Union of India Vs. Kishorilal Gupta and Bros.
AIR 1959 SC 1362
Key Words: novation, substitution, consensus ad idem
Plaintiff entered into three settlement contracts with the government after the breach of the original contracts containing the arbitration clause, such that first of them provided “the contract on payment of amount mentioned shall stand finally determined” while other two mentioned that the new settlement is determined in “full and final settlement of original contract” and in the event of default by plaintiff, government reserved the right to recover the balance amount, also by execution of hypothecation bond. However, plaintiff failed to give any of the agreed amounts to the government, upon which arbitration proceedings were held. However, plaintiff contested that since by the settlement contracts entered into by the parties subsequent to the breach of the original contracts did not contain any such arbitration clause, hence, arbitral award was nullity.
- Whether settlement contracts entered into between the parties could be held to be novation u/s 62?
- Whether the arbitration proceedings as arising under the original contract were nullity?
Under section 62, the contract if rescinded in entirety before breach, then no primary or secondary obligations will flow from original contract, albeit if such recession happens after breach, then secondary obligations will nevertheless die. It is the question of construction of new contract whether it rescinds the original contract wholly or not (Morris v. Baron). Therefore, if parties with the intention and consensus ad idem rescind original contract in entirety then arbitration clause (which is collateral to substantive obligations under the contract and is not rescinded usually after the breach of such obligations) contained in the original contract also gets rescinded, however, if no such rescission takes place then arbitration clause will subsist. The same rule applies when the parties after rescission enter into new contract, or substitute the original contract with the new contract.
S.62 requires an agreement which necessarily implies consideration (as u/s 2(e)) However, application of S.63 doesn’t require consideration to support the remission or dispensing of the performance by the promisee who can do so gratuitously before breach of the contract. Quite independently to the provisions of S.62 and 63, liability arising out of the breach of the contract can be discharged by accord and satisfaction: “an agreement [i.e. accord] after breach whereby some consideration [i.e. satisfaction] other than his legal remedy is accepted by the party not at fault, followed by performance of the substituted consideration.” Further, “it may be shown that the accord itself is satisfaction; it is open to the injured party to accept the promise of the party in default in satisfaction of the existing cause of action”
The breach of substituted contract doesn’t revive the original contract which the party not in default had ‘put an end to’ u/s 39 or has been ‘substituted’ u/s 62 by the new contract.
In present case, the words, ‘in full and final settlement of’ are conclusive that the parties intended the new settlement contract to be in ‘complete’ substitution of original contract such that the ‘clauses collateral to substantive stipulations’ were also abrogated with the original contract. Further, government reserved the right to execute the hypothecation of bonds, and also recover from the plaintiff any balance due from Court proceedings. Therefore, the arbitration clause contained in the original contract perished with the original contract.
However, the court ruled that the arbitral award with respect to first settlement contract would not have been void but for the law relating to arbitration; because, since the payment was never paid, therefore, the original contract was never settled.
Author: Vishrut Kansal
Editor: Vivek Verma