Arbitration can be invoked even after full and final settlement arrived by the Parties: Supreme Court reaffirmed the position of minimal interference warranted in S.11 petitions/2024.

On 18^th July 2024, our Hon’ble Apex Court had delved into an intricate aspect as to 1). Whether the arbitration can be invoked and an arbitrator can be appointed even when there is full and final accord and satisfaction has arrived between the parties, 2) to what extent a court is empowered to determine the dispute over the full anf final settlement.

To make a nutshell, the Hon’ble Apex Court has concluded that the arbitration is still be invokable even after the final settlement is arrived by the parties. Further, our Hon’ble Apex court had made a crystal-clear finding that the courts only have minimal power to intervene into S.11 and S.8 petitions. The courts should just determine the existance of the arbitration agreement and then pass the adjudication of any disputes to the hands of Arbitrator. Even ex-facie frivolous and meritless claims on deputes in accord and satisfaction cannot be looked by the courts.

Most importantly, our Hon’ble Apex court had affirmed the position stipulated in n In Re: Interplay and overturned the precedents Vidya Drolia and NTPC v. SPML. Thus, at this point of time it is clear that the position of In Re: Interplay (supra) stands affirmed and will be followed for a while. This just empowers the courts to only look into the aspect of existance of arbitration agreements and noting else in S.11 Petitions.

Case Details:

Case Name: SBI General Insurance Co. Ltd. vs. Krish Spinning

Case No: Civil Appeal No. 7822 Of 2024 dated 18th July, 2024

Judge Name: Hon’ble Chief Justice, Dr. Dhananjaya Y. Chandrachud. Justice. B. Pardiwala, Justice. Manoj Misra.

Where can this judgment be used:

This Apex Court’s judgment is vital for our professionals (more particularly to Advocates practicing in Arbitration) in various legal contexts, which are:

1. Arbitration Clauses Post Settlement: The enforceability of arbitration agreements after the execution of settlement documents like discharge vouchers.
2. Economic Duress and Coercion Claims: Cases where parties claim to have signed agreements or discharge vouchers under financial pressure or duress and which have arrived settlement due to coercions upon parties.
3. Judicial Review Standards: Defining the extent of judicial scrutiny allowed in pre-arbitration disputes more particularly in the matters pertaining to Applications under section 11 of Arbitration Act, ensuring that the courts do not overstep their boundaries.
4. Arbitral Autonomy: Reinforcing the principle that arbitration agreements can survive the termination of the main contract, thus promoting the autonomy of arbitration.
5. Understanding the entire background of Apex Courts rulings in the issue over the judicaial intervention in S.11 Petitions

Brief Facts:

Gist of the facts are as follows: –

1. In the dispute between SBI General Insurance Co. Ltd. (the appellant) and Krish Spinning (the respondent), the crux of the matter was the invocation of arbitration and appointment of arbitrator even after the respondent had signed a discharge voucher/settlement arrived between the parties.
2. The appellant entered an insurance contract with the respondent for fire and Special Perils.
3. Two fire accident took place during different dates of the Policy Period and for the first accident, a claim amounting to approximately Rs.1.7 crores was initiated by the appellant. However, based on the Surveyor Report, a claim amount of approximately 84 lakhs was accepted by the respondent on the first accident through their discharge reports.
4. This amount along with amounts accruing from other incidents were said to be discharged by the appellant by three spells.
5. Consequently, after receipt of final amount from the appellant, there seems to be a letter sent by respondent to the appellant requesting for Survey Report contending that the same was not provided to them. Krish Spinning emphasized that their consent to the surveyor’s assessment was given under significant financial pressure due to an additional fire incident in their factory.
6. Reply to the above, the appellant had sent a letter refuting all the allegations and had further stated that the claims were considered to be full and final settlement.
7. Subsequently, various communications transpired between the parties which ultimately led to initiation of S.11 application by the Repondent befor High Court.

The High Court was pleased to refer this matter to the aribtiration by appointing an Arbitrator. Aggrrived by the appointment of Arbitrator and intiatioin of Arbitration proceeding, the appellant had approached the Apex Court.

Contentions of the Parties:

Appellant (SBI General Insurance Co. Ltd.):

Full and Final Settlement: There is a full and final settlement accorded by the parties through discharge voucher and the same precludes the respondent from invoking the arbitration clause.

