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
G 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
H consequences. For the same reason it cannot be said to-
BRANCH MANAGER, M/S. MAGMA LEASING AND FINANCE 831
LTD. v. POTLURI MADHAVILATA [R.M. LODHA, J.]

substitute a new contract for the old one. As I have earlier A
'. stated it postulates the existence of the contract and only
decides the incidence of its breach."

16. In the case of National Agricultural Coop. Marketing
Federation India Ltd. v. Gains Trading Ltd., 3 this Court held
8
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 C
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 D
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 E
(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 F
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. G
J vs. Maharashtra Krishna Valley Development Corporation
And Ors., 4 while dealing with the argument of the respondent

3. (2001) s sec 692.
4. (2009) 2 sec 494. H
832 SUPREME COURT REPORTS [2009] 14 (ADDL.) S.C.R

.
A 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
considered the concept of separability of the arbitration clause
from the contract and made the following observations :
B
"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
c 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
D 16(1)(b), which reads as under:

"16. Competence of Arbitral Tribunal to rule on its
4
jurisdiction.-(1) The Arbitral Tribunal may rule on
its own jurisdiction, including ruling on any
E 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
F 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."
G
(emphasis supplied)

Modern laws on arbitration confirm the concept.

28. The United States Supreme Court in a recent
H judgment in Buckeye Check Cashing Inc. v. Cardegna
BRANCH MANAGER, M/S. MAGMA LEASING AND FINANCE 833
LTD. v. POTLURI MADHAVILATA [RM. LODHA, J.]

[546 US 460 (2005)] acknowledged that the separability A
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, B
held:
"Prima Paint and Southland answer the question
presented here by establishing three propositions.
First, as a matter of substantive federal arbitration C
law, an arbitration provision is severable from the
remainder of the contract."

out this must be distinguished from the situation where the
claim itself was to be raised during the subsistence of a
contract so as to invoke the arbitration agreement would D
not apply."
18. The statement of law expounded by Viscount Simon,
LC. in the case of Heyman as noticed above, in our view,
equally applies to situation where the contract is terminated by E
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 "ifl respect of' or "with regard to" F
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 G
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 H
834 SUPREME COURT REPORTS [2009] 14 (ADDL.) S.C.R. ·

A ~ntered 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.
B
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:
c •
"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
D 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
E 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
F 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
G 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
H other party tenders the original arbitration agreement or duly
BRANCH MANAGER, M/S. MAGMA LEASING AND FINANCE 835
LTD. v. POTLURI MADHAVILATA [RM. LODHA, J.]

certified copy thereof. A
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
6
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 C
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 the o
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,
E
no order as to costs.

B.B.B. Appeal allowed .

..