Supreme Court Upholds Discharge Voucher in Insurance Claim Dispute: United India Insurance Co. Ltd. vs. Antique Art Exports Pvt. Ltd. (28 March 2019)

Introduction

Date of the Judgment: 28 March 2019
Citation: 2019 INSC 287
Judges: A.M. Khanwilkar, J. and Ajay Rastogi, J.
Can an insurance company be compelled to arbitrate a claim after the insured party has already accepted a settlement and signed a discharge voucher? The Supreme Court of India recently addressed this critical question in a case involving a dispute over a fire insurance claim. The court examined whether a party can later challenge a settlement, claiming coercion, and seek arbitration, or if the discharge voucher acts as a full and final settlement, barring further disputes. This judgment clarifies the circumstances under which a settlement can be challenged and when arbitration can be invoked. The judgment was delivered by a two-judge bench of Justices A.M. Khanwilkar and Ajay Rastogi, with the opinion authored by Justice Rastogi.

Case Background

Antique Art Exports Pvt. Ltd. (the respondent) owned a factory in Panipat and had purchased two Standard Fire and Special Perils Policies from United India Insurance Co. Ltd. (the appellant), dated 29th June 2013 and 10th October 2013. Two fire incidents occurred at the factory on 25th September 2013 and 25th October 2013, which the respondent claimed were due to short circuits. The appellant appointed M/s. Protocol Surveyors & Engineers Pvt. Ltd. to survey the damage and also assigned an investigator to prepare a fact-finding report. After receiving the surveyor’s report, the appellant informed the respondent via email that it had approved a claim of Rs. 2,81,44,413 for the fire incident on 25th October 2013, as a full and final settlement. The email also detailed the computation of the amount and requested certain documents and a full and final settlement discharge voucher. The respondent accepted the settlement, provided the required documents, and submitted the discharge voucher. A similar process was followed for the fire incident on 25th September 2013, with a settlement of Rs. 2,20,36,840. However, after approximately 11 weeks, the respondent alleged that they were coerced into signing the discharge voucher and sought to invoke the arbitration clause in the insurance policy.

Timeline:

Course of Proceedings

The respondent filed an application under Section 11(6) of the Arbitration and Conciliation Act, 1996, before the High Court of Delhi, seeking the appointment of an arbitrator. The respondent argued that the insurer had coerced them into signing a pre-signed discharge voucher under financial duress. The appellant refuted these allegations, stating that the respondent had accepted the payment without protest and signed a letter of subrogation, thus discharging the contract by accord and satisfaction. The High Court, considering Section 11(6A) of the Arbitration and Conciliation Act, 1996, held that the issue of whether the acceptance of payment was under coercion or undue influence should be examined by an arbitrator and appointed a sole arbitrator. The appellant then appealed to the Supreme Court challenging the High Court’s order.

Legal Framework

The primary legal framework for this case is the Arbitration and Conciliation Act, 1996, specifically:

• Section 11(6): This section deals with the procedure for the appointment of arbitrators. It allows a party to apply to the High Court to appoint an arbitrator if the other party fails to do so as per the arbitration agreement.
• Section 11(6A): Introduced by the 2015 Amendment Act, this section mandates that the court, while considering an application under Section 11(6), should confine itself to the examination of the existence of an arbitration agreement.

The case also touches upon the principle of “accord and satisfaction,” which refers to the discharge of a contract when parties agree to settle a dispute by accepting a different performance than what was originally agreed upon. The court also considered the concept of “coercion” and “undue influence” in the context of contract law, which, if proven, can invalidate a contract or settlement.

Arguments

Appellant’s Arguments (United India Insurance Co. Ltd.):

• The appellant argued that the respondent had accepted the settlement amount and issued a discharge voucher in full and final settlement of their claim. This, according to the appellant, constituted a discharge of the contract by accord and satisfaction, leaving no further claim or dispute to be arbitrated.
• The appellant contended that the respondent had received payment without any protest and only raised allegations of coercion and undue influence after 11 weeks of the settlement. The appellant argued that such a delayed claim, without any prima facie evidence, should not be entertained.
• The appellant relied on the judgment in New India Assurance Company Limited vs. Genus Power Infrastructure Limited [2015(2) SCC 424], arguing that it was a similar case where a bald plea of coercion was not sufficient to warrant arbitration.
• The appellant further submitted that Section 11(6A) of the Arbitration and Conciliation Act, 1996, was introduced to expedite arbitral disputes, but only if a prima facie arbitral claim exists. In this case, the appellant argued, no such dispute existed after the settlement.