No Coercion: The appellant denied any coercion or undue pressure. There is no evidence adduced to support the plea of Coercion and there is no evidence to establish that the discharge  certificate was issued on Take it or leave it basis. They pointed out that the respondent had a 14 months delay in alleging coercion which had ultimately undermined their credibility and suggested that the claims were fabricated post-settlement.

Legal Precedents: The appellant relied upon the judgment of NTPC Ltd. v. SPML Infra Ltd. (2023) in which the “eye of needle test” was applied. This judgment was relied by the appellant to substantiate the high court error in not rejecting the deadwood claims in limini.

The appellant had also relied upon the judgment of New India Assurance Co. Ltd. v. Genus Power Infrastructure Ltd. (2015), wherein, the appellant argued that claims of coercion should be dismissed if they are raised after an unreasonable delay.

Respondent (Krish Spinning):

Economic Duress: The respondent asserted that the discharge voucher was signed under severe economic distress. They highlighted their pending claims amounting to approximately Rs. 8 crores, which created a dire financial situation compelling them to sign the voucher.

Validity of Arbitration Clause: Krish Spinning argued that despite the discharge voucher, the arbitration clause should still be enforceable. They maintained that the agreement to settle was not voluntary and, thus, should not invalidate the arbitration clause.

Timely Protest: The respondent emphasized that they raised the issue of coercion within a reasonable timeframe through correspondence and a formal arbitration notice. They contended that their protests were not an afterthought but a genuine claim against the coercion they faced.

Issue is subject matter of arbitration: – It was submitted that the issued pertaining to decision of coercion and allegations levelled by the appellant has to be dealt by the arbitrator as the courts have jurisdiction of limited scrutiny over S.11 petitions.

Analysis by the Court:

When there is a question or dispute over the full and final accord and satisfaction by the parties, then, it is ultimately necessary to determine the applicability of invoking the Arbitration through arbitration clause and determining the maintainability of S.11 petitions. The preliminary question revolves around is that the courts power to interfere upon the dispute over full and final satisfaction on the S.11 petition.  The Hon’ble Apex Court had just framed three sets of questions to determine this issue, which are as follows: –

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?

The first question tends was framed to determine whether there is an absolute bar to the court even to invoke arbitration when there is a full and final satisfaction by the parties. This questioned was affirmed in favour of the respondent, wherein, the apex court had emphasized that the courts have power to invoke arbitration as there is no complete bar. This was decided by relying through precedents such as Boghara Polyfab case. Once the courts have power to invoke arbitration, then the second question arises as to how far the courts can travel in ascertaining the disputes over full accord and satisfaction and to establish that the Second and Third question read above had been framed.  We had summarised the findings of each and every question for your easy understanding,

First Question- Whether the execution of a discharge voucher towards the full and final settlement between the parties would operate as a bar to invoke arbitration?

To be precise, the court found that executing a discharge voucher for full and final settlement does not act an automatic bar for intiating arbitration. The arbitration agreement survives even if there is a full and final settlement by parties, and if there are disputes about the validity of the settlement itself, these can be subject to arbitration under the original contract’s clause. The court emphasized the need to consider the circumstances of each case, particularly when allegations of fraud, coercion, or undue influence are involved in obtaining the discharge voucher. Please do find the comprehensive nutshell of findings pertaining to the above question:

Discharge by “accord and satisfaction”:

– A contract can end by performance or by substituting new obligations (accord) and fulfilling them (satisfaction).

– This is often referred to as “full and final settlement” and can be documented through discharge vouchers or no-dues certificates.

Survival of arbitration agreement:

  -The court emphasized that an arbitration agreement survives even after the discharge of the substantive contract.

 -This is based on the doctrine of separability, embodied in Section 16(1) of the Arbitration Act, 1996.

  -The arbitration clause is treated as an independent agreement from the main contract.

Key precedents cited:

   a) National Agricultural Coop. Marketing Federation India Ltd. v. Gains Trading Ltd. (2007):

      – Held that the arbitration agreement survives even if the underlying contract ends.

   b) Heyman v. Darwins Ltd. [1942]:

      – Established that breach or repudiation of a contract doesn’t extinguish the arbitration agreement.

      – The arbitration clause survives to settle disputes arising from the breach.

   c) Boghara Polyfab case:

      – Rejected the notion that signing a “full and final discharge voucher” automatically bars arbitration.

      – If the validity of the discharge is challenged on grounds of fraud, coercion, or undue influence, arbitration can still be invoked.

   d) R.L. Kalathia and Company v. State of Gujarat (2011):

      – Reiterated that issuing a no-dues certificate doesn’t prevent raising genuine claims later.

