# NATIONAL INSURANCE CO. L TO v. M/S. BOGHARA POLYFAB PVT. LTD

- **Citation:** [2008] 13 S.C.R. 638
- **Court:** Supreme Court of India
- **Decided:** 2008-09-18
- **Case number:** Civil Appeal No. 5733 of 2008
- **Bench:** R.V. Raveendran, Lokeshwar Singh Panta
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/national-insurance-co-l-to-v-m-s-boghara-polyfab-pvt-ltd-23575
- **Pages:** 39

## Headnote

Contract - Insurance contract - Reference to arbitration
c - After issuance of final discharge voucher by the insured -
Propriety of - Insured alleging coersion for issuance of discharge voucher - Held: A claim for arbitration cannot be re-
;ected merely/solely on the ground that final discharge voucher
had been executed by the claimant, if its validity is disputed
0 by the claimant - If the claimant is able to prove that the discharge voucher was executed on account of fraud/coersion/
undue influence, such voucher would be rendered void - Discharge of contract on account of performance, or accord and
satisfaction or mutual agreement which is reduced to writing
E cannot be referred to arbitration - In the instant case, prima
facie it appears that voucher was not issued on account of
accord and satisfaction - Hence reference to arbitration -
General practice by Government Departments and Corporate
sectors of obtaining undated receipts of final settlement vouchers/No dues in advance for a sum which is smaller than the
F claim in full and final settlement of all claims, as a condition
precedent for releasing even the admitted dues, is unfair, irregular and illegal and hence deprecated - Arbitration and
Conciliation Act, 1996 - s. 11.
G
The question for consideration in the present appeal
was whether a dispute raised by an insured, after giving
full and final discharge voucher to the insurer, could be
referred to arbitration. Contention of the insured was that
it had given the discharge voucher under coercion and
H
638
NATIONAL INSURANCE CO. LTD. v. M/S. BOGHARA 639
POLYFAB PVT. LTD.
pressure of the insurer in as much the insurer wanted A
that unless and until the insurer would sign an undated
discharge voucher in advance, it would not release even
the admitted claim amount.
Dismissing the appeal, the Court
B
HELD: 1.1 Where the intervention of the court is
sought for appointment of an Arbitral Tribunal under section 11 of Arbitration and Conciliation Act, 1996, the preliminary issues that may arise for consideration in such
application falls into three categories, that is (i) issues c
which the Chief Justice or his Designate is bound to decide; viz. (a) whether the party making the application has
approached the appropriate High Court; (b) whether there
is an arbitration agreement and whether the party who
.
~·
has applied u/s. 11 is a party to such an agreement. (ii) D
issues which he can also decide, that is issues which he
.may choose to decide; viz. (a) whether the claim is a dead
(long barred) claim or a live claim (b) whether the parties
have concluded the contract/transaction by recording
satisfaction of their mutual rights and obligation~~or by E
receiving the final payment without objection; and (iii) issues which should be left to the Arbitral Tribunal to decide. viz. (a) whether a claim made fails within the arbitration clause (as for example, a matter which is reserved
. i
for final decision of a departmental authority and excepted
F
or excluded from arbitration); (b) merits or any claim involved in the arbitration. [Para 17] [656-H; 657-A-G]
1.2 With regard to issues which the Chief Justice or
his Designate may choose to decide if raised in any application under Section 11 of the Act, the chief Justice/his G
designate may decide them, if necessary by taking evidence or may leave those issues open with a direction to
the Arbitral Tribunal to decide the same. If the Chief Justice or his Designate chooses to examine the issue and
decide it, the Arbitral Tribunal cannot re-examine the same H
640
SUPREME COURT REPORTS
[2008] 13 S.C.R.
A issue. Where allegations of forgery/fabrication are made
in regard to the document recording discharge of contract by full and final settlement, it would be appropriate if
the Chief Justice/his Designate decides the issue. [Para
17] (657-H; 658-A-C]
B
1.3. A claim for arbitration cannot be rejected merely
or solely on the ground that a settlement agreement or
discharge voucher had been ex

