Supreme Court settles the arbitrability of disputes after a full and final discharge voucher: National Insurance Co. Ltd. vs. M/s. Boghara Polyfab Pvt. Ltd. (2008)

Date of the Judgment: September 18, 2008

Citation: National Insurance Co. Ltd. vs. M/s. Boghara Polyfab Pvt. Ltd. [2008] INSC 1437

Judges: R.V. Raveendran, J., Lokeshwar Singh Panta, J.

Can a dispute be referred to arbitration after an insured party has issued a full and final discharge voucher to the insurer? The Supreme Court, in a judgment delivered by Justice R.V. Raveendran and Justice Lokeshwar Singh Panta, addressed this critical question in a case involving an insurance claim dispute. The core issue revolved around whether a discharge voucher, given under alleged coercion, prevents the insured from seeking arbitration to resolve the remaining claim amount. This judgment clarifies the circumstances under which a court can refuse arbitration when a discharge voucher is in question, especially concerning allegations of coercion or undue influence.

Case Background

M/s. Boghara Polyfab Pvt. Ltd. (referred to as “Insured”) obtained a Fire and Special Perils Policy from National Insurance Co. Ltd. (referred to as “Insurer”) for their godowns in Surat. The initial sum insured was Rs. Three crores, which was later increased to Rs. Six crores.

✓ August 4, 2003 to August 3, 2004: The period for which the policy was taken.

✓ May 27, 2004: The Insured requested an additional increase of Rs. Six crores for two months, leading to a total sum insured of Rs. Twelve crores.

✓ August 2-3, 2004: Heavy rains and flooding caused damage to the Insured’s stocks, leading to a claim.

✓ August 5, 2004: The Insured reported the loss/damage to their stocks to the Insurer.

✓ August 14, 2004: The surveyor submitted a preliminary report.

✓ December 6, 2004: The surveyor’s final report assessed the net loss at Rs. 3,18,26,025/-, based on the sum insured being Rs. 12 crores.

✓ March 1, 2005: The Insurer informed the surveyor of an error in the assessed loss, stating that the sum insured was only Rs. 6 crores after July 26, 2004.

✓ March 22, 2005: The surveyor issued an addendum, reassessing the net loss at Rs. 2,34,01,740/- based on the sum insured of Rs. 6 crores.

✓ March 21, 2006: The Insurer sent a voucher for Rs.2,33,94,94 to the Insured.

✓ March 24, 2006: The Insured lodged a complaint with the Insurance Regulatory and Development Authority (IRDA).

✓ March, 2006 (last week): The Insured signed and gave the undated ‘Discharge voucher-in-advance’.

✓ May 27, 2006: The Insured issued a legal notice demanding the difference amount with interest and invoked arbitration.

✓ August 2, 2006: The Insurer rejected the demand for arbitration.

✓ April 19, 2007: The Bombay High Court allowed the petition under Section 11 of the Arbitration & Conciliation Act, 1996, and appointed an arbitrator.

Timeline

Course of Proceedings

The respondent filed an application under Section 11 of the Arbitration & Conciliation Act, 1996, in the Bombay High Court after the appellant refused to agree to arbitration. The appellant resisted the petition, contending that the respondent had accepted the payment of Rs.233,94,964/- in full and final settlement and, therefore, could not invoke the arbitration clause. The learned Chief Justice of the Bombay High Court, exercising power under Section 11 of the Act, allowed the petition by order dated 19.4.2007, noting a serious dispute between the parties as to whether the ‘discharge voucher’ was given voluntarily or under pressure or coercion. The High Court appointed Sri Justice S.N.Variava as the sole arbitrator and left open the question of coercion/undue influence, permitting the parties to lead evidence before the arbitrator on that question.

Legal Framework

✓ Section 11 of the Arbitration & Conciliation Act, 1996: Deals with the appointment of arbitrators by the High Court in case of disagreement between parties.

✓ Section 16(1)(a) of the Arbitration & Conciliation Act, 1996: “An arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract.” This section embodies the principle that an arbitration clause is separable from the main contract.

✓ Section 16(1)(b) of the Arbitration & Conciliation Act, 1996: “A decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.” This provision ensures that even if the contract is deemed invalid, the arbitration clause remains enforceable.

The legal framework emphasizes the autonomy of the arbitration agreement and the competence of the arbitral tribunal to determine its jurisdiction, even when the main contract’s validity is in question.

