SBI General Insurance Co. Ltd. vs Krish Spinning

Held: Although ordinarily no arbitrable disputes may subsist after execution of a full and final settlement, yet any dispute pertaining to the full and final settlement itself, by necessary implication being a dispute arising out of or in relation to or under the substantive contract, would not be precluded from reference to arbitration as the arbitration agreement contained in the original contract continues to be in existence even after the parties have discharged the original contract by “accord and satisfaction” – Once the full and final settlement of the original contract itself becomes a matter of dispute and disagreement between the parties, then such a dispute can be categorised as one arising “in relation to” or “in connection with” or “upon” the original contract which can be referred to arbitration in accordance with the arbitration clause contained in the original contract, notwithstanding the plea that there was a full and final settlement between the parties – Where the parties are not ad idem over accepting the execution of the no-claim certificate or the discharge voucher, such disputed discharge voucher may itself give rise to an arbitrable dispute – Thus, the position is that ordinarily, the Court while acting in exercise of its powers u/s. 11, will only look into the existence of the arbitration agreement and would refuse arbitration only as a demurrer when the claims are ex-facie frivolous and non-arbitrable – On facts, existence of the arbitration agreement as contained in the insurance policy not disputed by the appellant-insurer – Dispute raised by the claimant being one of quantum and not of liability, prima facie, falls within the scope of the arbitration agreement – Dispute regarding “accord and satisfaction” as raised by the appellant does not pertain to the existence of the arbitration agreement, and can be adjudicated upon by the arbitral tribunal as a preliminary issue – Appointment of the former Judge of the High Court as an arbitrator to resolve the disputes between the parties upheld. [Paras 59, 93, 135, 136]

Arbitration and Conciliation Act, 1996 – Arbitration agreement contained in a substantive contract, if survives even after the underlying contract is discharged by “accord and satisfaction”:

Held: Arbitration for the purpose of resolving any dispute pertaining to any claim which has been “fully and finally settled” between the parties can only be invoked if the arbitration agreement survives even after the discharge of the substantive contract – Arbitration agreement, by virtue of the presumption of separability, survives the principal contract in which it was contained – Even if the contracting parties, in pursuance of a settlement, agree to discharge each other of any obligations arising under the contract, this does not ipso facto mean that the arbitration agreement too would come to an end, unless the parties expressly agree to do the same – Intention of the parties in discharging a contract by “accord and satisfaction” is to relieve each other of the existing or any new obligations under the contract – Such a discharge of obligations under the substantive contract cannot be construed to mean that the parties also intended to relieve each other of their obligation to settle any dispute pertaining to the original contract through arbitration – Although ordinarily no arbitrable disputes may subsist after execution of a full and final settlement, yet any dispute pertaining to the full and final settlement itself, by necessary implication being a dispute arising out of or in relation to or under the substantive contract, would not be precluded from reference to arbitration as the arbitration agreement contained in the original contract continues to be in existence even after the parties have discharged the original contract by “accord and satisfaction”. [Paras 48, 49, 51, 53, 54]

Arbitration and Conciliation Act 1996 – s. 11 – Powers of the referral court under, as regards the appointment of an arbitrator – Scope of – Effect of the decision in In Re: Interplay Between Arbitration Agreements under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899: Held: In view of the observations made by this Court in In Re: Interplay’s case that the High Court and the Supreme Court at the stage of appointment of arbitrator shall examine the existence of a prima facie arbitration agreement and not any other issues, it is clear that the scope of enquiry at the stage of appointment of arbitrator is limited to the scrutiny of prima facie existence of the arbitration agreement, and nothing else – Thus, it is difficult to hold that the observations made in Vidya Drolia’s case and adopted in NTPC v. SPML’s case that the jurisdiction of the referral court when dealing with the issue of “accord and satisfaction” u/s.

11 extends to weeding out ex-facie non-arbitrable and frivolous disputes would continue to apply despite the subsequent decision in In Re: Interplay’s case. [Paras 113-114]

Arbitration and Conciliation Act 1996 – s. 11 – Powers of the referral court under, as regards the appointment of an arbitrator – Scope of – Effect of the decision in In Re: Interplay Between Arbitration Agreements under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899 – Principle of arbitral autonomy-judicial non-interference, principle of negative competence-competence, and judicial interference under the Act, 1996, explained. [Paras 96-112]

Contract – Discharge of – Discharge by performance – Discharge by “accord and satisfaction” or by “full and final settlement” – Explanation of:

