The Question Of “Accord And Satisfaction” Comes Within The Exclusive Jurisdiction Of The Arbitral Tribunal
Subsequently, the Respondent issued a legal notice calling upon the Appellant to release the balance payment of the claim amount arising from the first fire incident. It alleged that he had signed the consent letter and the advance discharge voucher without free will. Further, it was mentioned in the notice that it shall be deemed to be a notice invoking the arbitration in case of non-compliance. Later, the Respondent filed a petition for the appointment of an arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996 before the HC.
While placing reliance on the decision of the SC in Oriental Insurance Company Ltd. v. Dicitex Furnishing Ltd. reported in (2020) 4 SCC 621, the HC held that the dispute must be referred to the arbitration, and thereafter, the arbitration application was placed before the Chief Justice and he appointed the Arbitrator. The Appellant assailed both the orders before the SC.
Issues
a. Whether the execution of a discharge voucher toward the full and final settlement between the parties operate as a bar to invoke arbitration?
b. 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?
c. What is the effect of the decision of this Court in In Re: Interplay Between Arbitration Agreements under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899 on the scope of powers of the referral court under Section 11 of the Act, 1996?
First Issue
Whether the execution of a discharge voucher toward the full and final settlement between the parties operate as a bar to invoke arbitration?
A contract between parties can come to an end by the performance thereof by both parties, that is, by the fulfillment of all the obligations in terms of the original contract. This is referred to as 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. The substituted obligations are referred to as ‘accord’ and the discharge of the substituted obligations is referred to as ‘satisfaction’. It is referred to as discharge by “accord and satisfaction” or by “full and final settlement” in common parlance.
(The term “accord and satisfaction” is defined in Payana Reena Saminathan v. Pana Lana Palaniappa reported in (1913-14) 41 IA 142)
It was the contention of the Appellant that as no arbitrable disputes remained after a full and final settlement was arrived at, there was nothing left to be referred to the arbitrator and hence the appointment of the arbitrator being an exercise in futility, should not have been undertaken by the High Court.
It is correct that 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.
Whether the arbitration agreement contained in a substantive contract survive even after the underlying contract is discharged by “accord and satisfaction”?
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
Doctrine of Separability
The arbitration agreement, by virtue of the presumption of separability, survives the principal contract in which it was contained. Section 16(1) of the Act, 1996 which is based on Article 16 of the UNCITRAL Model Law on International Commercial Arbitration, 1985 embodies the presumption of separability. There are two aspects to the doctrine of separability as contained in the Act, 1996: -
a. An arbitration clause forming part of a contract is treated as an agreement independent of the other terms of the contract.
b. A decision by the arbitral tribunal declaring the contract as null and void does not, ipso facto, make the arbitration clause invalid.
The SC in the National Agricultural Coop. Marketing Federation India Ltd. v. Gains Trading Ltd. reported in (2007) 5 SCC 692, while interpreting Section 16 of the Act, 1996, held that even if the underlying contract comes to an end, the arbitration agreement contained in such a contract survives for the purpose of resolution of disputes between the parties. The 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.
In Heyman v. Darwins Ltd. reported in [1942] AC 356, it was held by the House of Lords that the repudiation or breach of a contract does not extinguish the arbitration agreement as it survives for the purpose of resolution of any outstanding claims arising out of the breach.
In view of the above, the SC observed and held that:
“53. Thus, 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. The 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.”
It was further observed by the SC that there is no rule of an absolute kind which precludes arbitration in cases where a full and final settlement has been arrived at. The SC relied upon a judgment of the SC delivered in the National Insurance Co. Ltd. v. Boghara Polyfab reported in (2009)1 SCC 267 wherein it was held that the mere execution of a full and final settlement receipt or a discharge voucher would not by itself operate as a bar to arbitration when the validity of such a receipt or voucher is challenged by the claimant on the grounds of fraud, coercion, or undue influence. In other words, 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
Second Issue
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?
In Jayesh Engineering Works v New India Assurance Co. Ltd. reported in (2000) 10 SCC 178, dealing with an application for appointment of arbitrator under the Act, 1996, the SC observed and held that:
“Whether any amount is due to be paid and how far the claim made by the Appellant is tenable are matters to be considered by the Arbitrator. In fact, whether the contract has been fully worked out and whether the payments have been made in full and final settlement are questions to be considered by the Arbitrator when there is a dispute regarding the same.”
Power Of The Referral Court Under Section 11 Of The Act, 1996
Section 11(6A) of the Arbitration and Conciliation Act, 1996 provides that the SC or HC while considering any application under subsection (4), subsection (5), or subsection (6) shall confine to the examination of the existence of an arbitration agreement only.
The SC discussed the impact of the addition of Section 11(6A) in Duro Felguera, S.A. v. Gangavaram Port Ltd reported in (2017) 9 SCC 729 as follows:
“48. […] From a reading of Section 11(6-A), the intention of the legislature is crystal clear i.e. the court should and need only look into one aspect—the existence of an arbitration agreement. What are the factors for deciding as to whether there is an arbitration agreement is the next question. The resolution to that is simple—it needs to be seen if the agreement contains a clause which provides for arbitration pertaining to the disputes which have arisen between the parties to the agreement.”
