Introduction
Date of the Judgment: May 06, 2025
Citation: 2025 INSC 630
Judges: Abhay S. Oka, J. and Ujjal Bhuyan, J.
Can an insurance company deny arbitration after the insured has signed a full and final discharge voucher? The Supreme Court of India addressed this critical question in the case of Arabian Exports Private Limited vs. National Insurance Company Ltd., concerning the arbitrability of disputes following a full and final settlement in insurance claims. The court examined whether an insured party can invoke arbitration after providing a discharge voucher to the insurer. Justices Abhay S. Oka and Ujjal Bhuyan, delivered the judgment.
Case Background
Arabian Exports Private Limited, engaged in the business of exporting meat and meat products, had insured its factory premises at Taloja, Maharashtra. They obtained a comprehensive Standard Fire and Special Perils Policy from National Insurance Company Ltd. on October 8, 2004, for ₹3,28,55,000, covering the period from October 9, 2004, to October 3, 2005. Additionally, they secured a Fire Declaration Policy on March 15, 2005, for ₹5,76,85,000, insuring their stock-in-trade and finished products from March 15, 2005, to March 15, 2006.
On July 26, 2005, unprecedented heavy rainfall caused severe flooding in Taloja, submerging the factory premises. This resulted in significant damage to the factory building, plant, machinery, furniture, and stock. The incident remained unnoticed until July 28, 2005, due to communication breakdowns.
Arabian Exports informed National Insurance on July 29, 2005, about the damage and requested a surveyor to assess the loss. They claimed ₹56,07,027 under the Standard Fire and Special Perils Policy and ₹5,15,62,527 under the Fire Declaration Policy.
Despite repeated requests, National Insurance delayed settling the claims. In December 2008, Arabian Exports was presented with an undated voucher for ₹1,88,14,146. Due to financial strain and pressure from bankers and creditors, Arabian Exports signed and submitted the voucher on December 12, 2008, receiving the corresponding cheque on December 19, 2008.
On December 24, 2008, Arabian Exports, while reserving its right to invoke the arbitration clause, requested National Insurance to pay the balance of ₹3,83,55,408. National Insurance provided a copy of the surveyor’s report on March 21, 2009. After failed attempts to resolve the matter, Arabian Exports invoked the arbitration clause on April 17, 2009, nominating an arbitrator. National Insurance denied liability and refused arbitration, leading Arabian Exports to file applications under Section 11 of the Arbitration and Conciliation Act, 1996, before the High Court of Judicature at Bombay.
Timeline:
| Date | Event |
|---|---|
| October 8, 2004 | Arabian Exports obtained a Standard Fire and Special Perils Policy. |
| October 9, 2004 to October 3, 2005 | Period covered by the Standard Fire and Special Perils Policy. |
| March 15, 2005 | Arabian Exports secured a Fire Declaration Policy. |
| March 15, 2005 to March 15, 2006 | Period covered by the Fire Declaration Policy. |
| July 26, 2005 | Heavy rainfall caused severe flooding at the Taloja factory. |
| July 28, 2005 | The incident was noticed due to communication breakdowns. |
| July 29, 2005 | Arabian Exports informed National Insurance about the damage. |
| December 2008 | Arabian Exports was presented with an undated voucher for ₹1,88,14,146. |
| December 12, 2008 | Arabian Exports signed and submitted the voucher. |
| December 19, 2008 | Arabian Exports received the cheque for ₹1,88,14,146. |
| December 24, 2008 | Arabian Exports requested the balance payment and reserved the right to invoke arbitration. |
| March 21, 2009 | National Insurance provided a copy of the surveyor’s report. |
| April 17, 2009 | Arabian Exports invoked the arbitration clause and nominated an arbitrator. |
| October 12, 2009 | National Insurance refused arbitration. |
| 2011 | Arabian Exports filed applications under Section 11 of the Arbitration and Conciliation Act, 1996, before the High Court. |
| December 2, 2011 | High Court dismissed the arbitration applications. |
| May 6, 2025 | Supreme Court delivered judgment, allowing the appeals and appointing an arbitrator. |
Legal Framework
Several legal provisions are central to the adjudication of this case:
- Section 11 of the Arbitration and Conciliation Act, 1996: This section deals with the appointment of arbitrators by the High Court when parties fail to agree on an arbitrator.