Arguments

Appellant’s Arguments (National Insurance Co. Ltd.):

• Full and Final Settlement: The insurance claim was settled, and the Insured received payment and issued a full and final discharge voucher, discharging the contract by accord and satisfaction.
  • Explanation: Once a discharge voucher is issued, acknowledging receipt of the amount paid in full and final settlement, it should be accepted as a discharge of the contract.
• Validity of Discharge Voucher: The Insured cannot challenge the validity or correctness of the discharge voucher while retaining and enjoying the benefit of the full and final payment.
  • Explanation: Accepting payment under the discharge voucher implies agreement with the settlement terms.
• Reliance on Authorities: The Appellant relied on State of Maharashtra v. Nav Bharat Builders [1994 Supp (3) SCC 83], M/s. P. K. Ramaiah & Co. v. Chairman & Managing Director, National Thermal Power Corpn. [1994 Supp (3) SCC 126], and Nathani Steels Ltd. v. Associated Constructions [1995 Supp (3) SCC 324] to support the contention that once a full and final settlement is reached, no subsequent claim or request for arbitration can be entertained.
  • Explanation: These cases establish that a voluntary settlement bars further disputes.

Respondent’s Arguments (M/s. Boghara Polyfab Pvt. Ltd.):

• Limited Scope of Section 11 Proceedings: The scope of proceedings under Section 11 of the Arbitration & Conciliation Act is limited to establishing the existence of an arbitration agreement and that the dispute arises from the contract.
  • Explanation: The court’s role is primarily to ensure the arbitration agreement exists and applies to the dispute.
• Arbitrability of Discharge Voucher Validity: Whether the discharge voucher was given voluntarily or under pressure/coercion is a matter for the arbitral tribunal to examine and decide.
  • Explanation: The validity of the discharge voucher itself is an arbitrable issue.
• Coercion and Economic Duress: The discharge voucher is not valid or binding if given under threat or coercion, resulting in economic duress and compulsion.
  • Explanation: A discharge voucher obtained through coercion does not represent a genuine agreement.
• Reliance on Authorities: The Respondent relied on Damodar Valley Corporation v. K. K.Kar [1974 (1) SCC 141], M/s. Bharat Heavy Electricals Ltd., Ranipur v. M/s. Amar Nath Bhan Prakash [1982 (1) SCC 625], Union of India vs. L. K. Ahuja & Co. [1988 (3) SCC 76], Jayesh Engineering Works v. New India Assurance Co. Ltd. [2000 (10) SCC 178], Chairman & Managing Director, NTPC Ltd. v. Reshmi Constructions, Builders & Contractors [2004 (2) SCC 663], and Ambica Construction v. Union of India [2006 (13) SCC 475] to argue that disputes related to the validity of a discharge voucher are arbitrable.
  • Explanation: These cases support the view that allegations of coercion or undue influence make the dispute arbitrable.

Submissions Table

Issues Framed by the Supreme Court

1. In what circumstances will a court refuse to refer a dispute relating to quantum to arbitration when the contract specifically provides for such reference?
2. What is the position when a respondent resists reference to arbitration on the ground that the petitioner has issued a full and final settlement discharge voucher, and the petitioner contends that they were constrained to issue it due to coercion, undue influence, and economic compulsion?

Treatment of the Issue by the Court

Authorities

The court considered several cases and legal provisions to arrive at its decision:

Cases Relied Upon:

Legal Provisions Considered:

Judgment

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

How each authority was viewed by the Court?