      – Common practice of requiring discharge certificates before payment doesn’t bar future genuine claims.

Court’s conclusions with respect to first question:

The following pointwis conclusion is sumarised for your reference.

1. No absolute rule precludes arbitration after a full and final settlement.
2. Discharge vouchers or no-dues certificates are only valid if executed voluntarily.
3. If execution was due to fraud, coercion, or undue influence, the discharge is void and can be challenged.
4. Mere execution of a settlement receipt or discharge voucher doesn’t bar arbitration if its validity is challenged.
5. Disputes over the settlement itself can be considered disputes arising from or related to the original contract.
6. Such disputes can be referred to arbitration under the original contract’s arbitration clause.

Second Question- 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?

When a contention of final settlement arrived with coercion comes into play, the other question arises is that whether courts have power to scrutinise such contentions in the S.11 petition and till what extent the court can scrutanise such allegations. Whether the courts can delve into factual aspects of such allegations and then proceeed with accepting the Sectioon 11 pettion or whether the court should merely make a prima facie view without delving into the merits of the contentions? these are the questions which had been ascertained by our Apex Court with detailed explination through various precedents.

Our Apex Court in multiple occasions, had took different views and had ultimately formulated a crystalissed view over the judicial interference in the S.11 petitions. To put it in the simple terms, presently the Courts have to simply apply a minimal judicial intervention over S.11 petition, making the Arbitral Tribunal empowered to acertain the issues over contentions of Full Accord and Satisfaction. Detailed findings of Apex Court views over this issue over various time are as follows:-

Initial Position (Pre-2015):

Konkan Railway Corpn. Ltd. v. Rani Construction (P) Ltd. reported in (2002) 2 SCC 388: Five Judges bench observed that when there is question over full accord and satisfaction then it is left to be decided by Arbitral Tribunal. The Apex Court categorized it as Administrative Power with an view of minimal judicial interference.

SBP & Co. v. Patel Engineering Ltd. (2005): The Seven Judge Bech of  our apex court expanded the scope of judicial scrutiny under Section 11, allowing courts to decide all the preliminary issueds in invoking arbitration thereby enabling an extensive examination of the disputes on merits, including issues like “accord and satisfaction”. The court acted as more than just a referral body and could delve into the substantive aspects of the dispute.

Evolution and Narrowing of Scope:

Boghara Polyfab v. National Insurance Co. Ltd. (2009): This case had followed the principles laid down in SBP & Co.

However, had narrowed the intervention of courts to certain extent, stating that while courts could examine whether there was an accord and satisfaction, this inquiry should be prima facie. The courts were advised to avoid a detailed investigation unless there was compelling prima facie evidence suggesting the dispute should not proceed to arbitration.

At this stage the judicial intervention of the Courts over S.11 petitions where substantially expanded.

Legislative Amendment (2015):

The legislative amendment made in 2015 to the Arbitration and Conciliation Act, 1996, introduced Section 11(6-A). This amendment significantly limited the scope of judicial intervention at the stage of appointing an arbitrator. Specifically, it mandated that the courts should confine their examination to the existence of an arbitration agreement. The intention was to streamline the arbitration process by minimizing delays caused by extensive judicial scrutiny, thereby promoting efficiency and respecting the principle of minimal judicial interference in arbitration matters.

This legislative change was a response to criticisms that extensive judicial scrutiny under Section 11 was causing delays and defeating the purpose of arbitration as a swift dispute resolution mechanism.

Post-Amendment Jurisprudence:

Duro Felguera S.A. v. Gangavaram Port Ltd. (2017): Reinforced the legislative intent behind Section 11(6-A), ruling that the court’s role is confined to examining whether an arbitration agreement exists. Any other issues, including disputes over of “accord and satisfaction”, should be left to the arbitral tribunal unless the issue of the agreement’s existence itself is in question.

United India Insurance Co. Ltd. v. Antique Art Exports Pvt. Ltd. reported in (2019) 5 SCC 362, in this judgment the court had mandated certainprima facie ascertainment of disputes in coercion overturning the earlier judgment of Duro Felguera.

Mayavati Trading Pvt. Ltd. v. Pradyuat Deb Burman (2019) 8 SCC 714:

The court overruled the previous decision in United Insurance Co. Ltd. v. Antique Art Exports Pvt. Ltd., holding that post the 2015 amendment, courts should confine their inquiry under Section 11 to the existence of an arbitration agreement and not go into the question of disputes over “accord and satisfaction.”