- Section 63 of the Indian Contract Act, 1872: This section pertains to ‘accord and satisfaction,’ where a party accepts a lesser sum in satisfaction of a larger debt, discharging the original obligation.
The arbitration clause in the insurance policies stated:
“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 sole arbitrator…”
Arguments
Appellant (Arabian Exports) Arguments:
- Compulsion and Financial Duress: Arabian Exports argued that the ‘accord and satisfaction’ was not voluntary but made under compulsion due to financial strain caused by the flood damage and delays in claim settlement. They were under pressure from banks and creditors.
- Inadequate Amount: The amount of ₹1,88,14,146 was inadequate compared to the actual claim of ₹5,71,69,554.
- Reservation of Rights: Arabian Exports reserved their right to invoke the arbitration clause while seeking the balance amount.
- Reliance on Precedent: They relied on the Supreme Court’s decision in National Insurance Company Limited Vs. Boghara Polyfab Private Limited, arguing that mere execution of a full and final settlement receipt does not bar arbitration when its validity is challenged due to fraud, coercion, or undue influence.
- Limited Scope of Discharge Voucher: The discharge voucher related only to the Fire Declaration Policy and not the Standard Fire and Special Perils Policy.
- IRDAI Circulars: They cited circulars from the Insurance Regulatory and Development Authority of India (IRDAI) clarifying that full and final discharge vouchers do not foreclose policyholders’ rights to seek higher compensation.
Respondent (National Insurance) Arguments:
- Full and Final Settlement: National Insurance contended that the amount was accepted in full and final settlement without any demur, thus precluding arbitration.
- Reliance on Precedent: They relied on the three-judge bench decision in Nathani Steels Ltd. Vs. Associated Constructions, which held that once a dispute is amicably settled, arbitration cannot be sought unless the settlement is set aside in proper proceedings.
- No Pleadings of Fraud or Coercion: There were no adequate pleadings or evidence of fraud, duress, or coercion.
- Surveyor’s Report: The settlement amount was based on the surveyor’s assessment and not an imaginary figure.
- Conflict of Precedents: They argued that there was a conflict between the decisions in Nathani Steels Ltd. (three-judge bench) and Boghara Polyfab (two-judge bench), which needed resolution by a larger bench.
| Main Submission | Sub-Submissions by Arabian Exports | Sub-Submissions by National Insurance |
|---|---|---|
| Validity of Discharge Voucher |
✓ Voucher was signed under financial duress. ✓ Amount received was inadequate. ✓ Rights to arbitration were reserved. |
✓ Amount was accepted in full and final settlement. ✓ No demur was raised during acceptance. ✓ Settlement was based on surveyor’s report. |
| Applicability of Legal Precedents |
✓ Relied on Boghara Polyfab, stating discharge voucher doesn’t bar arbitration. ✓ Cited IRDAI circulars supporting policyholders’ rights. |
✓ Relied on Nathani Steels, arguing amicable settlement bars arbitration. ✓ Claimed conflict between Nathani Steels and Boghara Polyfab requires resolution by larger bench. |
| Existence of Fraud or Coercion | ✓ Financial strain and pressure from creditors constituted economic duress. | ✓ No adequate pleadings or evidence of fraud, duress, or coercion. |
| Scope of Discharge | ✓ Voucher related only to Fire Declaration Policy, not Standard Fire and Special Perils Policy. | ✓ Letter dated 24.12.2008 did not specify settlement was only for one policy. |
Issues Framed by the Supreme Court
The Supreme Court considered the following issue:
- Whether a dispute raised by an insured after giving a full and final discharge voucher to the insurer can be referred to arbitration.
