2008 (9) TMI 864 - SC - Indian Laws

Whether a dispute raised by an insured, after giving a full and final discharge voucher to the insurer, can be referred to arbitration? Held that - Appeal dismissed. High Court examined the issue and found that prima facie there was no accord and satisfaction or discharge of the contract. It held that the appellant is still entitled to raise this issue before an arbitrator and the arbitrator has to decide it. On the facts and circumstances and the settled position of law referred we are also prima facie of the view that there is no accord and satisfaction in this case and the dispute is arbitrable. But it is still open to the appellant to lead evidence before the arbitrator, to establish that there is a valid and binding discharge of the contract by way of accord and satisfaction.

Issues Involved:

1. Whether a dispute raised by an insured after giving a full and final discharge voucher to the insurer can be referred to arbitration.

Detailed Analysis:

1. Whether a dispute raised by an insured after giving a full and final discharge voucher to the insurer can be referred to arbitration:

The brief facts :

The respondent (Insured) obtained a standard Fire and Special Perils Policy from the appellant (Insurer) to cover its goods in its godowns. The sum insured was initially Rs. Three crores, later increased to Rs. Six crores, and further requested to be increased by another Rs. six crores for a period of two months. The appellant issued an additional endorsement increasing the sum insured to Rs. twelve crores. The respondent alleges the additional endorsement cover was for 69 days, while the appellant claims it was for 60 days. On 5.8.2004, the respondent reported loss/damage due to heavy rains and flooding on 2/3.8.2004 and made a claim. The surveyor's preliminary and final reports assessed the net loss at Rs.3,18,26,025/-. The appellant instructed the surveyor to reassess the net loss considering the sum insured as Rs. six crores after 26.7.2004, resulting in a reassessed net loss of Rs.2,34,01,740/-. The respondent protested this reassessment.

The respondent alleged coercion by the appellant to accept a lower settlement and signed an undated discharge voucher for Rs.2,33,94,964/- in full and final settlement due to financial pressure. The payment was released only after receiving the discharge voucher. The respondent lodged a complaint with the Insurance Regulatory and Development Authority and issued a legal notice demanding the difference amount with interest, alleging the discharge voucher was signed under duress. The appellant rejected this demand, claiming the respondent had unconditionally accepted the settlement amount.

The respondent filed an application under section 11 of the Arbitration & Conciliation Act, 1996 in the Bombay High Court, which appointed an arbitrator, leaving open the question of coercion/undue influence regarding the discharge voucher. The appellant challenged this order, contending that the full and final discharge voucher resulted in the discharge of the contract by accord and satisfaction, thus barring any subsequent claim or arbitration. The respondent argued that the issue of coercion/undue influence in signing the discharge voucher should be decided by the arbitral tribunal.

The Supreme Court examined the principles regarding arbitration agreements and the discharge of contracts. It referred to the competence of the arbitral tribunal to rule on its jurisdiction, as provided in Section 16 of the Arbitration & Conciliation Act, 1996, and the decision in SBP & Co. vs. Patel Engineering Ltd., which outlined the duties of the Chief Justice or his designate in deciding preliminary issues under section 11 of the Act.

The Court held that if a respondent contends that the dispute is not arbitrable due to the discharge of the contract under a settlement agreement or discharge voucher, and the claimant challenges the validity of such discharge on grounds of fraud, coercion, or undue influence, the issue must be decided either by the Chief Justice/his designate or by the arbitral tribunal as directed by the order under section 11 of the Act. The Court emphasized that a claim for arbitration cannot be rejected solely on the ground that a settlement agreement or discharge voucher had been executed if its validity is disputed by the claimant.

The Court further analyzed the consequences of the discharge of a contract, distinguishing between discharge by performance and discharge by accord and satisfaction. It noted that where both parties confirm in writing that the contract has been fully and finally discharged, no subsequent claim or dispute can be referred to arbitration. However, if a discharge voucher is alleged to have been obtained by fraud, coercion, or undue influence, the dispute remains arbitrable.

The Court reviewed various precedents, including cases relied on by both the appellant and the respondent, and concluded that the existence of a full and final discharge voucher does not bar arbitration if the validity of the discharge is challenged. It reiterated that the arbitral tribunal has the authority to decide whether the discharge of the contract was valid or vitiated by fraud, coercion, or undue influence.

In this case, the High Court found prima facie that there was no accord and satisfaction or discharge of the contract, and the dispute was arbitrable. The Supreme Court upheld this view, allowing the appellant to present evidence before the arbitrator to establish a valid and binding discharge of the contract by accord and satisfaction.

The appeal was dismissed, and the Court clarified that its observations should not be construed as final opinions on the issue of accord and satisfaction or the merits of the claims and contentions of the parties.

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