1. The challenge in this Commercial Appeal is directed against judgment and order dated 20th January 2024 passed by learned Principal District and Sessions Judge, Mysuru in Commercial Original Suit No.237 of 2023, whereby the application of the appellant-original defendant under Section 8 of the Arbitration and Conciliation Act, 1996 for referring the subject matter to the arbitration came to be rejected.

2. It was a suit instituted by the plaintiff-respondent herein for recovery of Rs.4,09,06,283/- with interest. The plaintiff and defendant had previously entered into a Partnership Deed on 24th June 2020 and were engaged in partnership business of sale of motor spirit, motor oils, greases, LPG, CNG and other motor accessories manufactured by the Bharat Petroleum Corporation Ltd., in the name and style of ‘Shree Service Station’.

3. In the plaint it was the case of the plaintiff inter alia that the said service station which was situated at Kantharaja Urs Road, Saraswathipuram, Mysuru was under the ownership of the defendant, his sisters and his mother and originally belonged to the father. It was stated that the plaintiff had initially invested the amount towards working capital and it was agreed that for a period of five years the plaintiff would be entitled to 99% profit and the rest 1% profit will go to the defendant. While the investment of the plaintiff was Rs.30,00,000/- as working capital, the defendant had collected in addition Rs.2,49,50,000/-

3.1 It was averred by the plaintiff that defendant started to insist that the plaintiff should receive back investment made in the partnership firm by him, and exit the partnership. For this, the defendant agreed to pay Rs.3,75,00,000/- within stipulated time and upon such payment, the plaintiff was to leave from the partnership. The terms and conditions relating to above agreement came to be reduced into writing in agreement dated 10th August 2022 between the parties. It is the say of the plaintiff that even after execution of this agreement, defendant failed to pay the sum agreed to be paid, and requested the plaintiff to give further time. Despite notices, the amount was not paid, the suit was therefore, required to be instituted, stated the plaintiff.

3.2 In the aforementioned suit, the defendant filed application under Section 8 of the Arbitration and Conciliation Act, 1996 on the ground that the Partnership Deed dated 24th June 2020, there existed an Arbitration Clause No.21 and in view of that the suit dispute was required to be referred to the Arbitrator and that the suit was not maintainable.

3.3 Clause No.21 relied on by the defendant from the Partnership Agreement dated 24th June 2020 was as under,

“21. Arbitration: That if any dispute would arise in interpretation of any of the clause of this deed the same shall be referred to the arbitrator/arbitrators, in accordance with the Arbitration Act and the award of the arbitrator/arbitrators shall be final and binding upon the partners. The place and jurisdiction of arbitration is Facilitation council, Bangalore, Karnataka.”

3.4 The application for reference to the arbitration was contested contending that the suit was based on agreement dated 10th August 2022 under which the defendant agreed to pay a definite sum, in view of his not fulfilling the terms and conditions of the Partnership Deed, it was contended that the subsequent agreement clearly showed that the partnership constituted on 24th June 2020 was not taken up and that the plaintiff and the defendant had agreed to exit from the partnership.

3.5 In the above light, it was contended that eventhough the original Partnership Deed contained the arbitration clause relating to business of partnership, in view of settlement of the dispute between the parties and in light of fresh agreement having been entered into the suit for implementation of the commitment given by the defendant in the said subsequent agreement was maintainable and that the arbitration clause would not apply in as much as no dispute regarding partnership business could be said to have subsisted.

3.6 The court below framed two issues. Firstly, whether it was necessary to direct the parties to invoke arbitration clause in the Deed of Partnership between them. Secondly, whether in view of the arbitration clause in the Partnership Deed, the Court had jurisdiction to try the suit, answering both the issues in the negative.

4. Learned Senior Advocate for the appellant assailed the judgment and order of the Commercial Court below to submit that the commercial suit was filed for a dispute which originated from partnership agreement and that the partnership agreement contained arbitration clause. According to learned Senior Counsel, for the suit dispute, the arbitration clause was referable and invokable. It was further contended that dispute between the partners to a partnership agreement is a commercial dispute within the meaning of Section 2(1)(c)(xv) of the Commercial Courts Act, 2015. The submission was furthered by canvassing that had the dispute not been one arising from the partnership deed, the commercial suit would not have been competent and a simplicitor suit for recovery of money would have been instituted.

