Supreme Court Clarifies Scope of Arbitration After Full and Final Settlement: SBI General Insurance Co. Ltd. vs. Krish Spinning (2024)

Introduction

Date of the Judgment: 18th July 2024

Citation: 2024 INSC 532

Judges: Dr. Dhananjaya Y. Chandrachud, CJI, J.B. Pardiwala, J., Manoj Misra, J.

Can a party invoke arbitration after signing a full and final settlement discharge voucher? The Supreme Court of India recently addressed this critical question in a case involving SBI General Insurance Co. Ltd. and Krish Spinning. The core issue revolves around whether a discharge voucher, meant to settle all claims, can prevent a party from seeking arbitration for further disputes arising from the same contract. This judgment clarifies the extent to which a court can interfere in such matters, emphasizing the autonomy of arbitration.

Case Background

SBI General Insurance Co. Ltd. (the appellant) is a private sector general insurance company. Krish Spinning (the respondent) is a partnership firm engaged in manufacturing and spinning cotton filaments. The respondent obtained a fire and special perils insurance policy from the appellant on March 31, 2018, for a sum of ₹7,20,00,000, covering the period from March 31, 2018, to March 30, 2019.

During the policy period, two fire incidents occurred at the respondent’s factory. The first incident took place on May 28, 2018, with the respondent claiming a loss of ₹1,76,19,967. The second incident occurred on November 17, 2018, with a claimed loss of ₹6,32,25,967. This appeal concerns only the settlement of the first fire incident.

Following the first fire, M/s Paresh Shah & Associates were appointed as the surveyor on May 29, 2018. The surveyor assessed the loss at ₹84,19,579, concluding that the fire was likely caused by spontaneous combustion. Initially, the respondent claimed ₹1,76,19,967 but later, on December 24, 2018, agreed to the surveyor’s assessment. The respondent then signed an advance discharge voucher on January 4, 2019, confirming the receipt of ₹84,19,579 as full and final settlement. The appellant released ₹84,08,957 on January 31, 2019.

Subsequently, the appellant released ₹4,86,67,050 in three installments for the second fire incident, with the final installment being released on October 14, 2019. On October 25, 2019, the respondent sent a letter alleging that they had to sign the discharge voucher due to financial need and that they had not received the surveyor’s report. The appellant rejected this letter. The respondent then sent a legal notice on March 2, 2020, claiming the balance amount and invoking arbitration, which the appellant refuted.

Timeline:

Course of Proceedings

The respondent filed a petition under Section 11(6) of the Arbitration and Conciliation Act, 1996, before the High Court, seeking the appointment of an arbitrator. The respondent argued that they had not been fully indemnified for the loss suffered in the first fire incident, and that the discharge voucher was signed under duress.

The appellant contested the petition, arguing that the claim was stale and that the respondent, having signed the consent letter and discharge voucher, could not raise a dispute. The appellant also contended that the court could consider the question of arbitrability at this stage.

The High Court held that the dispute fell within the realm of adjudication and should be decided by an arbitrator. Relying on the Supreme Court’s decision in Oriental Insurance Company Ltd. v. Dicitex Furnishing Ltd., the High Court stated that if a dispute can be referred to arbitration under an arbitration agreement, the appointment of an arbitrator must follow. The High Court directed the matter to be listed before an appropriate bench for the appointment of an arbitrator, which was subsequently done, appointing Justice K.A. Puj as the arbitrator.

Legal Framework

The judgment discusses the concept of “accord and satisfaction” as embodied in Section 63 of the Indian Contract Act, 1872, which allows a promisee to accept a substituted obligation in place of the original promise, thereby discharging the contract.

The arbitration clause, Clause 13, in the insurance policy states:

“13) If any dispute or difference shall arise as to the quantum to be paid under this Policy (liability being otherwise admitted) such difference shall independently of all other questions be referred to the decision of a sole arbitrator… arbitration shall be conducted under and in accordance with the provision of the Arbitration and Conciliation Act, 1996.”

The judgment also refers to Section 16(1) of the Arbitration and Conciliation Act, 1996, which embodies the principle of separability of the arbitration agreement, stating that an arbitration clause is treated as an agreement independent of the other terms of the contract.