Respondent’s Arguments (Antique Art Exports Pvt. Ltd.):

• The respondent argued that they were not in a bargaining position and were under financial stress, leaving them with no choice but to accept the settlement on the terms dictated by the appellant. They claimed that the acceptance was not voluntary but under undue influence and coercion.
• The respondent contended that the existence of an arbitration clause in the agreement meant that the issue of whether the acceptance of the claim was voluntary or under coercion should be examined by an arbitrator.
• The respondent argued that the High Court was correct in appointing an arbitrator to examine the issue of coercion and undue influence, as the court’s role is limited to examining the existence of an arbitration agreement.

Issues Framed by the Supreme Court

The Supreme Court framed the following key issue for consideration:

1. Whether the discharge in the present case, upon acceptance of the compensation and signing of the discharge letter, was voluntary or under coercion or undue influence, and whether the respondent was justified in invoking Section 11(6) of the Arbitration and Conciliation 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 the following authorities:

Cases:

• National Insurance Company Limited vs. Boghara Polyfab Private Limited [2009(1) SCC 267] – Supreme Court of India. This case was cited to highlight that a mere execution of a full and final settlement receipt or discharge voucher is not a bar to arbitration if its validity is challenged on grounds of fraud, coercion, or undue influence. The court also laid down illustrations as to when claims are arbitrable and when they are not.
• Union of India and Others vs. Master Construction Co. [2011(12) SCC 349] – Supreme Court of India. This case was cited to emphasize that there is no absolute rule, and each case must be examined based on its facts. The court held that if a claimant alleges that a discharge voucher was obtained by fraud or coercion, the Chief Justice or his designate must examine whether the dispute is bona fide and genuine.
• New India Assurance Company Limited vs. Genus Power Infrastructure Limited [2015(2) SCC 424] – Supreme Court of India. This case was cited to support the proposition that a bald plea of fraud, coercion, duress, or undue influence is not enough, and the party making such a plea must prima facie establish it by placing material before the Chief Justice or his designate.
• Duro Felguera S.A. vs. Gangavaram Port Limited [2017(9) SCC 729] – Supreme Court of India. This case was cited by the respondent to argue that the court’s jurisdiction is limited to examining the existence of an arbitration agreement. The Supreme Court clarified that while the court’s role is limited, it still needs to ensure that the dispute resolution process is not unnecessarily protracted.

Legal Provisions:

• Section 11(6) of the Arbitration and Conciliation Act, 1996: This provision outlines the procedure for appointing an arbitrator when parties fail to do so as per the arbitration agreement.
• Section 11(6A) of the Arbitration and Conciliation Act, 1996: This provision, introduced by the 2015 Amendment Act, limits the court’s examination to the existence of an arbitration agreement when considering an application under Section 11(6).

Judgment

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

How each authority was viewed by the Court?

• The Court relied on National Insurance Company Limited vs. Boghara Polyfab Private Limited [2009(1) SCC 267]* to reiterate that a discharge voucher is not an absolute bar to arbitration if its validity is challenged, but emphasized that there has to be a genuine dispute.
• The Court followed Union of India and Others vs. Master Construction Co. [2011(12) SCC 349]* to emphasize that each case must be examined on its own facts, and the Chief Justice or his designate must look into the genuineness of the dispute.
• The Court upheld the principle laid down in New India Assurance Company Limited vs. Genus Power Infrastructure Limited [2015(2) SCC 424]*, stating that a bald plea of coercion is not sufficient and must be supported by prima facie evidence.
• The Court distinguished Duro Felguera S.A. vs. Gangavaram Port Limited [2017(9) SCC 729]*, clarifying that while the court’s role is limited, it still needs to ensure that the dispute resolution process is not unnecessarily protracted.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the lack of prima facie evidence presented by the respondent to support their claim of coercion or undue influence. The court emphasized that a mere allegation of coercion is not sufficient to invalidate a discharge voucher, especially when the respondent had initially accepted the settlement without any demur or protest. The court also noted the significant delay (11 weeks) between the settlement and the respondent’s claim of coercion, which further weakened their case. The court’s reasoning was also guided by the principle of accord and satisfaction, which holds that a contract is discharged when parties agree to settle a dispute by accepting a different performance. The court also considered the limited scope of judicial intervention under Section 11(6A) of the Arbitration and Conciliation Act, 1996, which confines the court’s examination to the existence of an arbitration agreement.

