Arbitrability of Disputes arising post Discharge of Contract by Accord & Satisfaction
Arjun Gupta
Leader
Adimesh Lochan
Senior Member
Shruti Dhonde
Member
Nishith Desai Associates
- Discharge of a contract by ‘accord and satisfaction’ or ‘full and final settlement’ does not prevent parties from initiating arbitration proceedings under the same contract.
- Jurisdiction of courts in an application under Section 11 of the Arbitration and Conciliation Act, 1996 (“A&C Act”) is confined to the prima facie scrutiny of the existence of an arbitration agreement, in matters involving accord and satisfaction.
- An issue as to whether a contract has been discharged by ‘accord and satisfaction’ falls within the exclusive jurisdiction of the arbitral tribunal.
- In an application under Section 11, courts should not delve into the issue of whether claims are time-barred which, should be exclusively determined by an arbitral tribunal.
Introduction
The Indian Supreme Court (“SC”) has affirmed the limited scope of pre-referral jurisdiction of courts in an application for appointment of an arbitrator.[1] Such jurisdiction does not extend to an examination of whether a contract has been discharged by “accord and satisfaction”. While the court may consider whether the application under Section 11 has been filed within the limitation period, it must not delve into the issue of whether underlying claims are time barred.
Relevant Factual Background
M/s Krish Spinning (“Respondent”) had obtained a fire insurance policy from SBI General Insurance Co. Ltd., (“Appellant”). During the insurance coverage period, two separate fire incidents occurred for which the Respondent filed its claims with the Appellant. The Respondent agreed to the assessment of loss, signed a consent letter and issued a discharge voucher for the first incident. The Respondent also confirmed receipt of the assessed amount for the first incident.
Soon after, the Respondent issued a notice of arbitration (“Notice”). In the Notice, the Respondent raised a demand with the Appellant for additional claim amounts alleging that the Respondent signed the discharge voucher under the apprehension that if the Respondent did not sign it, the claim for the second fire incident would be detrimentally affected. The Appellant did not nominate any arbitrator in their response to the Notice. Thereafter, the Respondent filed an application under Section 11(6) of the A&C Act with the Gujarat High Court (“HC”) for appointment of an arbitrator. The HC allowed the Respondent’s application and held that the plea of ‘accord and satisfaction’ should be decided by the arbitrator. The judgment of the HC was challenged in the appeal before the SC.
Reasoning and Decision
Disputes arising from the substantive contract remain arbitrable post extinguishment of obligations as per Section 63 of the Indian Contract Act, 1956
The SC held that an arbitration agreement continues to be in force even after the discharge of the substantive contract, unless the parties expressly agree otherwise. While discharging a contract by ‘accord and satisfaction’ or ‘full and final settlement’, the intention of parties is to relieve themselves of existing/new obligations under the contract. Such a discharge does not demonstrate an intention of the parties to extinguish obligations to arbitrate under the arbitration agreement.[2] If the full and final settlement itself is disputed, such a dispute would be considered as a dispute arising out of or in relation to the substantive contract. Hence, such a dispute can be referred to arbitration,[3] and discharge of a contract by ‘accord and satisfaction’ or ‘full and final settlement’ does not as a norm prevent parties from initiating future arbitrations.
Limited scope of jurisdiction in an application for appointment of Arbitrator
Section 11(6-A) was introduced in the A&C Act in the year 2015. Section 11(6-A) limits the scope of jurisdiction of courts to ‘examination of the existence of an arbitration agreement’. However, there were divergent case laws on the scope of jurisdiction in an application under Section 11. In one set of cases, courts have limited themselves to the narrow scope of jurisdiction under Section 11(6-A).[4] In the other set of cases, courts expanded their scope of jurisdiction to include a determination of ex-facie frivolous and meritless claims.[5] As per the second set of case laws,[6] in disputes involving a discharge of contract by accord and satisfaction, courts are bound to prima facie examine whether there exists proof of duress or coercion. In the absence of such prima facie proof, the court may not refer the disputes to arbitration.
With its judgment in Krish Spinning, the SC has affirmed the limited scope of jurisdiction in an application under Section 11. The SC referred to the decision by the 7-judge bench in the Stamping Judgement,[7] to hold that the jurisdiction of courts in an application for appointment of arbitrator is limited to prima facie scrutiny of the existence of an arbitration agreement. The SC also explained that the power available to courts under Section 11 must be considered narrowly since there is no right to appeal available against an order passed under Section 11. If the court delves into the domain of the arbitral tribunal, and rejects the application under Section 11, it might leave the claimant/applicant in a situation where it is rendered remediless even before the constitution of the arbitral tribunal.
With respect to matters involving accord and satisfaction, the SC stated that the issue as to whether a contract was discharged by “accord and satisfaction” involves a mixed question of fact and law. Such an issue falls within the exclusive jurisdiction of the arbitral tribunal unless otherwise agreed upon by the parties. Therefore, in an application under Section 11, courts should not carry out even a prima facie determination of such an issue.[8] The SC explained that mere appointment of an arbitral tribunal does not imply dilution of the sanctity of discharge of a contract by ‘accord and satisfaction’. Such appointment only upholds the legislative intent of minimum judicial interference in arbitration proceedings.
Determination of Time-barred Claims at the Pre-Referral Stage
In an earlier decision in the matter of M/s Arif Azim Co. Ltd. v. M/s Aptech Ltd. (“Arif Azim”),[9] the SC had returned its findings on the following issues:
- Applicability of the Limitation Act, 1963, to an application for appointment of arbitrator under Section 11(6) of the A&C Act, and
- Scope of reference if the claims are ex-facie and hopelessly time barred.
