Supreme Court Clarifies Arbitration Scope After Compromise Decree: Zenith Drugs vs. Nicholas Piramal (2019)

Introduction

Date of the Judgment: July 30, 2019

Citation: [Not Available in Source]

Judges: R. Banumathi, J., A.S. Bopanna, J.

Can a dispute be referred to arbitration if the parties have already settled a previous dispute through a compromise decree? The Supreme Court of India addressed this crucial question in a case involving Zenith Drugs and Nicholas Piramal, clarifying the scope of arbitration clauses when a compromise has been reached. This judgment highlights the importance of the specific terms of a compromise and its impact on prior agreements. The bench comprised of Justice R. Banumathi and Justice A.S. Bopanna.

Case Background

Zenith Drugs & Allied Agencies Pvt. Ltd. (appellant) was initially appointed as a clearing and forwarding agent by Rhone Poulene India Limited (RPIL) in 1997. This agreement included an arbitration clause. In 2001, RPIL merged with Nicholas Piramal India Ltd. (respondent), leading to the termination of the agency agreement. Zenith Drugs objected to this termination, leading to a legal dispute.

The parties then entered into a compromise, which resulted in a decree by the Civil Judge, Senior Division, Guwahati. Under this compromise, Nicholas Piramal paid Zenith Drugs a sum of Rs. 23,50,000 and appointed them as stockists for Guwahati and Agartala. However, disputes arose again, leading to further legal action.

Timeline:

Course of Proceedings

The trial court dismissed Nicholas Piramal’s application under Section 8 of the Arbitration and Conciliation Act, 1996, stating that the compromise decree in the earlier suit (Title Suit No. 241 of 2001) settled the dispute. The Guwahati High Court, however, reversed this decision. The High Court held that the existence of an arbitration clause was admitted and that the arbitrator should decide if the clause applied to the dispute, in accordance with Section 16 of the Arbitration and Conciliation Act, 1996. This led to Zenith Drugs appealing to the Supreme Court.

Legal Framework

The core legal framework in this case revolves around the Arbitration and Conciliation Act, 1996, specifically Section 8 and Section 16.

✓ Section 8 allows a party to apply for a dispute to be referred to arbitration if there is an arbitration agreement.

✓ Section 16 states that the arbitral tribunal may rule on its own jurisdiction.

The Supreme Court also considered the implications of a compromise decree and whether it supersedes prior agreements containing arbitration clauses. The court also examined the scope of the phrase “…touching upon these presents…” in the arbitration clause.

Arguments

Appellant (Zenith Drugs) Arguments:

• The High Court erred in stating that Zenith Drugs admitted to the existence of an arbitration clause. The compromise decree of 24.12.2001 was a full and final settlement of the dispute.

• A substantial part of the claim in Money Suit No. 73 of 2003 was outside the scope of the arbitration clause, and therefore, the dispute could not be referred to arbitration.

• The dispute in Money Suit No. 73 of 2003 is exclusively determinable by the trial court. The High Court should not have referred the parties to arbitration.

• Nicholas Piramal had challenged the compromise decree on the grounds of inducement and fraud, which is still pending.

Respondent (Nicholas Piramal) Arguments:

• Zenith Drugs admitted the existence of the arbitration clause in the agreement dated 01.05.1997. The claim for compensation stemmed from the termination of the clearing and forwarding agent agreement, which is arbitrable.

• The compromise deed was obtained through false inducement and fraud. Therefore, the compromise decree is void.

• The dispute raised by Zenith Drugs “touches upon the presents” of the agreement dated 01.05.1997, making it arbitrable.

The innovativeness of the argument by the respondent was that the phrase “…touching upon these presents…” in the arbitration clause could be interpreted broadly to include any dispute related to the original agreement, even if it arose after the compromise.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for determination:

1. 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?
2. 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?

Treatment of the Issue by the Court

Authorities

Cases Relied Upon by the Court:

• Nathani Steels Ltd. v. Associated Constructions 1995 Supp.(3) SCC 324 – The trial court relied on this case to dismiss the application under Section 8 of the Arbitration and Conciliation Act, 1996.
• Konkan Railway Corporation Ltd. and Another v. Rani Construction Pvt. Ltd. (2002) 2 SCC 388 – The High Court relied on this case to refer the parties to arbitration.
• Yogi Agarwal v. Inspiration Clothes & U and Others (2009) 1 SCC 372 – The Supreme Court relied on this case to emphasize that the arbitration agreement should relate to the specific contract in dispute.
• Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya and Another (2003) 5 SCC 531 – The Supreme Court relied on this case to emphasize the importance of the arbitration agreement being applicable to the dispute.
• Deccan Merchants Cooperative Bank Ltd. v. Dalichand Jugraj Jain and Others AIR 1969 SC 1320 – The respondent relied on this case to argue that the words “touching upon” should be interpreted broadly.
• World Sport Group (Mauritius) Limited v. MSM Satellite (Singapore) PTE Limited (2014) 11 SCC 639 – The respondent relied on this case to argue that the words “touching upon” should be interpreted broadly.
• Swiss Timing v. Commonwealth Games 2010 (2014) 6 SCC 677 – The respondent relied on this case to argue that arbitration should not be shut out at the initial stage.
• A. Ayyasamy v. A. Paramasivam and Others (2016) 10 SCC 386 – The Supreme Court relied on this case to emphasize that allegations of fraud can be decided by the Civil Court and not through arbitration.
• M.S. Madhava Rao v. D.V.K. Surya Rao, AIR 1954 Mad 103 – The respondent relied on this case to define “touching” in the context of disputes.

Legal Provisions Considered:

• Section 8 of the Arbitration and Conciliation Act, 1996 – Pertaining to the power of judicial authority to refer parties to arbitration.
• Section 16 of the Arbitration and Conciliation Act, 1996 – Pertaining to the competence of the arbitral tribunal to rule on its own jurisdiction.

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The court distinguished the case of Konkan Railway Corporation Ltd. and Another v. Rani Construction Pvt. Ltd. (2002) 2 SCC 388, stating that the facts were different.
• The court relied on 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 to emphasize that for the parties to be referred to arbitration, the dispute must relate to the contract in respect of which the parties have agreed to refer to arbitration.
• The court relied on A. Ayyasamy v. A. Paramasivam and Others (2016) 10 SCC 386 to hold that allegations of fraud must be decided by the civil court.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the fact that the compromise decree created a new agreement between the parties, which superseded the original agreement containing the arbitration clause. The court emphasized that the arbitration clause could not be invoked for disputes arising from the new agreement. Additionally, the allegations of fraud made by the respondent were a significant factor in the court’s decision to refer the matter back to the civil court. The court also considered the fact that the claims made in the Money Suit No. 73 of 2003 were not entirely covered by the arbitration clause in the original agreement.

Logical Reasoning:

The court rejected the argument that the phrase “…touching upon these presents…” could be interpreted broadly to include the subsequent dispute. The court also considered the fact that Nicholas Piramal had challenged the compromise decree on the grounds of fraud, which further supported the decision to refer the matter back to the civil court. The court noted that “the parties have substituted a new agreement by way of compromise” and that “the arbitration clause in the agreement dated 01.05.1997 cannot be read into the terms of the compromise”. The Supreme Court also stated that “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.”

Key Takeaways

• A compromise decree creates a new agreement that supersedes the original contract, including any arbitration clause.
• Arbitration clauses in prior agreements cannot be invoked for disputes arising from a subsequent compromise decree.
• Allegations of fraud related to a compromise decree must be decided by a civil court, not through arbitration.
• The scope of an arbitration clause is limited to the specific contract it is part of and cannot be extended to other agreements.
• Parties should be careful to include an arbitration clause in the compromise agreement, if they intend to resolve disputes through arbitration.

Directions

The Supreme Court set aside the Guwahati High Court’s order and restored Money Suit No. 73 of 2003 to the file of the Civil Judge, Senior Division, Kamrup, Guwahati. The trial court was directed to proceed with the matter in accordance with the law.

Development of Law

The ratio decidendi of this case is that a compromise decree creates a new agreement that supersedes the original contract, including any arbitration clause. This judgment clarifies that an arbitration clause in an earlier agreement cannot be invoked for disputes arising out of a subsequent compromise decree, unless the compromise agreement specifically includes such a clause. This changes the previous position where a broad interpretation of the arbitration clause was sometimes adopted.

Conclusion

The Supreme Court’s judgment in Zenith Drugs & Allied Agencies Pvt. Ltd. vs. M/s. Nicholas Piramal India Ltd. clarifies that a compromise decree creates a new agreement, which supersedes the original contract, including its arbitration clause. The court held that the dispute in Money Suit No. 73 of 2003 was not covered by the arbitration clause of the original agreement and that allegations of fraud related to the compromise decree must be decided by a civil court. The Supreme Court set aside the High Court’s order and restored the suit to the trial court for further proceedings.