REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.4430 OF 2009

ZENITH DRUGS & ALLIED AGENCIES     PVT. LTD.  REPRESENTED BY ITS MANAGING DIRECTOR, SHRI UDAY KRISHNA PAUL             …Appellant

VERSUS

M/S. NICHOLAS PIRAMAL INDIA LTD.           ...Respondent                  

J U D G M E N T

R. BANUMATHI, J.

This  appeal  arises  out  of  the  order  dated  26.03.2007

passed by the Guwahati High Court in Civil Revision (P) No.31

of 2005 in and by which the High Court allowed the revision

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petition preferred by the respondent and referred the parties to

arbitration.

2. Brief facts which led to filing of this appeal are as follows:-

The  appellant  is  a  Company  registered  under  the

Companies  Act,  1956  and  is  involved  with  various  types  of

agency  businesses  including  that  of  clearing  and  forwarding

agents,  freight  contractors,  etc.   M/s  Rhone  Poulene  India

Limited (RPIL) vide agreement dated 01.05.1997 appointed the

appellant Company as its clearing and forwarding agent for a

period  of  three  years.  Clause  17  of  the  agreement  dated

01.05.1997  contains  arbitration  clause.  The  agreement  was

renewed for a further period from 01.04.2001 to 31.03.2002.  

3. RPIL  vide  its  letter  dated  20.07.2001  informed  the

appellant that their Company is getting merged with respondent

Company- Nicholas Piramal India Ltd. (NPIL) and that pursuant

to the merger, RPIL shall cease to exist as a legal entity and

therefore, with effect from three months from the date of the

letter, the subsisting clearing and forwarding agency agreement

shall  stand  terminated  in  terms  of  the  provisions  of  the

agreement.  The Bombay High Court  in Company Application

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No.252 of 2001 passed the order dated 27.09.2001 inter alia

approving  amalgamation  of  RPIL  with  the  respondent

Company. The appellant by its letter dated 25.07.2001 objected

to  the  unilateral  decision  of  the  respondent  Company  to

terminate the clearing and forwarding agency agreement and

requested the respondent to maintain status-quo with respect

to the agency until the issue is resolved through negotiations.

RPIL vide its  letter  dated 03.09.2001 informed the appellant

that they are unable to accede to the request for withdrawing

the termination letter.  For  all  practical  purposes,  the clearing

and forwarding agency agreement dated 01.05.1997 thus stood

terminated.  

4. The  appellant  filed  Title  Suit  No.241  of  2001  inter  alia

praying for declaration that the contract between the appellant

and  RPIL-defendant  No.1  was  valid,  subsisting,  legal  and

continuing and for further  declaration that  defendants cannot

terminate the appellant  as clearing and forwarding agents in

any manner in case of merger with the respondent Company.

In the said suit, the parties have compromised the matter and

on the basis of compromise deed dated 11.12.2001 jointly filed

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by the parties, Civil Judge, Senior Division, Guwahati vide its

order dated 24.12.2001 decreed the Title Suit No.241 of 2001

on compromise as per the terms and conditions embodied in

the  compromise  deed.  In  terms  of  the  said  compromise,

respondent  has  made the  payment  of  Rs.23,50,000/-  to  the

appellant  and  also  as  a  part  of  compensation  package

appointed  the  appellant  as  its  stockist  for  their  products  at

Guwahati and Agartala.  

5. Case  of  appellant  is  that  the  respondents  refused  to

honour  the  terms  and  conditions  of  the  compromise  decree

therefore, the appellant had filed Title Execution case No.4 of

2002  for  execution  of  the  compromise  decree  dated

24.12.2001.  Differences  arose  between  the  parties  on  the

alleged diversion of stocks by the appellant’s employee in the

year  2002.  The  respondent  filed  criminal  complaint  in  C.R.

Case No.1446 of  2002  before  the  Chief  Judicial  Magistrate,

Kamrup for the offences punishable under Sections 420, 406,

409 and 403 IPC read with Section 34 IPC. The respondent

had also filed an application under Section 151 CPC praying for

setting aside/recalling of compromise decree dated 24.12.2001

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on the ground that  the compromise decree was obtained by

appellant by false inducement and misrepresentation and the

same is vitiated on account of fraud.  

