Introduction
In the recent case of SBI General Insurance Co. Ltd. vs. Krish Spinning,[i] the Hon’ble Supreme Court clarified whether a discharge voucher signed as a full and final settlement can preclude arbitration proceedings. This judgment also addresses the interplay between the scope of judicial scrutiny under s. 11(6) of the Arbitration and Conciliation Act, 1996 (‘A&C Act’) and the accord of ‘accord and satisfaction’ which is embodied in s. 63 of the Indian Contract Act, 1872. The Supreme Court has also explained the effect of this ruling in its own decision in In Re Interplay Between Arbitration Agreements under the Arbitration and Conciliation Act, 1966 and the Indian Stamp Act, 1899, reported in 2023 INSC 1066.
Brief Facts
SBI General Insurance Co. Ltd (‘Appellant’), a private-sector general insurance company engaged in rendering insurance, issued a standard fire and special perils insurance policy to Krish Spinning (‘Respondent’), a manufacturer of cotton spinning filaments. The insurance policy covered the period from 31.03.2018 to 30.03.2019 for a sum of Rs. 7,20,00,000.
During this insurance period, two fire incidents occurred at the Respondent’s factory, causing substantial losses. The first incident, which took place on 28.05.2018, resulted in claimed losses of Rs. 1,76,19,967. The second incident on 17.11.2018 led to further claimed losses of Rs. 6,32,25,967. This judgment specifically pertains to the dispute arising from the first fire incident.
The Appellant argued that a full and final settlement had been reached as the Respondent had accepted an assessed loss of Rs 84,19,579 after the first fire incident and had signed a discharge voucher on 04.09.2019, confirming receipt of this amount in the full and final settlement.
The Appellant contended that this discharge voucher barred any further claims or arbitration. Furthermore, the Appellant argued that the Respondent had not raised any allegations of coercion or undue influence until much later, suggesting that these allegations were an afterthought lacking credibility. The Appellant further asserted that arbitration should be refused in cases of inordinate delay in raising a dispute.
The Respondent argued that the discharge voucher was signed under economic duress and faced significant financial pressure from pending claims and loans from financial institutions. It was contended that the execution of the discharge voucher was not voluntary and was done under the apprehension that failing to sign it would affect the pending claim from the second fire incident.
The Respondent also stated that a protest letter was sent on 25.09.2019, shortly after receiving the final payment for the second claim. This letter highlighted the dissatisfaction with the settlement amount and requested a copy of the survey report. Subsequently, the Respondent issued a legal notice on 02.03.2020 invoking arbitration, arguing that the settlement was coerced and not made with free consent.
The Hon’ble Gujarat High Court upheld the Respondent’s Plea for the appointment of an arbitrator. The Appellant subsequently filed this appeal before the Supreme Court.
Finding and rational
Discharge Voucher and Arbitration: The Supreme Court held that executing a discharge voucher does not automatically bar arbitration. It also held that if the discharge voucher was obtained under coercion, fraud, or undue influence, it would not preclude arbitration.
Scope and Standard of Judicial Scrutiny: The Supreme Court reiterated that under s. 11(6) of the A&C Act, the court’s role was limited to examining the existence of an arbitration agreement. The arbitral tribunal should be left to detailed scrutiny of whether the claims are arbitrable or if there was coercion in signing the discharge voucher.
Impact on Previous Decision: This judgement analysed the impact of its previous decision in In Re Interplay Between Arbitration Agreements under the Arbitration and Conciliation Act, 1966 and the Indian Stamp Act, 1899 (Supra). The Supreme Court highlighted that arbitral autonomy and the doctrine of separability ensure that the arbitration agreement survives even if the substantive contract is terminated or fulfilled.
The Supreme Court upheld the appointment of Justice K.A. Puj, a former Judge of the Gujarat High Court, as the arbitrator. It vacated any orders staying the arbitration proceedings and left all legal contentions and objections to be addressed by the arbitrator.
Conclusion
In this case, the Supreme Court’s decision reaffirms the principle of minimal judicial intervention in arbitration matters, particularly in cases involving claims of accord and satisfaction. Moreover, by highlighting the freedom of arbitral tribunals, this decision aligns with the UNICTRAL Model on International Commercial Arbitration, 1985, promoting efficient dispute resolution. The doctrine of separability has been clearly articulated in this decision by ensuring that arbitration agreements remain enforceable even if the contract gets discharged. Furthermore, the Supreme Court has clearly explained the scope of s. 11(6) of the A&C Act, which is limited to verifying the existence of an arbitration agreement without venturing into the merits of the dispute. Hence, this ruling will serve as a guide for future arbitration proceedings in which the question is related to judicial intervention of the courts.
End Note
[i] 2024 SCC OnLine SC 1754.
Authored by Manmohan Bhola, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.