Can Arbitration Clause Be Invoked In A Dispute Arising After Parties Compromise? SC Explains [Read Judgment]

Can Arbitration Clause Be Invoked In A Dispute Arising After Parties Compromise? SC Explains [Read Judgment]

"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.”

The Supreme Court has observed that when the parties to a contract containing arbitration clause have settled their differences and compromised the matter, arbitration clause in the prior agreement cannot be invoked in the dispute subsequently arising between the parties after such compromise.

In Zenith Drugs & Allied Agencies Pvt. Ltd. vs. Nicholas Piramal India Ltd, as per the contract, the company was appointed as clearing and forwarding agent for the entire north-eastern region. Some dispute arose between the parties, and they entered into a compromise and a compromise decree was drawn. Compromise decree did not contain any arbitration clause. A Money suit was filed later alleging that the other party refused to honour the terms and conditions of the compromise decree. The issue before the court was whether the High Court was right in referring the parties to arbitration by observing that the company admits the existence of arbitration clause in the prior agreement.

The bench comprising Justice R. Banumathi and Justice AS Bopanna observed that 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. The court said that, 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.

The court also observed that the compromise decree was challenged 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, the bench added.

"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."

The bench made a reference to following observations made by the Apex Court in A. Ayyasamy v. A. Paramasivam:

"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 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…….".

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