6. On 30.04.2003, appellant had filed Money Suit No.73 of

2003 claiming compensation for rupees twenty crores. In the

suit, the appellant inter alia alleged that due to intentional acts

of  omission  and  commission  by  respondent,  the  appellant-

plaintiff  had  suffered  huge  financial  loss  as  well  as  loss  of

goodwill and reputation in the market. On 15.06.2004, relying

upon  Clause  17  of  the  agreement  dated  01.05.1997,  the

respondent  filed  an  application  under  Section  8  of  the

Arbitration  and  Conciliation  Act,  1996  (for  short  “the  Act”)

praying  for  referring  the  parties  to  arbitration  in  Money  Suit

No.73  of  2003.  The  trial  court  vide  order  dated  19.02.2005

dismissed the application filed under      Section 8 of the Act by

holding that the earlier suit in Title Suit No.241 of 2001 filed by

the appellant was decreed on compromise between the parties

and therefore, in view of the law laid down in  Nathani Steels

Ltd. v. Associated Constructions  1995 Supp.(3) SCC 324, the

respondent-defendant  cannot  invoke  the  arbitration  clause

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pertaining to the same dispute and the suit was directed to be

proceeded.  The respondent filed Civil Revision Petition No.31

of 2005 before the High Court challenging the order of the trial

court dated 19.02.2005. The High Court vide impugned order

allowed  the  revision  petition  and  referred  the  dispute  to

arbitration.  The High Court held that even before the merger of

RPIL with the respondent which was approved by the Bombay

High  Court  on  27.09.2001,  the  appellant  instituted  Title  Suit

No.241 of 2001 on the ground of illegal termination of contract,

which suit resulted in a compromise decree. Observing that the

existence  of  arbitration  clause  has  been  admitted  by  the

appellant  Company,  the  High Court  held  that  in  view of  the

decision  reported  in  Konkan  Railway  Corporation  Ltd.  and

Another v. Rani Construction Pvt. Ltd.  (2002) 2 SCC 388  and

other  decisions,  the Civil  Court  has no jurisdiction to  decide

whether the subject matter of the suit attracted the arbitration

clause or not. The High Court further held that under Section 16

of  the  Act,  whether  arbitration  clause  applied  to  the  subject

matter of the suit or not is for the arbitrator to decide on its own

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jurisdiction.  Being aggrieved, the appellant  has preferred this

appeal.

7. We have  heard  Mr.  Manish  Goswami,  learned  counsel

appearing  on  behalf  of  the  appellant  and  Mr.  Hrishikesh

Baruah,  learned  counsel  appearing  on  behalf  of  the

respondent.  

8. The learned counsel for the appellant contended that the

High Court erred in saying that the appellant-plaintiff admitted

the existence of the arbitration clause and the High Court failed

to take note that compromise decree dated 24.12.2001 in Suit

No.241 of 2001 was in full and final settlement of the dispute

between  the  parties.  It  was  inter  alia  contended  that  a

substantial  and  bona fide part  of  the  claim was  outside  the

scope of arbitration clause and when dispute is not covered by

the  arbitration  clause,  the  same  cannot  be  referred  to

arbitration.  Placing reliance upon  Yogi  Agarwal  v.  Inspiration

Clothes  &  U  and  Others  (2009)  1  SCC  372  and  Sukanya

Holdings (P) Ltd. v. Jayesh H. Pandya and Another  (2003) 5

SCC 531, the learned counsel for the appellant submitted that

in  order  to  refer  the  parties  to  arbitration,  the  dispute  must

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relate  to  the  contract  in  respect  of  which  the  parties  have

agreed to refer to arbitration. Taking us through the pleadings

and relief sought for in the subsequent suit in Money Suit No.73

of 2003, learned counsel for the appellant submitted that the

dispute is exclusively  determinable by the trial  court  and the

High Court erred in referring the parties to arbitration. It  was

also submitted that the High Court did not keep in view that the

respondent has challenged the very compromise decree dated

24.12.2001 on the ground of inducement and fraud by filing a

petition and the same is still pending.  