Arguments

Appellant’s Submissions:

• The appellant argued that a full and final settlement had been reached, indicating a clear understanding between the parties.
• They contended that the respondent had not provided evidence of coercion or that the settlement was offered on a “take it or leave it” basis, as required by the test laid down in National Insurance Co. Ltd. v. Boghara Polyfab.
• The appellant submitted that there was an inordinate delay by the respondent in alleging coercion, as these allegations were first made almost 14 months after the payment of the claim.
• They argued that the respondent’s pleadings lacked the necessary details about the alleged coercion and their poor financial condition.
• The appellant stated that the respondent’s letter dated October 25, 2019, could not be considered a protest letter as it only requested a copy of the surveyor’s report.

Respondent’s Submissions:

• The respondent argued that they had to succumb to the surveyor’s assessment due to acute economic distress and the large pending claim amount.
• They contended that the circumstances were such that they had to issue the discharge voucher to receive payment, and that the settlement was not voluntary but under duress.
• The respondent submitted that there was no inordinate delay in raising the plea of coercion, as the letter dated September 25, 2019, was sent within 11 days of the final payment.
• They argued that the issues raised by the appellant were subject to arbitration and not for the referral court to decide.

Submissions:

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for determination:

1. Whether the execution of a discharge voucher towards the full and final settlement between the parties would operate as a bar to invoke arbitration?
2. What is the scope and standard of judicial scrutiny that an application under Section 11(6) of the Act, 1996 can be subjected to when a plea of “accord and satisfaction” is taken by the defendant?
3. What is the effect of the decision of this Court in In Re: Interplay Between Arbitration Agreements under the Arbitration and Conciliation Act 1966 and the Indian Stamp Act 1899 on the scope of powers of the referral court under Section 11 of the Act, 1996?

Treatment of the Issue by the Court:

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered various cases and legal provisions, categorized by the legal points they address:

On the concept of “accord and satisfaction”:

• Payana Reena Saminathan v. Pana Lana Palaniappa [(1913 -14) 41 IA 142] – Privy Council: Defined “accord and satisfaction” as a new agreement extinguishing prior rights.
• Section 63 of the Indian Contract Act, 1872: Allows a promisee to accept a substituted obligation, discharging the original contract.

On the survival of arbitration agreements:

• National Agricultural Coop. Marketing Federation India Ltd. v. Gains Trading Ltd. [(2007) 5 SCC 692] – Supreme Court of India: Held that the arbitration agreement survives even if the underlying contract ends.
• Heyman v. Darwins Ltd. [[1942] AC 356] – House of Lords: Stated that breach of contract doesn’t extinguish the arbitration agreement.
• Section 16(1) of the Arbitration and Conciliation Act, 1996: Embodies the separability of the arbitration agreement.

On the effect of discharge vouchers:

• National Insurance Co. Ltd. v. Boghara Polyfab [(2009) 1 SCC 267] – Supreme Court of India: Held that a discharge voucher is not a bar to arbitration if its validity is challenged.
• R.L. Kalathia and Company v. State of Gujarat [(2011) 2 SCC 400] – Supreme Court of India: Re-iterated that a no-dues certificate is not a bar against raising genuine claims.

On the scope of judicial interference under Section 11(6):