4.1 Learned Senior Advocate for the appellant, after emphasizing that in the plaint if was not stated that the partnership deed dated 24th June 2020 was terminated, submitted that assuming without admitting that the agreement of partnership brought about a cessation of the partnership, the arbitration clause in the deed dated 24th June 2020 would still be subsisting and that the parties would be bound by it. It was submitted that because of the subsequent agreement regarding payment of dues by the defendant, the arbitration clause in the partnership agreement did not survive.

4.2 Learned Senior Advocate thereafter proceeded to highlight the scope and ambit of Section 8 of the Arbitration Act, 1996. In this regard, the decision of the Supreme Court in Praveen Electricals Pvt. Ltd. vs. Galaxy Infra and Engineering Pvt. Ltd. [(2021) 5 SCC 671], was relied on. For the proposition that merely because that the contract has come to an end by its termination due to breach, the arbitration clause does not get perished nor it is rendered inoperative. But would survive for the resolution of disputes arising ‘in respect of’ or ‘with regard to’ or ‘under the contract’, pressed into service was the decision in Branch Manager, Magma Leasing and Finance Ltd. vs. Potluri Madhavilata [(2009) 10 SCC 103].

4.3 On the other hand, learned Senior Advocate for the respondent-originally plaintiff supported the impugned judgment and order of the court below. He took the court through the contents of the partnership agreement and then highlighted the nature of and conditions in agreement entered into afresh by pinpointing terms and conditions incorporated in the new agreement, to emphasise that the subsequent was entirely an agreement which created obligations between the parties anew, in which, the arbitration clause found in the partnership was not extended either expressly or impliedly. It was his submission that the arbitration agreement ceased to exist post-entering into the new agreement and the arbitration clause also did not survive to operate.

4.4 Learned Senior Counsel lastly submitted on the conduct of the appellant-defendant that the defendant has not paid the amount agreed upon in the subsequent agreement. On one hand he has resiled from his obligation under the fresh agreement forcing the respondent herein to institute the recovery suit, on the other hand, now he has been trying to protract by filing such applications as a delaying tactics.

5. The core question that arises in the backdrop of above controversy is whether after the parties entering into agreement dated 10th August 2022, the arbitration clause found in the partnership agreement dated 24th June 2020 survives and whether the Arbitration clause was operative to refer the suit dispute to the arbitration; whether the partnership agreement stood rescinded or the new agreement was an extension, to be read into it the arbitration clause; whether the partnership agreement and the subsequent continued to bear nexus to each other.

5.1 Although the clause in a contract for arbitration is perceived in law to be independent in itself, the arbitration clause is always referable to the contract or the agreement in which it is incorporated. The arbitrable dispute arise when the disputes are of the kind to be ‘based on’, or ‘in relation to’ or ‘in connection with’ the contract. It could be said that the existence of contract in which the arbitration clause is inserted, becomes a prerequisite for applying the arbitration clause.

5.1.1 In certain circumstances, for certain purposes, in given case, it could be viewed however that arbitration clause may survive for its applicability for resolution of disputes even after the contract as such, has worked out for itself. One of such instances is that the contract has come to an end by virtue of doctrine of frustration, in which case the contract would be cease for all purposes, but only for future performance. In other words, where contracts are consensual, the question whether the arbitration clause survives or perishes, would depend upon the nature of the disputes and their effect on the contractual terms.

5.2 The discussion on position of law on this score is found in the decision of the Hon’ble Supreme Court in Damodar Valley Corporation vs. K.K. Kar [(1974) 1 SCC 141]. The issue is addressed by the Hon’ble Supreme Court in that decision in the context of Sections 62 and 39 of the Contract Act, 1872, was whether the arbitration clause incorporated in a contract perishes along with unilateral repudiation of the contract. The question for determination was: "where one of the parties refers a dispute or disputes to arbitration and the other party takes a plea that there was a final settlement of claims, is the court, on an application under Sections 9(b) and 33 of the Arbitration Act, 1940, entitled to enquire into the truth and validity of the averment as to whether there was or was not a final settlement on the ground that if that was proved, it would bar a reference to the arbitration inasmuch as the arbitration clause itself would perish."