9. Per  contra,  the  learned  counsel  for  the  respondent

submitted that the factum of arbitration clause in the agreement

dated 01.05.1997 is admitted by the appellant and the appellant

is  seeking compensation  on account  of  illegal  termination  of

clearing  and  forwarding  agent  agreement  and  the  issue

continues  to  be  arbitrable.  It  was  also  submitted  that  the

compromise  deed  dated  11.12.2001  in  Title  Suit  No.241  of

2001 was obtained by  the appellant  Company through false

inducement  and  practising  fraud  upon  the  respondent

Company and if the fraud played by the appellant was known to

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the respondent Company, the respondent would not have been

a  party  to  the  aforesaid  compromise  deed  and  the  said

compromise decree having been obtained by practising fraud is

a nullity and  void ab-initio.  Learned counsel further submitted

that the dispute raised by the appellant is “….touching upon the

presents….” of the agreement dated 01.05.1997 and the High

Court rightly set aside the order of the trial court and referred

the parties to arbitration”.  

10. We have carefully  considered the rival  contentions  and

perused the impugned judgment and materials on record.  The

following points arise for determination in this appeal:-

(i) Whether  the  High  Court  was  right  in  referring  the

parties to arbitration by observing that  the appellant-

Company admits the existence of arbitration clause in

the agreement dated 01.05.1997?

(ii) Whether the appellant is right in contending that  the

dispute raised in the Money Suit No.73 of 2003 is not

covered  by  the  arbitration  clause  and  cannot  be

referred to arbitration?

11. In  the  agreement  dated  01.05.1997  between  the

appellant-company and RPIL, the appellant was appointed as

clearing  and  forwarding  agent  for  the  entire  north-eastern

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region.   Clause  17  of  the  said  agreement  contains  the

arbitration clause which reads as under:-

“In the event of dispute arising between the parties out of the

subject contained herein or touching upon these presents during

pendency  of  this  Agreement  or  thereafter  the  same  shall  be

referred to Arbitration Act Bombay as provided under the Rules

and  Regulations  of  the  subject  of  Arbitration  framed  by  the

Bombay  Chamber  of  Commerce  and  the  competent  court  in

Mumbai alone shall have jurisdiction in the matter.”

12. The  respondent  did  not  accede  to  the  request  of  the

appellant for withdrawing the termination letter and hence, the

appellant filed Title Suit No.241 of 2001 inter alia praying for

declaration  that  the  contract  between  the  appellant  and  the

respondent-RPIL was  valid,  subsisting  and  continuing.   The

appellant  also  sought  for  declaration  that  the  respondent

cannot  terminate  the  appellant  as  clearing  and  forwarding

agent in any manner in case of RPIL’s merger with NPIL and

sought  for  permanent  injunction.   As pointed our  earlier,  the

said  Title  Suit  No.241  of  2001  ended  in  compromise  and

compromise decree was passed on 24.12.2001.   As per  the

said  compromise,  an amount  of  Rs.23,50,000/-  was paid  by

RPIL to the appellant by way of four demand drafts being  (i)

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Draft  No.215684  for  Rs.7,50,000/-;  (ii)  Draft  No.215682  for

Rs.6,70,000/-; (iii) Draft No.215683 for Rs.6,20,000/-; and (iv)

Draft No.215685 for Rs.3,10,000/-, all dated 04.01.2001 drawn

on  Allahabad  Bank,  Panbazar,  Guwahati.   As  a  part  of

compensation package, the respondent appointed the appellant

as stockist of the company at Guwahati and Agartala.  In terms

of  the  compromise,  the  appellant  has  handed  over  all  the

documents  to  the  respondent.   The  relevant  portion  of  the

terms of compromise reads as under:-

“…….

(iv) The  defendant  No.3  by  letter  dated  07.12.2001  has

appointed  the  plaintiff  as  a  stockist  of  the  company  at

Guwahati and Agartala as part of compensation package.

