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2025 (5) TMI 474 - SC - Indian LawsReference of dispute for arbitration - whether a dispute raised by an insured after giving a full and final discharge voucher to the insurer can be referred to arbitration? - HELD THAT - In Duro Felguera S.A. Vs. Gangavaram Port Ltd. 2017 (10) TMI 1304 - SUPREME COURT a two-Judge Bench of this Court examined Section 11(6) of the 1996 Act as well as Section 11(6A) inserted in the 1996 Act by way of the Arbitration and Conciliation (Amendment) Act 2015 and concluded that courts should look into only one aspect existence of an arbitration agreement. Already the width of jurisdiction under Section 11(6) of the 1996 Act was considerably wide following judicial dicta but post the aforesaid amendment all that the courts need to see is whether an arbitration agreement exists nothing more nothing less. The legislative policy and purpose is essentially to minimize the court s intervention at the stage of appointing the arbitrator. A three-Judge Bench of this Court in Vidya Drolia Vs. Durga Trading Corporation 2020 (12) TMI 1227 - SUPREME COURT held that subject matter qua arbitrability cannot be decided at the stage of Sections 8 or 11 of the 1996 Act unless it is a clear case of dead wood. The court under Sections 8 and 11 has to refer a matter to arbitration or to appoint an arbitrator as the case may be unless a party has established a prima facie case of nonexistence of a valid arbitration agreement. The court should refer a matter if the validity of the arbitration agreement cannot be determined on a prima facie basis. The rule should be when in doubt do refer. In Oriental Insurance Company Ltd. Vs. Dicitex Furnishing Ltd. 2019 (11) TMI 662 - SUPREME COURT a two-Judge Bench of this Court considered the objection of the insurer about maintainability of the application under Section 11(6) of the 1996 Act in which the High Court had appointed an arbitrator. The objection was that the claimant had signed the discharge voucher and had accepted the amount offered thus signifying accord and satisfaction which in turn meant that there was no arbitrable dispute. The doctrine of Kompetenz-Kompetenz is now firmly embedded in the arbitration jurisprudence in India. This doctrine is based on the principle that an arbitral tribunal is competent to rule on its own jurisdiction including on the issue of existence or validity of an arbitration agreement. The object is to minimize judicial intervention which is an acknowledgment of the concept of party autonomy. Conclusion - There are no hesitation in holding that the High Court was wrong in rejecting the Section 11(6) applications of the appellant. The question as to whether the appellant was compelled to sign the standardized voucher/advance receipt forwarded to it by the respondent out of economic duress and whether notwithstanding receipt of Rs.1, 88, 14, 146.00 as against the claim of Rs. 5, 71, 69, 554.00 the claim to arbitration is sustainable or not are clearly within the domain of the arbitral tribunal. The impugned order of the High Court dated 02.12.2011 is set aside - Appeal allowed.
The core legal question considered in this judgment is whether a dispute raised by an insured after giving a full and final discharge voucher to the insurer can be referred to arbitration. This central issue arises in the context of two insurance policies containing identical arbitration clauses and concerns the effect of acceptance of a payment accompanied by a discharge voucher on the right to arbitrate remaining claims.
In the factual matrix, the appellant company had suffered loss due to flooding at its factory premises insured under two fire insurance policies. The appellant lodged claims under both policies, but the insurer delayed settlement. After a prolonged delay and under financial pressure, the appellant signed an undated standardized discharge voucher for a partial payment of Rs. 1,88,14,146.00 against a bona fide claim of Rs. 5,71,69,554.00 and received the cheque. Subsequently, the appellant sought to recover the balance amount by invoking the arbitration clause in the policies. The insurer denied liability for further payment and refused arbitration, leading to the filing of applications under Section 11 of the Arbitration and Conciliation Act, 1996 for appointment of an arbitrator. The High Court rejected these applications on the ground that acceptance of the payment with the discharge voucher constituted accord and satisfaction, barring arbitration. The issues can be grouped as follows: 1. Effect of acceptance of payment with a full and final discharge voucher on the right to arbitrate remaining claims; 2. Whether the acceptance was voluntary or under economic duress, and the impact of such duress on arbitrability; 3. Interpretation and applicability of precedents concerning accord and satisfaction and arbitration; 4. Scope of judicial intervention at the stage of appointment of arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996; 5. Whether the arbitration agreement survives a settlement or accord and satisfaction; Issue-wise detailed analysis: 1. Effect of acceptance of payment with a full and final discharge voucher on the right to arbitrate remaining claims: The arbitration clause in both policies stipulated that disputes as to the quantum payable, where liability is admitted, shall be referred to arbitration. The respondent insurer contended that the appellant's acceptance of the payment accompanied by a discharge voucher constituted accord and satisfaction, thereby precluding further arbitration. The High Court had held that since the appellant accepted the amount without demur and encashed the cheque, the dispute was settled and no arbitrator could be appointed. The Court examined the nature of the discharge voucher and the legal effect of accord and satisfaction under Section 63 of the Indian Contract Act, 1872. It noted that ordinarily, a full and final settlement discharges contractual obligations and may extinguish disputes. However, the Court clarified that acceptance of a payment and signing of a discharge voucher does not ipso facto extinguish the arbitration agreement unless the parties expressly agree to terminate arbitration rights. The Court relied on recent precedents which held that disputes relating to the settlement itself remain arbitrable and that the arbitration agreement embedded in the original contract survives even after accord and satisfaction of the substantive contract. Thus, the mere execution of a discharge voucher does not preclude arbitration of disputes arising from or relating to the contract or the settlement. 