5.2.1 As explained by the Hon’ble Supreme Court in Damodar Valley Corporation (supra), the questions of unilateral repudiation of the rights and obligations under the contract or of a full and final settlement of the contract are relatable to the performance or discharge of the contract, in which eventuality, much less the arbitration clause is put an end to, such questions fall within the purview of the arbitration clause.

5.2.2 It was observed, however, that the case was not one where the plea is raised that the contract is void, illegal or fraudulent. It is to be added here by this Court that even in respect of a new contract entered into in substitution of or rearranging the contractual obligations into new contract in place of the existing one, the complexion would arise differently, stated the Supreme Court,

“This is not a case where the plea is that the contract is void, illegal or fraudulent, etc., in which case, the entire contract along with the arbitration clause is non est, or voidable. As the contract is an outcome of the agreement between the parties it is equally open to the parties thereto to agree to bring it to an end or to treat it as if it never existed. It may also be open to the parties to terminate the previous contract and substitute in its place a new contract or alter the original contract in such a way that it cannot subsist. In all these cases, since the entire contract is put an end to, the arbitration clause, which is a part of it, also perishes along with it.”

(Para 7)

5.2.3 Referring to Section 62 of the Contract Act, it was stated that it incorporates the very principle when it provides that when the parties to a contract agreed to substitute any contract or to rescind or alter it, the original contract need not be performed,

“Where therefore, the dispute between the parties is that the contract itself does not subsist either as a result of its being substituted by a new contract or by rescission or alteration, that dispute cannot be referred to the arbitration as the arbitration clause itself would perish if the averment is found to be valid. As the very jurisdiction of the arbitrator is dependent upon the existence of the arbitration clause under which he is appointed, the parties have no right to invoke a clause which perishes with the contract.”

(Para 7)

5.3 In State of Maharashtra vs. Navbharat Builders [1994 Supp (3) SCC 83], as well as in M/s. P.K. Ramaiah and Company vs. Chairman & Managing Director, National Thermal Power Corporation [1994 Supp (3) SCC 126], wherein a construction work contract, the contractor had accepted either by mutual agreement or voluntarily an unconditionally the payment in settlement of the contract claim, it was held that no arbitrable dispute survived and the contractor was not entitled to put forward the labour escalation or any subsequent claim was not an arbitrable dispute.

5.3.1 The question was whether the arbitration clause in the original contracts could claim any effect for it. The view of the Calcutta High Court that the third original contract and the arbitration clause contained therein has ceased to exist as a result of last settlement, was confirmed by the Apex Court by observing that the third settlement contract was in substitution of the three contracts, and after its execution the earlier contracts stood extinguished and the arbitration clause also stood extinguished.

5.3.2 The judgment of the Hon’ble Supreme Court per majority culled out the following principles, (i) An arbitration clause is a collateral term of a contract as distinguished from its substantive terms; but none the less it is an integral part of it; (ii) However comprehensive the terms of an arbitration clause may be, the existence of the contract is a necessary condition for its operation; it perishes with the contract; (iii) The contract may be non est in the sense that it never came legally into existence or it was void ab initio; (iv) Though the contract was validly executed, the parties may put an end to it as if it had never existed and substitute a new contract for it solely governing their rights and liabilities thereunder; (v) In the former case, if the original contract has no legal existence, the arbitration clause also cannot operate, for along with the original contract, it is also void; in the latter case, as the original contract is extinguished by the substituted one, the arbitration clause of the original contract perishes with it; (vi) Between the two falls many categories “of disputes in connection with a contract, such as the question of repudiation, frustration, breach etc. In those cases it is the performance of the contract that has come to an end, but the contract is still in existence for certain purposes in respect of disputes arising under it or in connection with it. (vii) As the contract subsists for certain purposes, the arbitration clause operates in respect of these purposes. It is to be observed that such is not the case in the present set of facts.

5.4 In the Union of India vs. Kishorilal Gupta [AIR 1959 SC 1362], respondents had entered into three contracts with the appellant, each of which had the arbitration clause. Before the contracts could be fully executed, disputes arose between the parties and allegations of breach was leveled. The parties thereafter entered into three fresh contracts on different successive dates settling the disputes on the terms contained in the new contract, wherein the respondents agreed to pay to the appellants certain monies in settlement of the dispute related to first two original contracts, and by last of the new agreement, the respondents agreed to pay to the appellant the specified amount preferable to third original contract.