(v) The plaintiff has handed over all the stocks of goods to the

defendants company and the company has already started

lifting  the  stocks  from  the  custody  of  the  plaintiff  and

expected to clear by 11th December, 2001.  The plaintiff has

also  handed  over  entire  documents  including  L/R  in

possession, files, records and Sales Tax documents such

as  both  utilized  and  unutilized  sales  tax  documents  (1)

Road Permit;  (2)  Despatched Note;  (3)  ‘C’ Forms;  (4)  ‘F’

Forms;  (5)  ‘C’  Forms  from  stockists  and  papers  to  the

defendants relating to the C & F Agency under defendants

No.1; (6) All previous records starting from November, 1994

till  date  has  also  been  handed  over  to  the  plaintiff;  (7)

Software supplied and data’s of computer is also taken and

PC left after complete deletion of programme of RPIL.”

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13. From a reading of  the above terms of  the compromise

deed  dated  11.12.2001,  it  is  clear  that  the  parties  have

substituted a new agreement by way of compromise.  As per

the  agreement  dated  01.05.1997,  the  appellant  was  the

clearing  and  forwarding  agent  for  the  entire  north-eastern

region;  whereas  under  the  terms  of  the  compromise,  the

appellant has been appointed as stockist of the company only

for Guwahati and Agartala and not as clearing and forwarding

agent for north-eastern region.  The clauses in the compromise

memo also clearly state that the appellant handed over all the

stocks of  goods to the respondent-Company.   The appellant

had also handed over the entire documents in their possession

both used and unused as well as sales tax documents, road

permit, ‘C’ forms from stockists and other documents.  When

the parties have settled their differences and compromised the

matter, in the dispute subsequently arising between the parties,

arbitration clause in  the prior  agreement  cannot  be invoked.

Since  the  agreement  dated  01.05.1997  (agreement  for

appointing the appellant as clearing and forwarding agent) and

the  compromise  (appointing  the  appellant  as  stockist)  are

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different,  the  arbitration  clause  in  the  agreement  dated

01.05.1997 cannot be read into the terms of the compromise as

per which the parties have entered into a new arrangement and

this has not been kept in view by the High Court.  The High

Court  erred  in  holding  that  the  existence  of  the  arbitration

clause has been admitted by the appellant-Company and it is

for the arbitrator to decide under Section 16 of the Act whether

the arbitration clause applied to the subject matter of the suit or

not.

14. The parties can be referred to arbitration in an application

filed under Section 8 of the Act only if the subject matter of the

action before the judicial authority relates to dispute which is

the subject matter of the arbitration agreement. As per Section

8 of the Act,  the following conditions have to be satisfied for

referring the parties to arbitration:-

(i)  there is an arbitration agreement;

(ii) a party to the agreement brings an action in the court

against the other party;

(iii)   subject-matter  of  the  action  is  the  same  as  the

subject-matter of the arbitration agreement;

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(iv) the opposite party applies to the judicial authority for

referring the parties to arbitration before it submits his

first statement on the substance of the dispute.

An application under Section 8 of the Act can be made only if

the subject matter of the suit is also the same as the subject

matter of arbitration. In other words, only those disputes which

are specifically agreed to be resolved through arbitration can be

the subject matter of arbitration; and upon satisfaction of the

same, the Court can refer the parties to arbitration.  

15. Observing that filing application under Section 8 of the Act

should relate to the arbitration agreement or to be applicable to

the dispute, in  Yogi Agarwal v. Inspiration Clothes and U and

Others (2009) 1 SCC 372, it was held as under:-

“9. When a defendant invokes Section 8 of the Act by alleging

existence of an arbitration agreement, he should establish that

such arbitration agreement related to, or is applicable to, the suit

transaction/contract.  The  parties  may  enter  into  different

contracts at different points of time or may enter into a series of

unrelated transactions. It is possible that in regard to some, they

may  provide  for  arbitration  and  in  regard  to  others,  may  not

provide for arbitration. Obviously, the existence of an arbitration

agreement with reference to some other transaction/contract to

which  the  plaintiff  was  or  is  a  party,  unconnected  with  the

transactions  or  contracts  to  which  a  suit  relates,  cannot  be

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considered as existence of an “arbitration agreement” in regard

to the suit transactions/contracts.

