Issuance of Discharge Vouchers: The End or the Beginning of a New Legal Battle?

The Hon’ble apex court recently in SBI General Insurance Co. Ltd. v. Krish Spinning, 2024 INSC 532 analysed substantial questions of law pertaining to the disputes arising out of a discharge voucher signed by the respondent/ insured against his insurance claim. The questions of law primarily focused on ‘accord and satisfaction’ and invocation of arbitration after acceptance of the amount by the insured on the ground that the respondent was made to sign the same under immense economic and financial pressure.

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

1. The Bench before answering the aforesaid question of law first examined “Whether the arbitration agreement contained in a substantive contract survives even after the underlying contract is discharged by “accord and satisfaction." The Bench discussed the doctrine of separability and observed that an arbitration clause is an independent agreement and ruled that even a decision of the arbitral tribunal declaring the principal contract as null and void does not make the arbitration clause therein invalid. Further, the Bench referred to the decision in National Agricultural Coop. Marketing Federation India Ltd. v. Gains Trading Ltd., (2007) 5 SCC 692, wherein the Court while interpreting Section 16 of the Arbitration Act, 1996 (‘the Act’) held that even if the contract comes to an end, the arbitration clause still survives.

2. The Bench answered the aforesaid question by referring to its judgment in National Insurance Co. Ltd. v. M/s. Boghara Polyfab Pvt. Ltd., AIR 2009 SC 170 wherein it was held that the mere execution of a discharge voucher does not operate as a bar to invoke an arbitration clause. Since the present case had a similar factual matrix to that in Boghara Polyfab (Supra), the answer to the aforesaid question of law is that the plea for the full and final settlement between the parties cannot be taken into consideration when the settlement of the original contract becomes a matter of dispute. Thus, such a dispute will be categorized as one arising “in relation to” or “in connection with” or “upon” the original contract and the same can be referred to arbitration in accordance with the arbitration clause contained in the original contract. This was notwithstanding the plea that there was a full and final settlement between the parties.

b. What is the scope and standard of judicial scrutiny that an application filed under Section 11(6) of the Act can be subjected to when a plea of “accord and satisfaction” is taken by the defendant?

1. The Court observed that the issue as regards to the validity of the full and final settlement is to be determined by the arbitral tribunal and not by the referral court acting under Section 11. In order to reach such a conclusion, the Bench discussed its earlier decisions in Damodar Valley Corporation v. KK Kar, (1974) 1 SCC 14, Bharat Heavy Electricals Ltd. v. Amar Nath Bhan Prakash, (1982) 1 SCC 625, wherein it was held the matters in dispute including the matters where the discharge contract executed with accord and satisfaction would have to be referred to arbitration. Subsequently, the position was changed with the decisions of the apex court in PK Ramaiah and Company v. Chairman and Managing Director, National Thermal Power Corporation, 1994 Supp (3) SCC 126 and Nathani Steels Ltd. v. Associated Constructions, 1995 Supp (3) SCC 324 wherein it was held that when there was a full and final settlement, no arbitral disputes subsist.

2. The Bench referred to Union of India v. Master Construction Co., (2011) 12 SCC 349 wherein the decision of Boghara Polyfab (Supra) which relied upon SBP & Co. v. Patel Engg. Ltd., (2005) 8 SCC 618, was followed and it was held that while deciding an application under Section 11(6) of the Act, a court must only examine and satisfy that plea against full and final discharge voucher was bonafide.

3. Further, while relying on the decision in Vidya Drolia & Ors v. Durga Trading Corporation, (2021) 2 SCC 1, reiterated that the factual disputes should be left for the arbitrator to decide. Ultimately, the Court answered the aforesaid question of law by considering the decision in Vidya Drolia (supra) and held that a referral court, while exercising its powers under Section 11 of the Act, should only look into the existence of an arbitration agreement and can refuse the arbitration only, if on a demurrer, the claims seem to be false, frivolous and non-arbitrable.

c. What is the effect of the apex’s court’s decision in In Re: Interplay Between Arbitration Agreement under the Act and the Indian Stamp Act, 1899 on the scope of powers of the referral courts under Section 11(6) of the Act?

The Bench while taking into consideration the decision in Re: Interplay Between Arbitration Agreements under the Arbitration and Conciliation Act 1966 and the Indian Stamp Act 1899, 2023 INSC 1066 (“Re: interplay”), affirmed the decision in Re: Interplay wherein it was held that the scope of enquiry at the stage of appointment of arbitrator is limited to the inspection of bona fide existence of the arbitration agreement. Therefore, the decision in Vidya Drolia (supra) would continue to apply even after the subsequent decision in Re: Interplay. 

The Court by way of this judgment while disposing of the matter held that the dispute regarding ‘accord and satisfaction’ does not pertain to the existence of the arbitration agreement and can only be adjudicated by the arbitral tribunal. The controversy, with the present ruling which touches upon the contours of the power of the referral court under Section 11, can be said to have been put to rest for now. However, the authors are of the view that there may be a change in this position once the omission of Section 11(6-A) of the Act, is notified.

About the authors: Ishwar Ahuja is a Principal Associate and Rahul Saxena is a Senior Associate at Saga Legal.

The views and opinions expressed in this Article are those of the author(s) alone and are meant to provide the readers with an understanding of the judgment passed in the batch of civil appeals titled “SBI General Insurance Co. Ltd. v. Krish Spinning, 2024 INSC 532” dated 18.07.2024. The contents of the aforesaid article do not necessarily reflect the official position of Saga Legal. The readers are suggested to obtain specific opinions/ advice with respect to their individual case(s) from professionals/ experts and not to use this article in place of expert legal advice.

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