Fact:Law Ratio

Logical Reasoning:

The court explicitly stated that “a mere plea of fraud, coercion, duress or undue influence is not enough and the party who sets up a plea, must prima facie establish the same by placing material before the Chief Justice/his designate.” The court also observed, “In the instant case averment was made for the first time after 11 weeks of the settlement of claim & release of discharge voucher in the petition filed by the respondent seeking appointment of Arbitrator of undue influence/coercion being used by the appellant in signing the papers on dotted lines.” Further, the court noted, “As observed, the phrase in itself is not sufficient unless there is a prima facie evidence to establish the allegation of coercion/undue influence, which is completely missing in the instant case.”

The Court rejected the respondent’s argument that financial distress alone constitutes coercion or undue influence, emphasizing that the respondent had freely entered into the settlement. The court also clarified that while its role under Section 11(6A) is limited to examining the existence of an arbitration agreement, it must ensure that the dispute resolution process is not unnecessarily protracted by referring disputes that lack a prima facie basis.

Key Takeaways

• Discharge Vouchers are Significant: A discharge voucher signed after accepting a settlement can be a bar to further claims, provided it is not obtained through fraud, coercion, or undue influence.
• Burden of Proof: The party alleging coercion or undue influence has the burden to provide prima facie evidence to support their claim. A mere allegation is not sufficient.
• Timely Objections: Any objection to a settlement must be raised promptly. A significant delay in raising such objections can weaken the claim.
• Limited Judicial Intervention: The court’s role in appointing an arbitrator is limited to examining the existence of an arbitration agreement. It is not meant to be a forum for resolving disputes on merits.
• Importance of Accord and Satisfaction: The principle of accord and satisfaction is upheld, meaning that when parties agree to settle a dispute by accepting a different performance, the original contract is discharged.

This judgment has significant implications for insurance companies and insured parties, as it reinforces the importance of finality in settlements and the need for prompt and substantiated objections to settlements.

Directions

The Supreme Court set aside the order passed by the High Court, which had appointed an arbitrator. The court did not provide any other specific directions.

Specific Amendments Analysis

The judgment discusses the impact of the insertion of sub-section (6A) to Section 11 of the Arbitration and Conciliation Act, 1996, by the Amendment Act of 2015. This amendment limited the scope of judicial intervention at the stage of appointment of an arbitrator, confining the court’s examination to the existence of an arbitration agreement. The court clarified that while its role is limited, it still needs to ensure that the dispute resolution process is not unnecessarily protracted by referring disputes that lack a prima facie basis.

Development of Law

The ratio decidendi of this case is that a discharge voucher, signed after accepting a settlement, is a valid discharge of the contract by accord and satisfaction unless the party challenging it can provide prima facie evidence of fraud, coercion, or undue influence. A mere allegation, without supporting evidence, is insufficient to warrant arbitration. This judgment reinforces the principle that settlements should be final and that parties should not be allowed to raise frivolous claims to avoid their contractual obligations. There is no change in the previous positions of law but this case clarifies the application of the existing law.

Conclusion

In conclusion, the Supreme Court’s judgment in United India Insurance Co. Ltd. vs. Antique Art Exports Pvt. Ltd. clarifies the circumstances under which a discharge voucher can be challenged and when arbitration can be invoked. The court emphasized that a discharge voucher is a valid settlement unless there is prima facie evidence of fraud, coercion, or undue influence. The judgment reinforces the importance of finality in settlements and the need for prompt and substantiated objections. The court also reiterated that the limited scope of judicial intervention under Section 11(6A) of the Arbitration and Conciliation Act, 1996, does not permit the court to refer disputes to arbitration that lack a prima facie basis.