16. In  the  present  case,  the  compromise  decree  does  not

contain any arbitration clause.  The subsequent Suit  No.73 of

2003  has  been  filed  by  the  appellant  due  to  failure  of  the

respondent  Company  to  appoint  the  appellant  as  stockist  of

their  products  in  Guwahati  and  Agartala  and  the  same  has

caused substantial  loss to the appellant.  In the said suit,  the

appellant also alleged that due to illegal act of the respondent,

the appellant has to face the criminal trial unnecessarily due to

which the appellant has sustained heavy loss both financially

and  mentally  and  also  it  resulted  in  loss  of  goodwill  and

reputation of the appellant and therefore, the appellant claimed

compensation  of  rupees  twenty  crores  from  the  respondent.

The suit claim is not covered by the arbitration.

17.  Mr.  Hrishikesh  Baruah,  learned  counsel  for  the

respondent submitted that  clause 17 of  the agreement dated

01.05.1997 covers all the disputes including “any dispute arising

between the parties” that may “touch upon” the clauses of the

agreement. It was submitted that the reading of the plaint filed

by the appellant clearly shows that the disputes between the

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parties  stem from the  contractual  agreement  which  “touches

upon”  the  agreement  dated  01.05.1997.   Learned  counsel

further  submitted  that  the  words  “….touching  upon  these

presents…..” used in the agreement has wide meaning which

not only relates to the dispute arising out of the appointment of

the appellant as clearing and forwarding agent,    but also any

other  dispute  arising  out  of  the  same  would  necessarily  fall

within the ambit of “…..touching upon these presents…..” and

the  High  Court  rightly  referred  the  parties  to  arbitration.  In

support of his contention, the learned counsel placed reliance

upon P Ramanatha Aiyar’s Advanced Law Lexicon, 4th Edition,

Page 4876.  The relevant portion relied upon reads as under:-

“The dictionary meaning of the word ‘touching’ is ‘in reference or

relation  to,  respecting,  regarding,  or  concerning’  and  this

meaning indicates that the disputes need not directly arise out of

the business of the society; but that it is enough that it should

have  reference  or  relation  to  or  concern  the  business  of  the

society.  M.S. Madhava Rao v. D.V.K. Surya Rao, AIR 1954 Mad

103, 107 (FB). [Madras Co-operative Societies Act (6 of 1932),

S.51]”

In  this  regard,  reliance  was  also  placed  upon  in  Deccan

Merchants Cooperative Bank Ltd. v. Dalichand Jugraj Jain and

Others  AIR 1969 SC 1320 : [1969] 1 SCR 887,  World Sport

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Group  (Mauritius)  Limited  v.  MSM Satellite  (Singapore)  PTE

Limited (2014) 11 SCC 639.

18. Taking us through the pleadings in the Money Suit No.73

of 2003, the learned counsel for the respondent submitted that

the various claims made in the Money Suit No.73 of 2003 relate

to the alleged loss sustained by the appellant-plaintiff  due to

termination of the agreement dated 01.05.1997 necessarily falls

within  the  ambit  of  “…..touching  upon  these  presents…..”

occurring in clause 17 of the agreement and therefore, the High

Court rightly referred the parties to arbitration.  Placing reliance

upon  Swiss Timing v.  Commonwealth  Games 2010 (2014)  6

SCC  677,  the  learned  counsel  submitted  that  to  shut  out

arbitration at the initial stage would destroy the very purpose for

which the parties had entered into arbitration agreement.  It was

submitted that when there is a clause for arbitration agreed by

the  parties,  it  is  mandatory  for  the  civil  court  to  refer  the

disputes to an arbitrator.  It was urged that in the present case,

in view of    clause 17 of the agreement dated 01.05.1997 and

in view of the mandatory language of Section 8 of the Act, the

High Court rightly referred the parties to arbitration.