5.5 The law in this regard came to be discussed by the Supreme Court also in Nathani Steels Ltd. vs. Associated Constructions [1995 Supp (3) SCC 324], wherein it was held that once there is a full and final settlement in respect of a particular dispute or difference in relation to a matter covered under arbitration clause and if such dispute is finally settled, it does not remain arbitrable dispute and that the arbitration clause cannot be invoked. It was stated that unless the settlement is set aside in an appropriate proceedings, a party to the settlement is not permissible to spurn it and to seek to invoke the arbitration clause.

5.5.1 The Supreme Court further observed,

“If this is permitted the sanctity of contract, the settlement also being a contract, would be wholly lost and it would be open to one party to take the benefit under the settlement and then to question the same on the ground of mistake without having the settlement set aside. In the circumstances, in the instant case since the dispute or difference was finally settled and payments were made as per the settlement, it was not open to the respondent unilaterally to treat the settlement as non est and proceed to invoke the Arbitration clause.”  (Para 3)

5.6 The principles came to be highlighted and summarized by the Supreme Court also in Gujarat Composite Ltd. vs. A. Infrastructure Ltd. [AIR 2023 SC (Civil) 1654]. The discussion is found in paragraphs 17, 18, 19 and 20 of the judgment which confirmed the view taken by the Gujarat High Court [AIR 2018 Gujarat 142]. The Delhi High Court in Larsen and Toubro Ltd. vs. IREO Victory Valley Pvt. Ltd. which was C.S (Comm) No.534/2023 decided on 24th April 2024, had an occasion to address the issue which considered the aforementioned decisions of the Apex Court to conclude that it is a settled legal position that if a mutual settlement supercedes the original contract, the original arbitration clause would not survive. It was stated that if there is unilateral repudiation, in such eventuality, the arbitration clause may survive depending upon the facts.

5.7 Whether the arbitration clause in earlier contract which may have been substituted with another contract by the parties would survive to operate for the purpose of obligation and disputes arising out of the subsequent contract, is a question to be considered in light of set of facts, having regard to the nature of the subsequent agreement juxtaposed with the previous one, the intention of the parties and whether the new contract introduced fresh rights and obligations between the parties. It is always a question of interpretation of contracts.

5.8 Reverting to the facts of the present case, as noted above, between the parties there existed a Deed of Partnership dated 24th June 2020 which was registered on 2nd July 2020. The said Deed of Partnership contained provision for arbitration, which was clause 21 in the contract. In view of the disputes arising, navigating through negotiation, the parties decided to enter into new agreement dated 10th August 2022 wherein the defendant agreed to pay sum of Rs.3,75,00,000/- in view of having failed to fulfill the terms and conditions in the Partnership Deed. Both the partners- the plaintiff and the defendant had agreed to put an end to the partnership. The suit was filed on the basis of the said agreement dated 10th August 2022.

5.9 The parties thus had earlier between them a partnership contract subsisting. Both the plaintiff and defendant bear their relationship as partners. The partnership business was set up with terms and conditions arrived at attending to the partnership. The defendant was unhappy and wanted to exist from partnership. He offered payment of definite amount in lieu of doing away with the partnership relationship. It was a dispute which was resolved by entering into new agreement dated 10th August 2022. This agreement was in place of the partnership agreement dated 22nd June 2020.

6. The new subsequent agreement is reproduced in its relevant portions,

“WHEREAS the First Party and Second Party herein had entered into a Deed or Partnership on 24.06.2020 at Mysuru City in the name and style ‘M/s. Shree Service Station' having Firm Number: MYS-F43-2020-21 dated 02/07/2020 by the Office of the Registrar of Firms, Mysore.

WHEREAS, meanwhile the first party and Second party entered in to Memorandum of Understanding dated 10/01/2020, the First party has not fulfill his words/Conditions as per Partnership deed and Memorandum of understanding between first and second party. Now the both the parties have decided that they will exit from the Partnership upon the First Party fulfilling the terms and conditions as mutually agreed amongst themselves and deduced herein below;

01. The First Party has agreed to pay a sum of Rs.3,75,00,000/- (Rupees Three Crore Seventy Five Lakh only) to the Second Party before the end of 31st December, 2022 in following manner:-

(a) Rs.1,31,81,019/- (Rupees One Crore Thirty one Lakh Eighty one Thousand and Nineteen only) by 3 No's Cheques respectively each of Rs.43,93,673/- to the Account No. 002210100023140 of Shobha S Poojari, in Bharath Co Operative Bank, Malleshwaram branch, Bangalore.