At this stage, the courts were of the view that a very minimal or no judicial interference can be made in the applications pertaining to S.11 & S.8 petitions. The courts have to just check the existance of arbitration clause and then simple pass on all the disputes to be determined by Arbitrator.

This is where the priciples of competence-competence and presumption of separability kicks in.

Refinement of Judicial Approach:

Vidya Drolia v. Durga Trading Corporation (2021): The court emphasized that issues of non-arbitrability should generally be resolved by the arbitral tribunal. The judgment reiterated that the court at the referral stage should only intervene in clear cases of non-arbitrability, thus respecting the arbitral tribunal’s competence to rule on its jurisdiction. However, this judgment had expanded the scope of judicial interference to a minimal extent by exercising a prima facie judicial review over the validity and existance of arbitration agreement such as looking into ex-facie frivolous and  meritless claim. Further held that such judicial review is extremely limited and the courts should refrain from going into the factual aspects on such judicial review.

Contemporary Position:

Indian Oil Corporation Limited v. NCC Limited (2023): This recent judgment aligns with the post-2015 trend, asserting that complex issues like “accord and satisfaction” should typically be left to the arbitral tribunal. It highlighted that when facts are disputable, the tribunal is better suited to handle these matters, thus minimizing judicial intervention at the Section 11 stage. Further held that such judicial review is extremely limited and the courts should refrine from going into the factual aspects on such judicial review.

Further in NTPC Ltd. v. SPML Infra Ltd. (2023) 9 SCC 385:

The court applied the “Eye of the Needle” test from Vidya Drolia, which requires a prima facie review to screen out ex-facie meritless claims. The decision reinforced that courts should only intervene at the referral stage if the claims are clearly non-arbitrable or frivolous.

At this stage it is clear and clarified that the standard of the judicial scrutiny over S.11 & S.8 Petitions is only prima facie, that is, unlike the pre-2015 position, the scrutiny does not entail elaborate appreciation of evidence and conduct of mini trials by the referral courts.

Interactive Timeline

1. 1974 – Damodar Valley Corporation v. K.K. Kar
   • Disputes about “accord and satisfaction” are arbitrable.
2. 2005 – SBP & Co. v. Patel Engineering Ltd.
   • Expanded judicial scrutiny under Section 11.
3. 2009 – Boghara Polyfab v. National Insurance Co. Ltd.
   • Introduced prima facie standard for “accord and satisfaction”.
4. 2015 – Introduction of Section 11(6-A)
   • Limited the scope of judicial inquiry to the existence of an arbitration agreement.
5. 2017 – Duro Felguera S.A. v. Gangavaram Port Ltd.

Courts have power to just look into existance of arbitration.

5. 2019-Mayavati Trading Pvt. Ltd. v. Pradyuat Deb Burman (2019) 8 SCC.

Courts have power to just look into existance of arbitration. No intervention by court.

7. 2021 – Vidya Drolia v. Durga Trading Corporation
   • Preferred arbitral tribunal for deciding non-arbitrability issues. Prima facie examination over exfacie meritless claim can be made.
8. 2023 – Indian Oil Corporation Limited v. NCC Limited
   • Referral courts should generally leave “accord and satisfaction” issues to arbitration.
9. 2023: NTPC Ltd. v. SPML Infra Ltd. –

Introduced the “Eye of the Needle” test for minimal scrutiny by courts. Prima facie examination over exfacie meritless claim can be made.

Conclusion to second question:

The ultimate conclusion of the court over the question of judicial scrutiny under Section 11(6) when a plea of “accord and satisfaction” is taken by the defendant, then the courts should exercise minimal intervention, focusing solely on the existence of an arbitration agreement.  A prima Facie exercise of determining the mertiless and ex-facie frivolous claim may be made. Detailed inquiries into “accord and satisfaction” or other substantive issues should be left to the arbitral tribunal. This approach aligns with the legislative intent behind Section 11(6-A) and promotes the efficiency and integrity of the arbitration process​.

The judicial preceedants over this issue had not stopped here, there is yet another recent case law which is “in  Re: Interplay Between Arbitration Agreements under the Arbitration and Conciliation Act 1966 and the Indian Stamp Act 1899” reported in 2023 INSC 1066.  This is one of the recent case law which had discussed the judicial interference of the court over S.11 & S.8 petitions. With respect this recent judgement, this apex court had framed another question for deciding and concluding the case.