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19. Though some of the claims in the Money Suit  No.73 of

2003 relate to  the loss allegedly  sustained by the appellant-

plaintiff due to termination of the agreement dated 01.05.1997,

other claims relate to the loss said to have been caused to the

appellant-plaintiff subsequent to the compromise.  According to

the appellant-plaintiff, claim of Rs.1.40 crores relates to alleged

loss  caused  due  to  the  failure  of  respondent  to  appoint

appellant-plaintiff  as stockist  at  Guwahati  and Agartala;  claim

relating  to  the alleged  loss  of  goodwill  and reputation;  claim

relating to the loss caused due to the mental pressure and legal

proceedings  and  such  other  claims  do  not  touch  upon  the

agreement dated 01.05.1997. The learned counsel for appellant

submitted that in the Money Suit No.73 of 2003, substantial part

of  the  claim  pertains  to  the  events  subsequent  to  non-

compliance of the compromise memo which do not fall  within

the  ambit  of  agreement  dated  01.05.1997  and  could  be

resolved only by the civil court.

20. As discussed earlier, by the agreement dated 01.05.1997,

the appellant was appointed as clearing and forwarding agent of

RPIL for  the  entire  north-eastern  region;  whereas  under  the

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compromise  memo,  the  appellant  has  been  appointed  as

stockist of the respondent Company at Guwahati and Agartala

which  is  entirely  a  different  appointment  though,  as  part  of

compensation  package.  Clause  17  of  the  agreement  dated

01.05.1997 cannot be invoked regarding the agreement of the

parties to appoint  the appellant  as stockist  for  Guwahati  and

Agartala pursuant to the compromise.  

21. It  is  also  pertinent  to  note  that  the  respondent  has

challenged the  compromise decree alleging that  it  has  been

obtained by inducement and fraud.  In view of the allegations of

fraud levelled by the respondent that the compromise decree is

vitiated by fraud, the parties cannot be referred to arbitration.

Observing that where there are allegations of fraud which are

so complicated that it becomes absolutely essential that such

complex  issues  can  be  decided  only  by  the  Civil  Court  on

apprehension of  the  evidence  adduced by  the  parties,  in  A.

Ayyasamy v. A. Paramasivam and Others (2016) 10 SCC 386, it

was held as under:-

“25. ……..It is only in those cases where the court, while dealing

with  Section  8  of  the  Act,  finds  that  there  are  very  serious

allegations of fraud which make a virtual case of criminal offence

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or where allegations of fraud are so complicated that it becomes

absolutely  essential  that  such complex issues can be decided

only  by  the  civil  court  on  the  appreciation  of  the  voluminous

evidence that needs to be produced, the court can sidetrack the

agreement  by  dismissing  the application  under  Section  8  and

proceed with the suit on merits. It can be so done also in those

cases where there are serious allegations of forgery/fabrication

of documents in support of the plea of fraud or where fraud is

alleged  against  the  arbitration  provision  itself  or  is  of  such  a

nature  that  permeates  the  entire  contract,  including  the

agreement to arbitrate, meaning thereby in those cases where

fraud  goes  to  the  validity  of  the  contract  itself  of  the  entire

contract which contains the arbitration clause or the validity of the

arbitration clause itself…….”.

Since the respondent has raised the plea that the compromise

decree is vitiated by fraud, the merits of such a plea could be

decided  only  by  the  Civil  Court  upon  consideration  of  the

evidence adduced by the parties.

22. As discussed earlier, there is no arbitration clause relating

to  the  dispute  between  the  parties  in  not  appointing  the

appellant  as stockist  and the claim of  compensation towards

loss  of  goodwill  and  reputation.  The  High  Court  erred  in

proceeding under the footing that  the dispute falls  within  the

ambit  of  the  agreement  dated  01.05.1997  and  that  the

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appellant-plaintiff admits the existence of the arbitration clause

and the impugned judgment is liable to be set aside.

23. In the result, the impugned order of the High Court in Civil

Revision  (P)  No.31  of  2005  is  set  aside  and  this  appeal  is

allowed and the Money Suit No.73 of 2003 shall stand restored

to the file of Civil Judge, Senior Division, Kamrup, Guwahati and

the trial court shall proceed with the matter in accordance with

law.

                                                   ………………………….J.                                                                [R. BANUMATHI]

………………………….J.                                                                [A.S. BOPANNA] New Delhi; July 30, 2019.

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