(b) Rs. 2,37,65,373/- (Rupees Two Crore Thirty Seven Lakh Sixty five Thousand and Three Hundred seventy Three only) by 3 No's Cheques respectively each of Rs.79,21,791/- to the Account No. 002212100009243 of Shri Sagar, in Bharath Co Operative Bank, Malleshwaram branch, Bangalore.

(c) Rs.5,53,608/- (Rupees Five Lakh Fifty Three Thousand and Six Hundred Eight only) to the Account No. 002210100034678 of Ganesh S Poojari, in Bharath Co Operative Bank, Malleshwaram branch, Bangalore.

02. The Second Party upon receiving the sum of Rs.3,75,00,000/- (Rupees Three Crore Seventy Five Lakh only) from the First Party towards full and final settlement shall retire/exit from 'M/s. Shree Service Station’, partnership and shall execute such documents as required to give effect to the same.

03. The parties herein have agreed that the sum agreed to be paid by the First Party to the Second Party includes the Capital brought in by the Second Party. It is mutually agreed that the sum of Rs.3,75,00,000/- (Rupees Three Crore Seventy Rive Lakh only) is a consolidated final settlement amount.

04. It is further agreed that irrespective of profit of loss of the Partnership, the First Party shall pay the Second Party the amount as agreed herein in full and final settlement.

05. It is further agreed by the parties that each partner shall mean and include all their heir/s, successor, representatives, executors and assignees.

06. If the first party is failed to fulfill the conditions of this agreement that the Second Party is entitled to specifically enforce this agreement under the provisions of Specific Relief Act 1963 before the competent Authority/Court.

In witness whereof both the parties have affixed their signatures to this Agreement on the day & place as mentioned herein above.”

6.1 It would be noticed from the aforesaid agreement and terms entered into between the parties that it was a memorandum of understanding which was reached at in view that the first party that is defendant was unable to fulfill the conditions of the partnership deed. It was recited and agreed, as reflected in the said agreement, that the parties would exit from the partnership. It is in this light that the first party agreed to pay a definite sum to the second party. This agreement marked termination of partnership and obliteration of the terms and conditions which operated amongst the partners in the partnership agreement.

6.1.1 It was agreed that irrespective of profit or loss of the partnership, the second party shall pay the amount as above in full and final settlement. It was a condition that second party upon receiving the amount paid towards full and final settlement shall retire and exit from the partnership which was in the name of ‘M/s. Shree Service Station’ and that necessary documents shall be executed to give effect to such arrangement of exit.

6.2 The conditions read as they stood in the fresh agreement, evidently evinced the intention of the parties to put an end to the partnership agreement. It had the effect of dissolution of partnership, one of the two partners exiting from the partnership. The partnership was broken by mutual agreement and fresh obligations and an entirely new obligation of payment of money by one party to another was settled.

6.3 The jural relationship which existed previously between the parties as the partners, came to an end with execution of a fresh contract. With the jural relationship having been put to an end by new contract, the partnership agreement perished. All the terms and conditions of the partnership deed stood rescinded. The said contract of partnership dated 22nd June 2020, having been replaced by new agreement dated 10th August 2022, did not survive on facts and in law.

6.4 Consequentially, the arbitration clause which was contained in the partnership agreement lost its existence. It perished with discontinuance of the partnership agreement. It was not carried in the new contract, nor there was an intention of the parties to carry forward the same. The agreement dated 10th August 2022 was in the nature of novation whereby the parties rescinded mutual rights and obligations as partners of the partnership firm, to be governed by fresh counts of rights and obligations. The exit of partnership was indeed coupled with exit of arbitration clause which stood in the forsaken partnership deed only. Invocation of Section 8 of the Arbitration and Conciliation Act, 1996 and prayer on that basis to refer the suit dispute to arbitration was misconceived. There existed no arbitration clause to be taken recourse to.

6.5 For all the aforesaid reason, the judgment and order of commercial court below refusing the prayer of the defendant to refer the suit dispute for arbitration was eminently proper and legal.

7. The present appeal fails and stands dismissed.