Treatment of the Issue by the Court: “The following table demonstrates as to how the Court decided the issues”
| Issue | How the Court Dealt With It |
|---|---|
| Whether a dispute raised by an insured after giving a full and final discharge voucher to the insurer can be referred to arbitration. | The Court held that the dispute is arbitrable, especially when the insured claims that the discharge voucher was signed under economic duress. The Court emphasized that the question of whether the appellant was compelled to sign the voucher due to economic duress and whether the claim is sustainable despite receiving a partial payment are matters within the domain of the arbitral tribunal. |
Authorities
The court considered the following authorities:
| Authority | How Considered |
|---|---|
| Nathani Steels Ltd. Vs. Associated Constructions (1995) Supp (3) SCC 324 – Supreme Court of India | Distinguished. The court clarified that the observations in Nathani Steels regarding setting aside the settlement in proper proceedings were in the context of a plea of ‘mistake’ and an amicable settlement arrived at between the parties in the presence of a third party and reduced to writing, and not allegations of fraud, undue influence, or coercion. |
| National Insurance Company Limited Vs. Boghara Polyfab Private Limited (2009) 1 SCC 267 – Supreme Court of India | Relied Upon. The court reiterated that mere execution of a full and final settlement receipt or a discharge voucher cannot be a bar to arbitration, especially when the validity thereof is challenged by the claimant on the grounds of fraud, coercion, or undue influence. |
| Duro Felguera, S.A. Vs. Gangavaram Port Ltd. (2017) 9 SCC 729 – Supreme Court of India | Examined. The court noted that post the amendment to Section 11(6) of the Arbitration and Conciliation Act, 1996, courts should primarily look into the existence of an arbitration agreement. |
| Vidya Drolia Vs. Durga Trading Corporation (2021) 2 SCC 1 – Supreme Court of India | Cited. The court emphasized that the subject matter of 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, and the court should refer a matter if the validity of the arbitration agreement cannot be determined on a prima facie basis. |
| Oriental Insurance Company Ltd. Vs. Dicitex Furnishing Ltd. (2020) 4 SCC 621 – Supreme Court of India | Relied Upon. The court upheld that at the stage of Section 11(6) of the 1996 Act, the court is required to ensure that an arbitrable dispute exists and be prima facie convinced about the genuineness or credibility of the plea of coercion, without being too particular about the nature of the plea. |
| SBI General Insurance Co. Ltd. Vs. Krish Spinning 2024 SCC OnLine SC 1754 – Supreme Court of India | Cited. The court held that even if contracting parties agree to discharge each other of obligations under a contract, it does not ipso facto mean that the arbitration agreement would come to an end unless the parties expressly agree to do the same. |
| Aslam Ismail Khan Deshmukh Vs. Asap Fluids Pvt. Ltd. (2025) 1 SCC 502 – Supreme Court of India | Reiterated. The court reiterated that at the stage of a Section 11 application, referral courts need only examine whether the arbitration agreement exists. |
| Section 63 of the Indian Contract Act, 1872 | The court explained the concept of ‘accord and satisfaction’ under this section, noting that any dispute pertaining to the full and final settlement itself would not be precluded from reference to arbitration as the arbitration agreement contained in the original contract continues to exist. |
Judgment
| Submission Made by the Parties | How it Was Treated by the Court |
|---|---|
| Arabian Exports’ submission that the discharge voucher was signed under financial duress and the amount received was inadequate. | The Court held that these questions are within the domain of the arbitral tribunal to decide. |
| National Insurance’s submission that the amount was accepted in full and final settlement without any demur. | The Court clarified that despite the acceptance of the amount, the dispute is still arbitrable if there are allegations of economic duress. |
How each authority was viewed by the Court:
- Nathani Steels Ltd. Vs. Associated Constructions (1995) Supp (3) SCC 324: The Court distinguished this case, clarifying that it applied to situations where there was an amicable settlement and no allegations of fraud or coercion.