In Krish Spinning, the SC referred to its decision in Arif Azim, re-affirming its ruling on the first issue and upheld that a limitation period of 3 years from the commencement of arbitration is applicable to filing an application under Section 11 of the A&C Act.[10] The SC stated that the ruling on the second issue required clarity and reconsideration in light of the observations in the Stamping Judgment. The SC clarified that the courts must not conduct an intricate evidentiary enquiry into the question of whether the underlying claims are time barred and that the courts should leave such a question for determination by the arbitrator.
Difference between the Pre-Referral Jurisdictions under Sections 8 and 11
In explaining the scope of jurisdiction under Section 11, the SC also differentiated the scope of powers conferred upon courts under Section 11 and Section 8.[11] The SC summarised the following as the points of distinction:
- The standard of scrutiny as per Section 8 is that of a prima facie examination of the validity and existence of an arbitration agreement. The standard as per Section 11 is confined to prima facie scrutiny of the existence of an arbitration agreement which is limited to ensuring that the formal requirements of an arbitration agreement under Section 7 of the A&C Act are met.
- The arbitration may commence during the pendency of a Section 8 application but cannot commence pending the appointment of an arbitrator pursuant to the Section 11 application. Therefore, it is necessary to limit the scope of jurisdiction under a Section 11 application in order to preserve the efficacy of the arbitral process.
The SC also referred to the tests adopted by earlier judgments like the ‘eye of the needle’ and ‘ex facie meritless’. The SC stated that although these tests try to minimize the extent of judicial interference, they require the referral court to examine contested facts and appreciate evidence howsoever limited the scope may be. The SC opined that such tests are not in conformity with the principles of arbitral autonomy and judicial non-interference.
Conclusion
The impact of this decision could arguably be limited to clarifying that a determination of whether an agreement has been discharged by way of ‘accord and satisfaction’, should be decided by the arbitral tribunal. Courts at the referral stage should not consider this to be an exceptional case where they are required to weed out ex-facie frivolous and non-arbitrable claims as per the holding in Vidya Drolia and NTPC. Arguably, such limited jurisdiction is because the SC did not specifically overrule Vidya Drolia and NTPC or the observations therein as per which a referral court can deny appointment of arbitrator in exceptional cases “when the claims are ex-facie frivolous and non-arbitrable.”
The decision in Krish Spinning reaffirms the limited scope of pre-referral jurisdiction under Section 11 of the A&C Act. By emphasizing that courts should only conduct a prima facie examination of the existence of an arbitration agreement, the judgment underscores the importance of limited judicial interference as well as the role of the arbitral tribunal. The clarification by the SC that referral courts must not delve into the issue of time-barred claims further strengthens the pro-arbitration stance. Therefore, this decision serves as a comprehensive reference for jurisprudence on the jurisdictional standards under Sections 8 and 11 of the A&C Act.
Lastly, this decision provides practical guidance on the drafting of discharge and settlement agreements. If parties to such agreements, intend to render disputes arising out of the original agreement non-arbitrable, they should (a) expressly state so, or (b) enter into a separate settlement agreement with independent obligations, including an arbitration agreement of its own. This will prevent either of the parties from initiating legal action in respect of substantive obligations under the original agreement.
References:
The authors express their gratitude to Durgeshwari Paliwal for her efforts on this article.
[1] SBI General Insurance Co. Ltd. v. Krish Spinning, (2024) ibclaw.in 169 SC; The SC in this case, considered its previous decisions in, amongst others, Vidya Drolia & Ors. v. Durga Trading Corporation (“Vidya Drolia”), NTPC Ltd. v. SPML Infra. Ltd. (“NTPC”), Duro Felguera, S.A. v. Gangavaram Port Ltd (“Duro Felguera”) and Mayavati Trading Private Limited v. Pradyut Deb Burman (“Mayawati Trading”), and arrived at the conclusion that in an application under Section 11 of the (Indian) Arbitration and Conciliation Act, 1996 (“A&C Act”), the courts must only prima facie examine the existence of an arbitration agreement.
[2] ¶ 50-53 of the Judgment. The SC referred to (a) UNCITRAL Model Law on International Commercial Arbitration, 1985, Article 16; (b) Section 16 of the A&C Act; (c) National Agricultural Coop. Marketing Federation India Ltd. v. Gains Trading Ltd., (2017) ibclaw.in 702 SC; and (d) Heyman v. Darwins Ltd., [1942] AC 356.
[3] ¶ 50-59 of the Judgment. The SC referred to (a) National Insurance Co. Ltd. v. Boghara Polyfab, (2017) ibclaw.in 274 SC; and (b) R.L. Kalathia and Company v. State of Gujarat, (2017) ibclaw.in 556 SC.
[4] Duro Felguera, S.A. v. Gangavaram Port Ltd., (2017) ibclaw.in 238 SC; Mayavati Trading Private Limited v. Pradyut Deb Burman, (2019) ibclaw.in 171 SC.
[5] Vidya Drolia & Ors. V. Durga Trading Corporation, (2019) ibclaw.in 148 SC ; NTPC Ltd. v. SPML Infra. Ltd., (2023) ibclaw.in 41 SC.
[6] United India Insurance Co. Ltd. v. Antique Art Exports Pvt. Ltd., (2019) ibclaw.in 151 SC.
[7] In re: Interplay between Arbitration Agreements under the Arbitration and Conciliation Act, 1996 and the Indian Stamp Act, 1899 (2023) ibclaw.in 153 SC.
[8] ¶ 115-116 of the Judgment.
[10] Commencement under Section 21 of the A&C Act is the issuance of a notice of arbitration.
[11] ¶ 109 of the Judgment.
