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Arbitration clause remains operative even where agreement terminated by mutual consent

The Supreme Court in Mrs. Hema Khattar & ANR. Vs. Shiv Khera has held that when an agreement is terminated by one party alleging breach committed by the other, the arbitration clause still survives and continues to be operative. This is particularly so when the contract is revoked by mutual consent and the arbitration clause is framed in general terms.

The Supreme Court referred to earlier decisions in Sundaram Finance Limited and Another vs. T. Thankam (2015) 14 SCC 444, where this Court has held as under:-

"8. Once there is an agreement between the parties to refer the disputes or differences arising out of the agreement to arbitration, and in case either party, ignoring the terms of the agreement, approaches the civil court and the other party, in terms of Section 8 of the Arbitration Act, moves the court for referring the parties to arbitration before the first statement on the substance of the dispute is filed, in view of the peremptory language of Section 8 of the Arbitration Act, it is obligatory for the court to refer the parties to arbitration in terms of the agreement, as held by this Court in P. Anand Gajapathi Raju v. P.V.G. Raju."

In P. Anand Gajapathi Raju & Others vs. P.V.G. Raju (Dead) and Others, Supreme Court has held
where an agreement is terminated by one party on account of the breach committed by the other, particularly, in a case where the clause is framed in wide and general terms, merely because agreement has come to an end by its termination by mutual consent, the arbitration clause does not get perished nor is rendered inoperative. This Court, in the case of P. Anand Gajapathi Raju (supra), has held that the language of Section 8 is peremptory in nature.

Therefore, in cases where there is an arbitration clause in the agreement, it is obligatory for the court to refer the parties to arbitration in terms of their arbitration agreement and nothing remains to be decided in the original action after such an application is made except to refer the dispute to an arbitrator. Therefore, it is clear that in an agreement between the parties before the civil court, if there is a clause for arbitration, it is mandatory for the civil court to refer the dispute to an arbitrator.

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