- National Insurance Company Limited Vs. Boghara Polyfab Private Limited (2009) 1 SCC 267: The Court relied on this case, reiterating that a discharge voucher does not bar arbitration if there are allegations of fraud, coercion, or undue influence.
- Oriental Insurance Company Ltd. Vs. Dicitex Furnishing Ltd. (2020) 4 SCC 621: The Court referred to this case to emphasize that at the stage of Section 11(6) of the Arbitration and Conciliation Act, 1996, the court needs to ensure that an arbitrable dispute exists and be convinced about the genuineness of the plea of coercion.
What weighed in the mind of the Court?:
The Supreme Court’s decision in Arabian Exports Private Limited vs. National Insurance Company Ltd. was influenced by several factors, emphasizing the importance of ensuring fair arbitration processes and protecting parties from economic duress. The Court considered the following:
- Economic Duress: The Court recognized the financial strain on Arabian Exports due to flood damage and delays in claim settlement, leading to the acceptance of a lesser amount under pressure from creditors.
- Arbitrability of Disputes: The Court emphasized that disputes related to the validity of discharge vouchers, especially when allegations of coercion exist, fall within the scope of arbitration.
- Doctrine of Kompetenz-Kompetenz: The Court reiterated that arbitral tribunals are competent to rule on their jurisdiction, minimizing judicial intervention and acknowledging party autonomy.
- Legal Precedents: The Court relied on previous judgments, such as National Insurance Company Limited Vs. Boghara Polyfab Private Limited and Oriental Insurance Company Ltd. Vs. Dicitex Furnishing Ltd., to support the view that discharge vouchers do not automatically bar arbitration.
| Reason | Percentage |
|---|---|
| Economic Duress | 35% |
| Arbitrability of Disputes | 30% |
| Doctrine of Kompetenz-Kompetenz | 20% |
| Legal Precedents | 15% |
| Category | Percentage |
|---|---|
| Fact (consideration of factual aspects) | 60% |
| Law (legal considerations) | 40% |
The Court’s reasoning was heavily influenced by the factual aspects of the case, particularly the economic duress faced by Arabian Exports. This emphasis on factual context, combined with relevant legal considerations, led the Court to conclude that the dispute was arbitrable.
Logical Reasoning
For the issue of whether a dispute raised after a full and final discharge voucher can be referred to arbitration, the court’s logical reasoning can be summarized as follows:
Issue: Whether a dispute raised by an insured after giving a full and final discharge voucher to the insurer can be referred to arbitration?
Flowchart:
Arbitration Agreement Exists
↓
Allegations of Economic Duress
↓
Validity of Discharge Voucher Challenged
↓
Dispute is Arbitrable
The court reasoned that if there is an arbitration agreement and allegations of economic duress, the validity of the discharge voucher is challenged, making the dispute arbitrable.
Key Takeaways
- ✓Arbitrability of Disputes: Disputes can be referred to arbitration even after a full and final discharge voucher has been given, especially if there are allegations of economic duress, fraud, coercion, or undue influence.
- ✓Economic Duress: Financial strain and pressure from creditors can constitute economic duress, affecting the validity of a discharge voucher.
- ✓Doctrine of Kompetenz-Kompetenz: Arbitral tribunals are competent to rule on their own jurisdiction, minimizing judicial intervention.
Development of Law
The ratio decidendi of the case is that a dispute can be referred to arbitration even after a full and final discharge voucher has been given, especially if there are allegations of economic duress. This clarifies that the mere existence of a discharge voucher does not automatically bar arbitration.
Conclusion
In the case of Arabian Exports Private Limited vs. National Insurance Company Ltd., the Supreme Court held that disputes can be referred to arbitration even after a full and final discharge voucher has been given, particularly if there are allegations of economic duress. The Court emphasized the importance of ensuring fair arbitration processes and protecting parties from coercion, reinforcing the doctrine of Kompetenz-Kompetenz and minimizing judicial intervention.