The SC in United India Insurance Co. Ltd. v. Antique Art Exports Pvt. Ltd. reported in (2019) 5 SCC 362, while dealing with the issue of “full and final settlement” in the context of the appointment of an arbitrator, held that mere bald allegation by a party that the discharge voucher was obtained under coercion or undue influence would not entitle it to seek referral of the dispute to arbitration unless it is able to produce prima facie evidence of the same during the course of proceedings under Section 11(6) of the Act, 1996. However, the same was overruled in Mayavati Trading Private Limited v. Pradyut Deb Burman reported in (2019) 8 SCC 714 and it was clarified that the position of law existing prior to the 2015 amendment to the Act, 1996 under which referral courts had the power to examine the aspect of “accord and satisfaction” had come to be legislatively overruled by Section 11(6-A) of the Act, 1996.
Thereafter, a three-judge Bench of the SC in Vidya Drolia & Ors v. Durga Trading Corporation reported in (2021) 2 SCC 1 extensively dealt with the scope of powers of the referral court under Section 8 and 11 respectively of the Act, 1996. It held, inter alia, that the general rule and principle, the Arbitral Tribunal is the preferred first authority to determine and decide all questions of non-arbitrability. Rarely as a demurrer the court may interfere at the Section 8 or 11 stage when it is manifestly and ex facie certain that the arbitration agreement is non-existent, invalid or the disputes are non-arbitrable, though the nature and facet of non-arbitrability would, to some extent, determine the level and nature of judicial scrutiny.
Eye Of The Needle
The pre-referral jurisdiction of the Courts under Section 11(6) of the Act is very narrow and inheres two inquiries. The primary inquiry is about the existence and the validity of an arbitration agreement, which also includes an inquiry as to the parties to the agreement and the applicant’s privity to the said agreement. These are matters which require a thorough examination by the Referral Court. The secondary inquiry that may arise at the reference stage itself is with respect to the non-arbitrability of the dispute.
Thus, the position after the decisions in Mayavati Trading (supra) and Vidya Drolia (supra) is that ordinarily, the Court while acting in the exercise of its powers under Section 11 of the Act, 1996, 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.
Third Issue
What is the effect of the decision of this Court in In Re: Interplay Between Arbitration Agreements under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899 on the scope of powers of the referral court under Section 11 of the Act, 1996?
A seven-judge Bench of the SC, in In Re: Interplay Between Arbitration Agreements under the Arbitration and Conciliation Act 1996 and the Indian Stamp Act 1899 reported in 2023 INSC 1066, observed and 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 requirement that the agreement should be in writing. The use of the term ‘examination’ under Section 11(6-A) as distinguished from the use of the term ‘rule’ under Section 16 implies that the scope of enquiry under Section 11(6-A) is limited to a prima facie scrutiny of the existence of the arbitration agreement, and does not include a contested or laborious enquiry, which is left for the arbitral tribunal to ‘rule’ under Section 16. The prima facie view on the existence of the arbitration agreement taken by the referral court does not bind either the arbitral tribunal or the court enforcing the arbitral award. The aforementioned approach serves a two-fold purpose – firstly, it allows the referral court to weed out non-existent arbitration agreements, and secondly, it protects the jurisdictional competence of the arbitral tribunal to rule on the issue of the existence of the arbitration agreement in depth.
The SC’s Observations
In view of the observations made by this Court in In Re: Interplay (supra), the SC overruled its decision in Vidya Drolia (supra) and adopted in NTPC v. SPML (supra) to the extent that the jurisdiction of the referral court when dealing with the issue of “accord and satisfaction” under Section 11 extends to weeding out ex-facie non-arbitrable and frivolous disputes.
The SC observed and held that the question of “accord and satisfaction”, being a mixed question of law and fact, comes within the exclusive jurisdiction of the arbitral tribunal, if not otherwise agreed upon between the parties. Thus, the negative effect of competence-competence would require that the matter falling within the exclusive domain of the arbitral tribunal, should not be looked into by the referral court, even for a prima facie determination, before the arbitral tribunal first has had the opportunity of looking into it. It was further held that tests like the “eye of the needle” and “ex-facie meritless”, although try to minimise the extent of judicial interference, yet they require the referral court to examine contested facts and appreciate prima facie evidence (however limited the scope of enquiry may be) and thus are not in conformity with the principles of modern arbitration which place arbitral autonomy and judicial non-interference on the highest pedestal.
Conclusion
The SC held that the existence of the arbitration agreement as contained in Clause 13 of the insurance policy is not disputed by the Appellant. The dispute raised by the claimant is one of quantum and not of liability, prima facie, falls within the scope of the arbitration agreement. The 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.
Doctrine of “Kompetenz-Kompetenz”
The doctrine of “kompetenz-kompetenz”, also referred to as “compétence-compétence”, or “compétence de la recognized”, implies that the Arbitral Tribunal is empowered and has the competence to rule on its own jurisdiction, including determining all jurisdictional issues, and the existence or validity of the arbitration agreement. This doctrine is intended to minimise judicial intervention so that the arbitral process is not thwarted at the threshold when a preliminary objection is raised by one of the parties. The doctrine of kompetenz-kompetenz is, however, subject to the exception i.e. when the arbitration agreement itself is impeached as being procured by fraud or deception.
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