• Union of India v. Kishorilal Gupta & Bros. [1960 (1) SCR 493]: The court culled out the general principles as to when arbitration agreements operate and when they do not operate.
• SBP & Co. vs. Patel Engineering Ltd. – 2005 (8) SCC 618: The court considered the scope of section 11 of the Act and held that the scheme of section 11 of the Act required the Chief Justice or his designate to decide whether there is an arbitration agreement in terms of Section 7 of the Act before exercising his power under Section 11(6) of the Act and its implications.
• State of Maharashtra v. Nav Bharat Builders [1994 Supp (3) SCC 83]: The court held that once a settlement is accepted and the amount received, it is no longer open to dispute the claim on any count or ground.
• M/s. P. K. Ramaiah & Co. v. Chairman & Managing Director, National Thermal Power Corpn. [1994 Supp (3) SCC 126]: The court held that when a contractor unconditionally acknowledges full and final settlement and satisfaction by issuing a receipt in writing, no arbitrable dispute arises.
• Nathani Steels Ltd. v. Associated Constructions [1995 Supp (3) SCC 324]: The court held that once parties arrive at a settlement, it cannot be unilaterally treated as non est and the arbitration clause invoked unless the settlement is set aside in proper proceedings.
• M/s. Bharat Heavy Electricals Ltd., Ranipur v. M/s. Amar Nath Bhan Prakash [1982 (1) SCC 625]: The court held that whether there was discharge of the contract by accord and satisfaction or not, is a dispute arising out of the contract, which requires to be referred to arbitration.
• Union of India vs. L. K. Ahuja & Co. [1988 (3) SCC 76]: The court observed that on settlement of the final bill, the right to get further payment gets weakened but the claim subsists and whether it does subsist, is a matter which is arbitrable.
• Jayesh Engineering Works v. New India Assurance Co. Ltd. [2000 (10) SCC 178]: The court held that whether the contract has been fully worked out and whether the payments have been made in full and final settlement are questions to be considered by the arbitrator when there is a dispute regarding the validity of such acknowledgement and that the arbitrator will consider whether any amount is due to be paid and how far the claim made by the contractor is tenable.
• Chairman & Managing Director, NTPC Ltd. v. Reshmi Constructions, Builders & Contractors [2004 (2) SCC 663]: The court ruled that the conduct of the parties as evidenced in their letters, clearly goes to show that not only the final bill submitted by the respondent was rejected but another final bill was prepared with a printed format that a “No-Demand Certificate” has been executed as otherwise the final bill would not be paid. The respondent herein, as noticed hereinbefore, categorically stated in its letter dated 20.12.1990 as to under what circumstances they were compelled to sign the said printed letter. It appears from the appendix appended to the judgment of the learned trial Judge that the said letter was filed even before the trial court. It is, therefore, not a case whether the respondent’s assertion of “under influence or coercion” can be said to have been taken by way of an afterthought.
• Ambica Construction v. Union of India [2006 (13) SCC 475]: The court observed that such a clause in contract would not be an absolute bar to a contractor raising claims which were genuine, even after submission of a no-claim certificate.
• United India Insurance Co. Ltd., vs. Ajmer Singh Cotton & General Mills – 1999 (6) SCC 400: The court held that the mere execution of the discharge voucher would not always deprive the consumer from preferring claim with respect to the deficiency in service or consequential benefits arising out of the amount paid in default of the service rendered. Despite execution of the discharge voucher, the consumer may be in a position to satisfy the Tribunal or the Commission under the Act that such discharge voucher or receipt had been obtained from him under the circumstances which can be termed as fraudulent or exercise of undue influence or by misrepresentation or the like. If in a given case the consumer satisfies the authority under the Act that the discharge voucher was obtained by fraud, misrepresentation, undue influence or the like, coercive bargaining compelled by circumstances, the authority before whom the complaint is made would be justified in granting appropriate relief.
• Central Inland Water Transport Corporation Ltd. vs. Brojo Nath Ganguly – 1986 (3) SCC 156: The court held that the courts will not enforce and will, when called upon to do so, strike down an unfair and unreasonable contract, or an unfair and unreasonable clause in a contract, entered into between parties who are not equal in bargaining power.

The Court made the following observations:

• Where there is a dispute as to whether the discharge voucher or no-claim certificate was validly executed, the court should not decide the matter, but leave it to the decision of the arbitrator.
• The Chief Justice or the designate should consider whether there is really accord and satisfaction, and whether the party giving the discharge voucher has done so voluntarily, or whether it was the result of fraud, undue influence, or coercion.
• The court should only consider whether the dispute is ex facie, patently, and demonstrably non-arbitrable.

Final Order:

The Supreme Court dismissed the appeal. The arbitrator appointed by the High Court was to continue the proceedings.

Ratio Decidendi

When a dispute arises as to whether a “full and final settlement” discharge voucher was executed voluntarily or under coercion, undue influence, or fraud, the matter must be referred to arbitration. The arbitral tribunal is competent to decide whether the discharge voucher was validly executed and whether it bars the insured from claiming further amounts.

Significance

This judgment is significant because it clarifies the circumstances under which disputes can be referred to arbitration despite the existence of a discharge voucher. It emphasizes that the validity of a discharge voucher is a matter that can be decided by an arbitral tribunal, especially when there are allegations of coercion, undue influence, or fraud. This ensures that parties are not unfairly prevented from seeking arbitration when they claim that the discharge voucher was not given voluntarily.

Flowchart of the Decision-Making Process

Conclusion

In conclusion, the Supreme Court’s judgment in National Insurance Co. Ltd. vs. M/s. Boghara Polyfab Pvt. Ltd. provides crucial guidance on the arbitrability of disputes arising after the issuance of a full and final discharge voucher. The court affirmed that allegations of coercion, undue influence, or fraud in obtaining the discharge voucher are sufficient grounds for referring the dispute to arbitration. This decision ensures that parties are not unfairly prevented from seeking recourse through arbitration when they genuinely believe that the discharge voucher was not given voluntarily. The judgment reinforces the principle that the validity of a discharge voucher is a matter that can be decided by an arbitral tribunal, thereby promoting fairness and justice in dispute resolution.