A) ABSTRACT / HEADNOTE

This Supreme Court decision addresses whether an arbitration clause contained in original contracts survives after those contracts are superseded by a new settlement agreement. The Union of India had entered into three military supply contracts with Kishorilal Gupta & Bros., each containing arbitration clauses. Before completion, disputes arose, leading to three successive settlement agreements that purported to resolve the disputes and fix payment obligations. The final settlement consolidated earlier settlements and included a clause stating that “the contracts stand finally concluded… and no party will have any further claim against the other.” When the respondents defaulted on payment, the Union sought arbitration under the original contracts. The High Court held that the arbitration clause survived for one contract but not for the third, and since the award was inseverable, it was void. On appeal, Subba Rao J. (with Imam J. concurring) held that the settlement agreement substituted the earlier contracts entirely, extinguishing the arbitration clauses with them. Applying principles from Payana Reena Saminathan v. Pana Lana Palaniappa [1914] A.C. 618, Norris v. Baron [1918] A.C. 1, and Heyman v. Darwins [1942] A.C. 356, the Court ruled that a novation wipes out both substantive and collateral terms, including arbitration clauses, unless expressly preserved. Sarkar J. dissented, reasoning that an accord and satisfaction only discharges obligations, not the contract itself, and that arbitration clauses are separable procedural agreements which survive unless expressly revoked. The case clarifies the doctrinal distinction between disputes arising under a contract still subsisting for some purposes (where arbitration survives) and those under a superseded contract (where it does not).

Keywords: Arbitration clause, novation, accord and satisfaction, contract discharge, settlement agreement, survival of arbitration agreement.

B) CASE DETAILS

i) Judgement Cause Title: The Union of India v. Kishorilal Gupta & Bros.

ii) Case Number: Civil Appeal No. 250 of 1955

iii) Judgement Date: 21 May 1959

iv) Court: Supreme Court of India

v) Quorum: Jafer Imam J., A.K. Sarkar J., K. Subba Rao J.

vi) Author: Subba Rao J. (majority); Sarkar J. (dissent)

vii) Citation: [1960] 1 SCR 493

viii) Legal Provisions Involved:

• Section 62, Indian Contract Act, 1872 – Novation, rescission, and alteration of contract

• Section 63, Indian Contract Act, 1872 – Promisee may dispense with or remit performance

• Section 33, Arbitration Act, 1940 – Challenge to existence/validity of arbitration agreement

ix) Judgments Overruled by the Case: None explicitly overruled.

x) Case is Related to which Law Subjects:

• Contract Law – Novation, discharge by agreement

• Arbitration Law – Survival and scope of arbitration agreements

C) INTRODUCTION AND BACKGROUND OF JUDGEMENT

The case arose from a supply arrangement during wartime where the Government entered into three distinct contracts for military equipment: ladles, bath ovals, and kettles. Each contract contained a broadly worded arbitration clause. Disputes emerged before execution was complete, leading to settlement contracts intended to resolve all issues. Importantly, the third settlement of 22 February 1949 consolidated payment obligations from the earlier settlements and stated that the “contracts stand finally concluded.”

The Union later bypassed the settlement, referring claims under the original contracts to arbitration. The legal issue was whether the original arbitration agreements survived after the contracts were substituted by settlement agreements. The Court had to reconcile principles from English law (e.g., Heyman v. Darwins, Hirji Mulji v. Cheong Yue) with Indian contract doctrine under Sections 62 and 63.

D) FACTS OF THE CASE

The Government cancelled the three contracts in 1945–46, raising claims for the value of raw materials supplied. The contractor counterclaimed for damages in two contracts. The first two disputes were settled on 6 September 1948:

• First Contract: Contractor to pay ₹3,164-8-0; contract “finally determined” upon payment.

• Second Contract: Contractor to pay ₹36,276; contract stood “finally determined” immediately.

The third settlement dated 22 February 1949 covered the third contract and unpaid sums from the earlier settlements. It fixed a lump sum of ₹45,000, allowed retention of surplus materials, and required monthly instalments with a hypothecation of property as security. Clause 6 declared all three contracts “finally concluded” with no further claims.

The contractor defaulted on instalments and hypothecation. On 10 August 1949, the Union demanded ₹1,51,723 under the original contracts and initiated arbitration. The arbitrator awarded ₹1,16,446-11-5 for the first and third contracts. The High Court set aside the award as inseverable, holding the arbitration clause had lapsed for the third contract.

