Disputes Between The Parties After Compromise Is Not Arbitrable: Supreme Court

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Introduction

Supreme Court of India cleared the law on arbitrability of the disputes after a compromise recently by declaring that disputes arisen between the parties after entering into a compromise deed are not arbitral in absence of an arbitration clause in the compromise deed.

Case Name

Zenith Drugs and Allied Agencies Pvt. Ltd. v. Nicholas Piramal India Ltd. (Full Case Document is here)

Facts And Issues

Parties had entered into an agreement, which allowed the Appellant to be appointed as clearing and forwarding agent for M/s Rhone Poulene India Limited (RPIL). This agreement had a valid arbitration clause. While the agreement was continuing and subsisting, RPIL merged into the Respondent Company and ceased to exist. Due to this merger, Appellant’s agreement with RPIL was terminated. Appellant to stop the termination filed a Title suit in the trial court. Parties after plenty of negotiation reached a compromise and compromise deed was drafted. According to this compromise deed, Respondent paid Rs.23.50,000/- to the Appellant and appointed it as its stockiest for their products in two cities. Thereafter, new disputes arose between the parties and both sides brought legal action against each other. Respondent invoked arbitration and applied for the appointment of an arbitrator under section 8 of the Arbitration and Conciliation Act, 1996. Trial Court dismissed this application. Respondent appealed against this order in the High Court, where the parties were referred to arbitration. Aggrieved by this outcome, the Appellant appealed to the Supreme Court of India. Following two issues came up for consideration before the Supreme Court:

  • Whether High Court erred in sending the matter to arbitration just because Appellant admitted the existence of Arbitration Clause?
  • Could the Appellant argue that the Arbitration Clause does not hit Compromise Deed?

Arguments Advanced

Counsel for the Appellant submitted that dispute could only be tried by a civil court and High Court erred in not considering the fact that Respondent had challenged the Compromise Deed because of fraud and inducement.

Counsel for Respondent argued the matter on two fronts first one being that Appellant admitted the existence of arbitration clause and was seeking compensation because of illegal termination of clearing and forwarding agent, which continues to be arbitrable. The second one was that the Appellant through fraud and inducement obtained Compromise Deed.

Decision Of The Case

Division Bench of Supreme Court consisting of Justice R. Bhanumati and Justice AS Bopanna after listening to both the sides and examining the evidence tendered came to the conclusion that dispute which arose between the parties after compromise deed was not arbitrable because original agreement between the parties was substituted by the compromise deed which was clear after examining the compromise deed. The Supreme Court bench also clarified that High Court erred in sending the parties for arbitration just because Appellant admitted the existence of arbitration clause. Furthermore, Bench observed that Respondent had challenged the compromise deed because of fraud and inducement such allegation could only be tried before a civil court and parties under no circumstances could be referred to arbitration.

Siding with the Appellant Supreme Court set aside the order passed by High Court sending the parties to the arbitration and restored the matter before Senior Civil Judge for the matter to have proceeded in accordance with Law.

Author’s Opinion

It should be appreciated that the Supreme Court took notice of the fact that the language of compromise deed substituted the original agreement between the parties. This observation automatically cleared that disputes will be arbitrable only if a valid clause exists in the compromise deed.

 

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