Third Question: – What is the effect of the decision of this Court in In Re: Interplay BetweenArbitration 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?

You would wonder as to why this case had been relied by our Apex Court. To put it in the simple terms, the judgment of In Re: interplay had simply emphasised upon the power of courts to take only a prima facie view on the existance of agreement which seems to be slightly differing with earlier judgments Vidya Drolia & NTPC v. SPML) which had extended judicial interference on ex facie and frivolous claim.

Here is where our Apex Court had reaffirmed the principles laid down in the “In Re: interplay”. The apex court had mandated that the courts just have to look into existance of arbitration and should not go beyond that. Which means that even the court cannot look into the aspects of ex-facie meritless and frivolous claims as the same was not in conformity with the modern day arbitration.

The Apex court while following the judgment of In Re: interplay had categorically reconsidered Vidya Drolia and NTPC v. SPML. Therefore it is clear that, presently powers enshrined under Vijay Drolia and NTPC cannot be examined by courts over frivolous and exfacie calim today.  While making such conclusion, the court delved into several related issues and made the following detailed findings:

Arbitral Autonomy, Judicial Non-Interference and Competence-Competence Principle:

1. The court strongly emphasized the principle of arbitral autonomy and the need for minimal judicial interference in arbitration proceedings.
2. It noted that the principle of judicial non-interference permeates the entire scheme of the Arbitration Act, 1996
3. The court reaffirmed the importance of the competence-competence principle, as enshrined in Section 16 of the Act which empowers arbitral tribunal to rule its own jurisdiction.
4. The negative aspect of competence-competence was highlighted, which restricts court interference at the referral stage, preventing courts from examining jurisdictional issues before the arbitral tribunal had the opportunity to do so.

“Accord and Satisfaction” Disputes:

1. The court held that disputes pertaining to “accord and satisfaction” do not attack or question the existence of the arbitration agreement.
2. It emphasized that the arbitration agreement, being separate and independent from the underlying substantive contract, continues to exist even after the original contract is discharged by “accord and satisfaction”.
3. The court categorized “accord and satisfaction” as a mixed question of law and fact, falling within the exclusive jurisdiction of the arbitral tribunal.

Appointment of Arbitrator and Its Implications:

The court clarified that appointing an arbitrator under Section 11 does not dilute the sanctity of “accord and satisfaction” or allow a claimant to renege on contractual undertakings.

It emphasized that appointment merely upholds the original understanding of the parties to resolve disputes through arbitration.

The court noted that the defendant can still raise the issue of “accord and satisfaction” before the arbitral tribunal.

Rejection of “Eye of the Needle” and “Ex-Facie Meritless” Tests:

The court criticized tests like “eye of the needle” and “ex-facie meritless” as requiring referral courts to examine contested facts and appreciate prima facie evidence.

It held that such tests are not in conformity with the principles of modern arbitration that prioritize arbitral autonomy and judicial non-interference.

Principle of Subsequent Judicial Review:

The court emphasized that appointment of an arbitral tribunal does not foreclose the possibility of judicial review.

It highlighted that the Act provides for subsequent review through the challenge mechanism under Section 34.

The court drew parallels with the U.S. doctrine of “Second Look” to support this approach.

Time-Bound and Expeditious Disposal:

The court stressed that Section 11 envisages a time-bound and expeditious disposal of applications for appointment of arbitrators.

It reasoned that delving into issues like “accord and satisfaction” at the referral stage would hinder this objective.

Clarification on Limitation:

The court clarified its previous decision in Arif Azim Co. Ltd. v. Aptech Ltd.

It held that while examining limitation under Section 11(6), courts should only determine if the application itself is within the three-year limitation period.

The court emphasized that referral courts should not conduct an intricate inquiry into whether the underlying claims are time-barred, leaving that determination to the arbitrator.

Final Conclusion:

Based on the extensive analysis through different case laws, the hon’ble Apex Court had affirmed the view taken by the High Court on the appointment of arbitrator. The Apex Court had observed that:

1. There is an arbitration clause exist between the parties
2. The arbitration clause can still be adjudicated by the arbitrator when there is full and final settlement.
3. The dispute over the accord and satisfaction does not pertain to the existance of arbitration claim and the court does not have power to adjudicate such matter. Such disputes can be adjudicated by the Arbitrator.

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