• Damodar Valley Corporation v. K.K. Kar [(1974) 1 SCC 141] – Supreme Court of India: Held that disputes on the validity of discharge by “accord and satisfaction” are arbitrable.
• Bharat Heavy Electricals Ltd. vs. Amar Nath Bhan Prakash [(1982) 1 SCC 625] – Supreme Court of India: Held that the question of discharge of contract by accord and satisfaction is a dispute to be resolved by the arbitrator.
• P.K. Ramaiah and Company v. Chairman and Managing Director, National Thermal Power Corporation [1994 Supp (3) SCC 126] – Supreme Court of India: Held that no arbitral dispute subsists after full and final settlement.
• Nathani Steels Ltd. v. Associated Constructions [1995 Supp (3) SCC 324] – Supreme Court of India: Held that once a dispute is settled, the arbitration clause cannot be invoked.
• Jayesh Engineering Works v New India Assurance Co. Ltd. [(2000) 10 SCC 178] – Supreme Court of India: Held that whether payments have been made in full and final settlement is a question for the arbitrator.
• Konkan Railway Corpn. Ltd. v. Rani Construction (P) Ltd. [(2002) 2 SCC 388] – Supreme Court of India: Held that the power under Section 11 is administrative.
• SBP & Co. v. Patel Engg. Ltd. [(2005) 8 SCC 618] – Supreme Court of India: Held that the power under Section 11 is judicial.
• Union of India v. Master Construction Co. [(2011) 12 SCC 349] – Supreme Court of India: Held that allegations against a discharge voucher must be prima facie bona fide.
• New India Assurance Co. Ltd. v. Genus Power Infrastructure Ltd. [(2015) 2 SCC 424] – Supreme Court of India: Held that a bald assertion of coercion is not enough to warrant referral.
• Duro Felguera, S.A. v. Gangavaram Port Ltd [(2017) 9 SCC 729] – Supreme Court of India: Held that the court should only look into the existence of an arbitration agreement.
• United India Insurance Co. Ltd. v. Antique Art Exports Pvt. Ltd. [(2019) 5 SCC 362] – Supreme Court of India: Held that prima facie evidence of coercion is required to refer to arbitration.
• Mayavati Trading Private Limited v. Pradyut Deb Burman [(2019) 8 SCC 714] – Supreme Court of India: Overruled Antique Art and clarified that Section 11(6-A) limits the court’s examination to the existence of an arbitration agreement.
• Uttarakhand Purv Sainik Kalyan Nigam Ltd. v. Northern Coal Field Ltd. [(2020) 2 SCC 455] – Supreme Court of India: Held that the issue of limitation should be decided by the arbitrator.
• Vidya Drolia & Ors v. Durga Trading Corporation [(2021) 2 SCC 1] – Supreme Court of India: Held that the court can interfere only when the claims are ex facie time-barred or non-arbitrable.
• DLF Home Developers Ltd. v. Rajapura Homes (P) Ltd. [(2021) 16 SCC 743] – Supreme Court of India: Held that the court may conduct a “prima facie review” to prevent wastage of resources.
• BSNL v. Nortel Networks (India) (P) Ltd. [(2021) 5 SCC 738] – Supreme Court of India: Explained the scope of primary examination of non-arbitrability.
• Indian Oil Corporation Limited v. NCC Limited [(2023) 2 SCC 539] – Supreme Court of India: Held that the determination of “accord and satisfaction” should be left to the arbitral tribunal in debatable cases.
• NTPC Ltd. v. SPML Infra Ltd. [(2023) 9 SCC 385] – Supreme Court of India: Introduced the “Eye of the Needle” test for judicial interference.
• In Re: Interplay Between Arbitration Agreements under the Arbitration and Conciliation Act 1966 and the Indian Stamp Act 1899 [2023 INSC 1066] – Supreme Court of India: Clarified the limited scope of Section 11 and emphasized arbitral autonomy.
• M/s Arif Azim Co. Ltd. v. M/s Aptech Ltd. [2024 INSC 155] – Supreme Court of India: Discussed the applicability of the Limitation Act to Section 11(6) applications.