Held: Contract between parties can come to an end by the performance thereof by both the parties, that is, by the fulfilment of all the obligations in terms of the original contract – This is discharge by performance – Alternatively, the contract may also be discharged by substitution of certain new obligations in place of the obligations contained in the original contract, and subsequent performance of the substituted obligations – Substituted obligations are referred to as ‘accord’ and the discharge of the substituted obligations is referred to as ‘satisfaction’ – This is discharge by “accord and satisfaction” or by “full and final settlement” in common parlance – Written confirmation of discharge by “accord and satisfaction” can also be in the form of a full and final discharge voucher or a No-Dues or a No Claims Certificate issued by one of the parties acknowledging that there are no outstanding claims and that such a party has received the full and final payment to its satisfaction – Concept of discharge of a contract by “accord and satisfaction” is embodied in s. 63 of the Contract Act, 1872, which provides that the promisee may, inter alia, accept any substituted obligation in place of the original promise made to him, and such acceptance on the part of the promisee would amount to the discharge of the contract – Once a contract has been fully performed, it can be said to have been discharged by performance – Once the contract has been discharged by performance, neither any right to seek performance, nor any obligation to perform remains under it – However, whether there has been a discharge of contract or not is a mixed question of law and fact, and if any dispute arises as to whether a contract has been discharged or not, such a dispute is arbitrable as per the mechanism prescribed under the arbitration agreement contained in the underlying contract. [Paras 40-42, 46, 47] Arbitration and Conciliation Act, 1996 – s. 16 – Presumption of separability – Doctrine of separability:

Held: Arbitration agreement, by virtue of the presumption of separability, survives the principal contract in which it was contained – s. 16(1) which is based on Art.16 of the UNCITRAL Model Law on International Commercial Arbitration, 1985 embodies the presumption of separability – Two aspects to the doctrine of separability as contained in the 1996 Act are that an arbitration clause forming part of a contract is treated as an agreement independent of the other terms of the contract; and decision by the arbitral tribunal declaring the contract as null and void does not, ipso facto, make the arbitration clause invalid – Fundamental premise governing the doctrine of separability is that the arbitration agreement is incorporated by the parties to a contract with the mutual intention to settle any disputes that may arise under or in respect of or with regard to the underlying substantive contract, and thus by its inherent nature is independent of the substantive contract. [Paras 49-51]

Arbitration and Conciliation Act 1996 – s. 11(6) – Appointment of an arbitrator – Case of M/s Arif Azim Co. Ltd. v. M/s Aptech Ltd. on applicability of Limitation Act, 1963 to an application for appointment of arbitrator u/s. 11(6), and the power of the court to decline to make a reference u/s. 11 where the claims are ex-facie and hopelessly time barred – Clarification: Held: It is clarified that while determining the issue of limitation in exercise of the powers u/s.11(6) the referral court should limit its enquiry to examining whether s.11(6) application has been filed within the period of limitation of three years or not – Date of commencement of limitation period for this purpose shall have to be construed as per the decision in Arif Azim’s case – It is further clarified that the referral courts, at the stage of deciding an application for appointment of arbitrator, must not conduct an intricate evidentiary enquiry into the question whether the claims raised by the applicant are time barred and should leave that question for determination by the arbitrator – Such approach gives true meaning to the legislative intention underlying s.11(6-A), and also to the view taken in In Re: Interplay’s case – Observations made in Arif Azim’s case are accordingly clarified – Effect of the said clarification is only to streamline the position of law, so as to bring it in conformity with the evolving principles of modern-day arbitration, and to avoid the possibility of any conflict that may arise in future. [Paras 133-134]

Arbitration and Conciliation Act; 1996 – s. 11 – Petition for appointment of an arbitrator – Preliminary objection that the arbitration clause as contained in the insurance policy not attracted as no admission of liability on the part of the appellant, whereas the said arbitration clause envisages reference to arbitration only in cases where liability is admitted, and there is a dispute as regards the quantum of liability: Held: No merit in the said plea – Appellant-insurer admitted its liability with respect to the first claim and had even disbursed certain amount in pursuance of the signing of the advance discharge voucher by the respondent-insured – Thus, a clear case of admission of liability by the appellant – However, the quantum of liability is in dispute as the amount claimed by the respondent is at variance with the amount admitted by the appellant – Thus, the dispute being one of quantum and not of liability, falls within the ambit of the conditional arbitration clause as contained in the insurance policy. [Paras 36, 37]

Arbitration and Conciliation Act, 1996 – s. 11 – Petition for appointment of an arbitrator – Plea that the claim sought to be referred to arbitration is a deadwood claim and thus, the application for appointment of arbitrator ought to have been rejected:

Held: Notice invoking arbitration was sent by the respondentinsured to the appellant-insurer on 02.03.2020 and the petition seeking appointment of arbitrator u/s. 11(6) was filed before the High Court on 25.10.2021 – Thus, the arbitration petition was filed before the High Court much prior to the expiry of the limitation period of three years – Further, the notice invoking arbitration was also sent by the respondent well within time from the date of the accrual of the cause of action – Thus, it cannot, be said that the claim is a deadwood claim or the arbitration application before the High Court was time-barred. [Para 38]