Introduction
In a significant ruling the Supreme Court in SBI General Insurance Co. Ltd. vs. Krish Spinning Mills, has addressed the issue of whether the signing of a discharge voucher, even when contested, can preclude a party from invoking arbitration. The Supreme Court reinforced the autonomy of arbitration clauses and clarified the boundaries of judicial intervention under Section 11, after a deep dive into the existing jurisprudence.
Facts
Krish Spinning Mills (Respondent/Krish Spinning) held a fire insurance policy with SBI General Insurance (Appellant/SBI) for its manufacturing unit. The judgment pertains specifically to the dispute arising from one of the fire incidents. Following the first incident, Krish Spinning submitted its claim. SBI settled the said claim basis a surveyor's report. Krish Spinning accepted this settlement by signing a discharge voucher, and subsequently, contended that the discharge voucher was signed under financial duress. Krish Spinning invoked the arbitration clause in the insurance policy. However, SBI maintained that the execution of the discharge voucher constituted a final settlement, thus barring arbitration.
Judgment
Autonomy of the Arbitration Clause
A central issue in the matter was whether an arbitration clause remains enforceable after the signing of a settlement agreement, i.e., "accord and satisfaction" or "full and final settlement,", in the form of a discharge voucher. The Court reaffirmed a fundamental tenet of arbitration, i.e., the doctrine of separability, which treats an arbitration clause as a distinct and independent agreement, separate from the main contract.
The discharge voucher signed by Krish Spinning did not contain any explicit waiver of arbitration rights, thus preserving the effectiveness of the arbitration clause.
The Court relied upon its judgment in National Insurance Co. Ltd. v. Boghara Polyfab Pvt. Ltd1. (Boghara Polyfab), and the House of Lords ruling in Heyman v. Darwins Ltd.2. The Court in Boghara Polyfab observed that the discharge of a contract by full and final settlement by issuance of a discharge voucher extends only to those vouchers or certificates which are validly and voluntarily executed. If a party alleges that the execution was on account of fraud, coercion or undue influence exercised by the other party, and is able to establish such an allegation, then the discharge of the contract by virtue of issuance of such a discharge voucher is rendered void.
In its detailed analysis, the Court observed that given Krish Spinning's substantial allegations of duress and coercion, arbitration was necessary to adjudicate the factual disputes.
Limited Role of Courts under Section 11 of the Arbitration Act
The Court, drawing reference from prior jurisprudence and after examining the historical chronology of Section 11 rulings, reaffirmed its well-established position that under Section 11 of the Arbitration and Conciliation Act, 1996 (the Act), judicial function is limited to verifying the existence of an arbitration agreement. The judiciary is not tasked with evaluating the merits of the dispute such as determining whether the discharge voucher was signed voluntarily.
In Damodar Valley Corporation3 and Amar Nath4, the Court emphasized that disputes surrounding issues such as questions of accord and satisfaction, fall within the jurisdiction of the arbitral tribunal. Thereafter in later rulings5, the position shifted, wherein it was held that in cases involving full and final settlements, no arbitral disputes remain, and reference to arbitration must not be allowed. The power under Section 11 was characterised as an administrative one, until the decision of the Court in SBP & Co. v. Patel Engg. Ltd6 (SBP & Co.), which significantly expanded the scope of judicial interference.
In Boghara Polyfab, the Court while relying upon SBP & Co., held that under Section 11, the Court can either look into the question of "accord and satisfaction" or leave it for the decision of the arbitrator; but in cases where there was "accord and satisfaction", the Court could reject appointment of an arbitrator. The prima facie standard of scrutiny was also expounded, stating that the party seeking arbitration would have to prima facie establish that there was fraud or coercion involved in the signing of the discharge certificate. The Boghara Polyfab line of judgments caused substantial delays in disposal of Section 11 matters, and therefore Section 11-6(A) was introduced.
In Duro Felguera7, the enquiry under Section 11 was restricted to an examination of whether an arbitration agreement existed between the parties or not. Mayavati Trading8, reiterated the view taken in Duro Felguera. In Vidya Drolia9, the Court carved out an exceptional category of cases in which interference by the referral court was permissible; it provided that in exceptional cases, where claims were ex facie time barred and deadwood, the Court could interfere. Thereafter, in NTPC Ltd. v. SPML Infra Ltd.10, the Court gave the "Eye of the Needle" test to delineate the contours of the power of interference, which the referral court may exercise under Section 11, and it was clarified that the standard of the scrutiny is only prima facie.