Authority Usage:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Payana Reena Saminathan v. Pana Lana Palaniappa: The definition of “accord and satisfaction” was used to explain the concept but was not a bar to arbitration.
• Section 63 of the Indian Contract Act, 1872: The Court acknowledged the legal basis for “accord and satisfaction” but held it does not bar arbitration if the validity of the settlement is challenged.
• National Agricultural Coop. Marketing Federation India Ltd. v. Gains Trading Ltd.: The principle that arbitration agreements survive the termination of the main contract was upheld.
• Heyman v. Darwins Ltd.: The ruling reinforced the separability of the arbitration clause from the main contract.
• Section 16(1) of the Arbitration and Conciliation Act, 1996: The Court used this to emphasize the separability of the arbitration agreement.
• National Insurance Co. Ltd. v. Boghara Polyfab: The principle that a discharge voucher does not bar arbitration if its validity is challenged was upheld.
• R.L. Kalathia and Company v. State of Gujarat: The ruling that a no-dues certificate does not prevent the raising of genuine claims was used to support the respondent’s case.
• Damodar Valley Corporation v. K.K. Kar: The principle that disputes on the validity of discharge are arbitrable was used in favor of the respondent.
• Bharat Heavy Electricals Ltd. vs. Amar Nath Bhan Prakash: The ruling that the question of discharge of contract by accord and satisfaction is a dispute to be resolved by the arbitrator was used in favor of the respondent.
• P.K. Ramaiah and Company v. Chairman and Managing Director, National Thermal Power Corporation: The Court distinguished this judgement stating that it was not applicable to the facts of this case.
• Nathani Steels Ltd. v. Associated Constructions: The Court distinguished this judgement stating that it was not applicable to the facts of this case.
• Jayesh Engineering Works v New India Assurance Co. Ltd.: The ruling that whether payments have been made in full and final settlement is a question for the arbitrator was used in favor of the respondent.
• Konkan Railway Corpn. Ltd. v. Rani Construction (P) Ltd.: The initial view of the power under Section 11 being administrative was noted.
• SBP & Co. v. Patel Engg. Ltd.: The ruling that the power under Section 11 is judicial was noted.
• Union of India v. Master Construction Co.: The ruling that allegations against a discharge voucher must be prima facie bona fide was noted but not used to reject the respondent’s claim.
• New India Assurance Co. Ltd. v. Genus Power Infrastructure Ltd.: The ruling that a bald assertion of coercion is not enough to warrant referral was distinguished.
• Duro Felguera, S.A. v. Gangavaram Port Ltd: The principle that the court should only look into the existence of an arbitration agreement was upheld.
• United India Insurance Co. Ltd. v. Antique Art Exports Pvt. Ltd.: The ruling that prima facie evidence of coercion is required for referral was distinguished.
• Mayavati Trading Private Limited v. Pradyut Deb Burman: The ruling that Section 11(6-A) limits the court’s examination to the existence of an arbitration agreement was upheld.
• Uttarakhand Purv Sainik Kalyan Nigam Ltd. v. Northern Coal Field Ltd.: The ruling that the issue of limitation should be decided by the arbitrator was upheld.
• Vidya Drolia & Ors v. Durga Trading Corporation: The principle that the court can interfere only when claims are ex facie time-barred or non-arbitrable was upheld.
• DLF Home Developers Ltd. v. Rajapura Homes (P) Ltd.: The ruling that the court may conduct a “prima facie review” to prevent wastage of resources was noted but not used to reject the respondent’s claim.
• BSNL v. Nortel Networks (India) (P) Ltd.: The explanation of the scope of primary examination of non-arbitrability was noted.
• Indian Oil Corporation Limited v. NCC Limited: The ruling that the determination of “accord and satisfaction” should be left to the arbitral tribunal in debatable cases was upheld.
• NTPC Ltd. v. SPML Infra Ltd.: The “Eye of the Needle” test for judicial interference was noted.
• In Re: Interplay Between Arbitration Agreements under the Arbitration and Conciliation Act 1966 and the Indian Stamp Act 1899: The principle that the scope of Section 11 is limited was upheld.
• M/s Arif Azim Co. Ltd. v. M/s Aptech Ltd.: The discussion on the applicability of the Limitation Act to Section 11(6) applications was noted.

Decision

The Supreme Court allowed the appeal, setting aside the judgment of the High Court. The Court held that the High Court had exceeded its jurisdiction by delving into the merits of the dispute. The Court emphasized that the only issue for the referral court under Section 11 of the Act, 1996, is to determine the existence of an arbitration agreement.

The Supreme Court clarified that a discharge voucher does not automatically bar arbitration. If a party alleges that the discharge voucher was obtained through coercion or undue influence, such a dispute is arbitrable. The Court reiterated that the arbitration clause is a separate agreement that survives the termination of the substantive contract.

The Court held that the referral court should not delve into the merits of the dispute or the validity of the discharge voucher. These issues are to be decided by the arbitral tribunal. The Court emphasized the principle of minimal judicial interference in arbitration matters.

The Court clarified that the “Eye of the Needle” test introduced in NTPC Ltd. v. SPML Infra Ltd. should be applied in cases of arbitrability.

The Court also clarified that the decision in In Re: Interplay Between Arbitration Agreements under the Arbitration and Conciliation Act 1966 and the Indian Stamp Act 1899 further limits the scope of Section 11 and emphasizes arbitral autonomy.

Flowchart: Arbitration After Full and Final Settlement

Key Takeaways

The Supreme Court’s judgment in SBI General Insurance Co. Ltd. vs. Krish Spinning provides crucial clarity on the interplay between full and final settlement discharge vouchers and arbitration clauses. The key takeaways from this judgment are:

• Limited Judicial Review: The scope of judicial review under Section 11 of the Arbitration and Conciliation Act, 1996, is limited to determining the existence of an arbitration agreement. Courts should not delve into the merits of the dispute or the validity of the discharge voucher.
• Arbitrability of Disputes: Disputes regarding the validity of a full and final settlement discharge voucher, including allegations of coercion or duress, are arbitrable. The arbitration agreement survives the discharge of the main contract.
• Autonomy of Arbitration: The judgment reinforces the principle of minimal judicial interference in arbitration matters, emphasizing the autonomy of the arbitral process.
• “Eye of the Needle” Test: The “Eye of the Needle” test should be applied when determining the arbitrability of a dispute. The court should only interfere when the claims are ex facie time-barred or non-arbitrable.
• Separability of Arbitration Clause: The arbitration clause is treated as a separate agreement, independent of the other terms of the contract.