E) LEGAL ISSUES RAISED

i) Whether the settlement agreement of 22 February 1949 substituted and extinguished the original contracts (novation) under Section 62 of the Indian Contract Act.

ii) Whether an arbitration clause contained in the original contracts survives such novation.

iii) Whether the arbitrator had jurisdiction to decide disputes under the original contracts after the settlement.

iv) Whether the inseverable nature of the award invalidated it in entirety.

F) PETITIONER/APPELLANT’S ARGUMENTS

The Union of India argued:

• The arbitration clauses were comprehensive enough to include disputes about whether the contracts had ended, relying on Heyman v. Darwins [1942] A.C. 356.

• There was no novation, only conditional settlements dependent on future performance; failure to perform revived original obligations and the arbitration clause.

• Even if there was novation, the arbitration agreement survived as a separate collateral contract, citing Tolaram Nathmull v. Birla Jute Mfg. Co. Ltd., I.L.R. (1948) 2 Cal. 171.

• Disputes “in connection with” the contracts clearly fell within the arbitration clause.

G) RESPONDENT’S ARGUMENTS

The Contractor contended:

• The settlement constituted a complete novation and discharge under Section 62; rights thereafter flowed solely from the settlement agreement.

• Clause 6 expressly extinguished all prior contractual claims, including procedural clauses like arbitration.

• Non-performance of the settlement did not revive the old contracts; the remedy lay in enforcing the settlement, not the original agreements.

• The arbitrator lacked jurisdiction to decide disputes under non-existent contracts; hence the award was void ab initio.

H) RELATED LEGAL PROVISIONS

i) Section 62, Indian Contract Act, 1872 – Novation replaces old contract with a new one, extinguishing prior terms, including arbitration clauses unless preserved.

ii) Section 63, Indian Contract Act, 1872 – Permits dispensing with performance or accepting satisfaction by new arrangement.

iii) Section 33, Arbitration Act, 1940 – Enables a party to seek a declaration that an arbitration agreement is invalid or has ceased to exist.

I) JUDGEMENT

a. Ratio Decidendi

Majority (Subba Rao J., Imam J. concurring):

• An arbitration clause, though collateral, is an integral term of the contract and perishes with it when the contract is extinguished by novation.

• The February 1949 settlement was intended as a comprehensive substitution of the earlier contracts, giving rise to a new cause of action and superseding all prior terms.

• Since the arbitration clause was part of the old contracts, it did not survive.

• As the award was inseverable, the entire award was void.

Key precedents applied:

• Payana Reena Saminathan v. Pana Lana Palaniappa [1914] A.C. 618 – Accord and satisfaction by substituted agreement extinguishes prior rights.

• Norris v. Baron [1918] A.C. 1 – Distinction between variation and rescission with substitution.

• British Russian Gazette v. Associated Newspapers [1933] 2 K.B. 616 – Executory accord can discharge prior cause of action.

• Heyman v. Darwins [1942] A.C. 356 – Arbitration survives frustration or repudiation but not novation.

b. Obiter Dicta

• Even a widely framed arbitration clause requires the continued legal existence of the underlying contract.

• Distinction drawn between cases of termination by breach/frustration (where contract survives for limited purposes) and by novation (where contract is extinguished for all purposes).

c. Guidelines

• Where parties intend to replace an agreement entirely, arbitration clauses will lapse unless expressly preserved.

• Drafting settlement agreements should clarify the survival or extinction of arbitration provisions to avoid jurisdictional disputes.

J) CONCLUSION & COMMENTS

The case establishes that novation extinguishes arbitration clauses unless expressly preserved, marking a clear boundary between disputes under terminated-but-subsisting contracts and disputes under superseded contracts. It underscores the importance of precise drafting in settlement agreements. While the majority favoured a strict contractual analysis, Sarkar J.’s dissent offers an alternative view that sees arbitration clauses as autonomous agreements capable of surviving unless expressly revoked—aligning with the separability doctrine later recognised in modern arbitration law.

K) REFERENCES

a. Important Cases Referred

1. Payana Reena Saminathan v. Pana Lana Palaniappa, [1914] A.C. 618 (PC)

2. Norris v. Baron and Co., [1918] A.C. 1 (HL)

3. British Russian Gazette and Trade Outlook Ltd. v. Associated Newspapers Ltd., [1933] 2 K.B. 616 (CA)

4. Heyman v. Darwins Ltd., [1942] A.C. 356 (HL)

5. Hirji Mulji v. Cheong Yue Steamship Co., [1926] A.C. 497 (PC)

6. Tolaram Nathmull v. Birla Jute Mfg. Co. Ltd., I.L.R. (1948) 2 Cal. 171 (Cal HC)

b. Important Statutes Referred

1. Indian Contract Act, 1872 – Sections 62, 63

2. Arbitration Act, 1940 – Section 33