2. Whether the acceptance was voluntary or under economic duress, and the impact of such duress on arbitrability: The appellant contended that the acceptance of the voucher was not voluntary but under economic duress and financial strain caused by the insurer's delay and pressure from bankers and creditors. The appellant argued that the acceptance was compelled and the amount accepted was grossly inadequate compared to the genuine claim. The Court referred to the principle established in prior judgments recognizing economic duress as a valid ground to challenge the finality of a settlement. It noted that at the stage of Section 11 applications, the court's role is limited to prima facie examination of the existence of an arbitration agreement and the genuineness of the plea of coercion or duress. The Court emphasized that detailed adjudication of duress or fraud is for the arbitral tribunal, not for the court at the appointment stage. Thus, the Court held that the appellant's plea of economic duress and coercion raised a prima facie arbitrable dispute which could not be rejected merely because a discharge voucher was signed and a payment accepted. 3. Interpretation and applicability of precedents concerning accord and satisfaction and arbitration: The Court analyzed the conflicting precedents of Nathani Steels Ltd. and National Insurance Co. Ltd. v. Boghara Polyfab Pvt. Ltd. The three-Judge Bench decision in Nathani Steels held that an amicable settlement of disputes, unless set aside in proper proceedings, bars arbitration. However, the Court distinguished Nathani Steels on facts, noting it involved a voluntary negotiated settlement reduced to writing in presence of witnesses, discharging all claims by accord and satisfaction. In contrast, Boghara Polyfab clarified that cases involving 'no dues' or 'full and final settlement discharge vouchers' taken as a condition precedent for payment are arbitrable, especially when challenged on grounds of fraud, coercion or undue influence. The Court also noted that Nathani Steels was decided under the Arbitration Act, 1940, whereas the present case falls under the broader Arbitration and Conciliation Act, 1996, which favors minimal judicial interference and party autonomy. The Court further relied on later decisions such as Oriental Insurance Co. Ltd. v. Dicitex Furnishing Ltd. and Duro Felguera S.A. v. Gangavaram Port Ltd., which emphasized the limited scope of court intervention at the Section 11 stage, focusing only on the existence of an arbitration agreement and prima facie arbitrability of the dispute. 4. Scope of judicial intervention at the stage of appointment of arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996: The Court reiterated the principle that at the stage of appointment of an arbitrator under Section 11, the court's jurisdiction is confined to determining the existence of a valid arbitration agreement. It should not delve into the merits of the dispute or the validity of pleas such as fraud, coercion or duress. The doctrine of Kompetenz-Kompetenz empowers the arbitral tribunal to decide its own jurisdiction, including challenges to the arbitration agreement. The Court cited the recent three-Judge Bench ruling in Vidya Drolia v. Durga Trading Corporation, which held that unless a party establishes a prima facie case of non-existence of an arbitration agreement, the court must refer the matter to arbitration. The rule is "when in doubt, do refer." 5. Whether the arbitration agreement survives a settlement or accord and satisfaction: The Court held that even if the parties discharge each other's obligations under the contract by accord and satisfaction, the arbitration agreement embedded in the original contract continues to subsist unless expressly terminated. Any dispute relating to the settlement itself or arising out of the original contract remains arbitrable. This principle was affirmed in the recent three-Judge Bench decision in SBI General Insurance Co. Ltd. v. Krish Spinning and reiterated in Aslam Ismail Khan Deshmukh v. Asap Fluids Pvt. Ltd. The Court emphasized that the arbitration agreement is a separate and independent contract, and its survival ensures that parties cannot avoid arbitration merely by executing a settlement or discharge voucher. Conclusions: The Court concluded that the High Court erred in rejecting the Section 11 applications for appointment of arbitrator on the ground that acceptance of the payment and signing of the discharge voucher constituted accord and satisfaction barring arbitration. The question of whether the appellant was compelled to sign the voucher under economic duress and whether the claim is sustainable despite receipt of partial payment are matters for the arbitral tribunal to decide. Accordingly, the Court set aside the impugned order and appointed a retired Judge of the Bombay High Court as the sole arbitrator to adjudicate the dispute. Significant holdings and core principles established: "Thus, even if the contracting parties, in pursuance of a settlement, agree to discharge each other of any obligations arising under the contract, this does not ipso facto mean that the arbitration agreement too would come to an end, unless the parties expressly agree to do the same. The intention of the parties in discharging a contract by 'accord and satisfaction' is to relieve each other of the existing or any new obligations under the contract. Such a discharge of obligations under the substantive contract cannot be construed to mean that the parties also intended to relieve each other of their obligation to settle any dispute pertaining to the original contract through arbitration." "At the stage of Section 11(6) of the 1996 Act, court is required to ensure that an arbitrable dispute exists; it has to be prima facie convinced about the genuineness or credibility of the plea of coercion; it cannot be too particular about the nature of the plea which naturally has to be made and established in the arbitral proceeding." "The doctrine of Kompetenz-Kompetenz is now firmly embedded in the arbitration jurisprudence in India. This doctrine is based on the principle that an arbitral tribunal is competent to rule on its own jurisdiction including on the issue of existence or validity of an arbitration agreement. The object is to minimize judicial intervention which is an acknowledgment of the concept of party autonomy." "The rule should be: when in doubt, do refer." Final determinations:
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