Thereafter, in a seven-Judge Bench judgment11, the Court undertook a comprehensive analysis of Sections 8 and 11. Relying upon the same, in the present case, the court observed that the principle behind arbitral autonomy and judicial non-interference is that when parties decide to settle their disputes through arbitration, they surrender their right to agitate the same before the national courts. Section 5 of the Act minimises the supervisory role that the courts may play in the arbitral process. The legislative mandate of prima facie determination at the stage of Sections 8 and 11, ensures that the referral courts do not end up venturing into what is intended by the legislature to be the exclusive domain of the arbitral tribunal. Further, Section 16 of the Act, recognises the doctrine of competence-competence and empowers the arbitral tribunal to rule on its own jurisdiction.
The parameters of judicial review laid down for Section 8 differ from those prescribed for Section 11. The view taken in SBP & Co. and affirmed in Vidya Drolia12, was legislatively overruled by the introduction of Section 11(6-A). Although both these provisions intend to compel parties to abide by their mutual intention to arbitrate, the scope of powers of the courts under both the sections are different13.
Scope under Section 11-6(A)
The Court held that the scope of examination under Section 11(6-A) is confined to the existence of an arbitration agreement on the basis of Section 7. The examination of validity of the arbitration agreement is also limited to the requirement of formal validity, such as the agreement should be in writing. Scope of enquiry under Section 11(6-A) is limited to a prima facie scrutiny. This prima facie view taken by the courts is not binding on the tribunal or the court enforcing the award.
In the context of the present dispute, it was held that the dispute pertaining to "accord and satisfaction" of claims is not one which attacks or questions the existence of the arbitration agreement. An arbitration agreement, being separate and independent from the underlying contract, continues to remain in existence even after the original contract stands discharged by "accord and satisfaction".
SBI had admitted liability with respect to the first claim and had already disbursed some amounts in accordance with the advance discharge voucher. As a result, the dispute was not regarding liability, but rather the quantum of the claim. Thus, the dispute fell within the scope of the conditional arbitration clause, in the insurance policy. Despite the signing of the discharge voucher, the allegations of coercion raised by Krish Spinning required examination by the arbitral tribunal. Consequently, the Court referred the matter to arbitration.
Conclusion
The present judgment is an indication of how India's arbitration landscape is undergoing a significant transformation, with courts increasingly strengthening arbitral autonomy and curbing judicial intervention. While this fosters a more arbitration-friendly framework, certain recent policy decisions—such as restricting arbitration as a dispute resolution mechanism, only in domestic public procurement disputes below ₹10 crores, and prioritizing mediation for higher value disputes—brings about some inconsistencies in approach. It would be interesting to see now what the Supreme Court decides in the matter wherein it has reserved judgment, to determine whether courts have the power to modify arbitral awards under Sections 34 and 37 of the Act.
Footnotes
1 (2009) 1 SCC 267
2 [1942] AC 356
3 Damodar Valley Corporation v. KK Kar (1974) 1 SCC 14
4 Bharat Heavy Electricals Ltd. v. Amar Nath Bhan Prakash (1982) 1 SCC 625
5 PK Ramaiah & Company v. Chairman and Managing Director, National Thermal Power Corporation 1994 Supp (3) SCC 126, Nathani Steels Ltd. v. Associated Constructions 1995 Supp (3) SCC 324
6 (2005) 8 SCC 618
7 Duro Felguera, S.A. v. Gangavaram Port Ltd (2017) 9 SCC 729
8 Mayavati Trading Private Limited v. Pradyut Deb Burman (2019) 8 SCC 714
9 Vidya Drolia & Ors v. Durga Trading Corporation (2021) 2 SCC 1
10 (2023) 9 SCC 385
11 Re: Interplay Between Arbitration Agreements under the Arbitration and Conciliation Act 1966 and the Indian Stamp Act 1899, 2023 INSC 1066
12 Vidya Drolia & Ors v. Durga Trading Corporation (2021) 2 SCC 1
13 Paragraph 109 of the judgment
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