September 6, 2011

When can an Arbitration clause in the contract be Invoked

            Nathani Steels Ltd. Vs. Associated Constructions,  1995(Supp) 3 SCC 324

Fact of the Case:

The facts giving rise to this appeal reveal that on 5.9.1989 respondent submitted a tender for the construction of sheds in the appellant’s factory which came to be accepted and a contract came to be executed. Under the terms of the contract executed on 22.9.1989 the work had to be completed by 5.6.1990. The work was not in fact completed on or before the due date. The contract contained the arbitration clause. The dispute which arose on account of the non-completion of the contract was settled by and between the parties and the settlement was reduced to writing as found in the documents submitted as exhibits. By this document the disputes and differences were amicably settled by and between the parties in the presence of the architect on terms and conditions set out in the clauses 1 to 8 thereof. The documents bear the signature between the parties. The respondent, although voluntarily entered into the said settlement, he later realized that there was a calculation mistake in regard to the amount in question on his part and thereupon invoked the arbitration clause. The appellant in High Court however contended that in view of the dispute disputes and differences in connection with the contract having been finally and amicably settled by and between the parties, it was not open to the respondent to unilaterally brush aside the settlement and invoke the arbitration clause as if the dispute survives without having the settlement set aside on the ground of mistake as permissible by law.


Once the dispute by and between the parties under a contract arising and that is amicably settled by way of a final settlement unless that settlement is set aside in proper proceedings, it cannot lie in the mouth of one of the parties to the settlement to spurn it on the ground that it was a mistake and proceed to invoke the Arbitration
clause. If it is permitted the sanctity of contract the settlement would be wholly lost and one party can take the benefit under the settlement .In the circumstances, since the dispute or difference was finally settled and payments were made as per the settlement it was not open to the respondent to treat the settlement as non est and proceed to invoke the Arbitration clause. So the High Court was wrong in its view therefore the Supreme Court allowed the appeal and set aside the impugned order of the High Court and holds that the respondent cannot invoke the Arbitration clause in relation to the dispute difference settled under the terms of the settlement.


Once the dispute is amicably settled between the parties finally, arbitration clause should be invoked by a party to resolve the same on ground of mistake in the settlement unless the settlement is first set aside in proper proceedings. If the settlement is unilateral and the other party has not given any receipt of settlement, the arbitration clause can be invoked as supreme observed in P.K. Ramaiah and Co v. Chairman & Managing Director, National Thermal Power Corporation.

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