## Text

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A
B
[2008] 13 S.C.R. 638
NATIONAL INSURANCE CO. L TO.
v
M/S. BOGHARA POLYFAB PVT. LTD.
(Civil Appeal No. 5733 of 2008)
SEPTEMBER 18, 2008
[R.V. RAVEENDRAN AND LOKESHWAR SINGH
PANTA, JJ.]
Contract - Insurance contract - Reference to arbitration
c - After issuance of final discharge voucher by the insured -
Propriety of - Insured alleging coersion for issuance of discharge voucher - Held: A claim for arbitration cannot be re-
;ected merely/solely on the ground that final discharge voucher
had been executed by the claimant, if its validity is disputed
0 by the claimant - If the claimant is able to prove that the discharge voucher was executed on account of fraud/coersion/
undue influence, such voucher would be rendered void - Discharge of contract on account of performance, or accord and
satisfaction or mutual agreement which is reduced to writing
E cannot be referred to arbitration - In the instant case, prima
facie it appears that voucher was not issued on account of
accord and satisfaction - Hence reference to arbitration -
General practice by Government Departments and Corporate
sectors of obtaining undated receipts of final settlement vouchers/No dues in advance for a sum which is smaller than the
F claim in full and final settlement of all claims, as a condition
precedent for releasing even the admitted dues, is unfair, irregular and illegal and hence deprecated - Arbitration and
Conciliation Act, 1996 - s. 11.
G
The question for consideration in the present appeal
was whether a dispute raised by an insured, after giving
full and final discharge voucher to the insurer, could be
referred to arbitration. Contention of the insured was that
it had given the discharge voucher under coercion and
H
638
NATIONAL INSURANCE CO. LTD. v. M/S. BOGHARA 639
POLYFAB PVT. LTD.
pressure of the insurer in as much the insurer wanted A
that unless and until the insurer would sign an undated
discharge voucher in advance, it would not release even
the admitted claim amount.
Dismissing the appeal, the Court
B
HELD: 1.1 Where the intervention of the court is
sought for appointment of an Arbitral Tribunal under section 11 of Arbitration and Conciliation Act, 1996, the preliminary issues that may arise for consideration in such
application falls into three categories, that is (i) issues c
which the Chief Justice or his Designate is bound to decide; viz. (a) whether the party making the application has
approached the appropriate High Court; (b) whether there
is an arbitration agreement and whether the party who
.
~·
has applied u/s. 11 is a party to such an agreement. (ii) D
issues which he can also decide, that is issues which he
.may choose to decide; viz. (a) whether the claim is a dead
(long barred) claim or a live claim (b) whether the parties
have concluded the contract/transaction by recording
satisfaction of their mutual rights and obligation~~or by E
receiving the final payment without objection; and (iii) issues which should be left to the Arbitral Tribunal to decide. viz. (a) whether a claim made fails within the arbitration clause (as for example, a matter which is reserved
. i
for final decision of a departmental authority and excepted
F
or excluded from arbitration); (b) merits or any claim involved in the arbitration. [Para 17] [656-H; 657-A-G]
1.2 With regard to issues which the Chief Justice or
his Designate may choose to decide if raised in any application under Section 11 of the Act, the chief Justice/his G
designate may decide them, if necessary by taking evidence or may leave those issues open with a direction to
the Arbitral Tribunal to decide the same. If the Chief Justice or his Designate chooses to examine the issue and
decide it, the Arbitral Tribunal cannot re-examine the same H
640
SUPREME COURT REPORTS
[2008] 13 S.C.R.
A issue. Where allegations of forgery/fabrication are made
in regard to the document recording discharge of contract by full and final settlement, it would be appropriate if
the Chief Justice/his Designate decides the issue. [Para
17] (657-H; 658-A-C]
B
1.3. A claim for arbitration cannot be rejected merely
or solely on the ground that a settlement agreement or
discharge voucher had been executed by the claimant, if
its validity is disputed by the claimant. When it is contended that the dispute is not arbitrable on account of
C discharge of the contract under a settlement agreement
or discharge voucher or no-claim certificate, and the
claimant contends that it was obtained by fraud, coercion
or under influence, the issue will have to be decided either by the Chief Justice/his designate in the proceedD ings under Section 11 or by the Arbitral Tribunal as directed by the order u/s. 11 of the Act. [Para 18] (658-D-E]
1.4 The arbitration agreement contained in a contract
cann.tt be invoked to seek reference of any dispute to
arbitration, in the circumstances, when the contract is
E discharged on account of performance, or accord and
satisfaction, or mutual agreement, and the same is reduced to writing (and signed by both parties or by the
party seeking arbitration. [Para 21] (660-E-F]
F
1.5 In such a case, a civil court would have considered the evidence as to whether there was any fraud, coercion or undue influence. If it found that there was none,
it will accept the voucher as being in discharge of the
contract and reject the claim without examining the claim
G on merits. On the other hand, if it found that the discharge
voucher had been obtained by fraud/undue influence/
coercion, it will ignore the same, examine whether plaintiff had made out the claim on merits and decide the matter accordingly. The position will be the same even when
H there is a provision for arbitration. The Chief Justiceihis
1
NATIONAL INSURANCE CO. LTD. v. MIS. BOGHARA 641
POLYFAB PVT. LTD.
designate exercising jurisdiction under Section 11 of the A
Act will consider whether there was really accord and satisfaction or discharge of contract by performance. If the
answer is in the affirmative, he will refuse to refer the dispute to arbitration. On the other hand, if the Chief Justice/
his designate comes to the conclusion that the full and B
final settlement receipt or discharge voucher was the resuit of any fraud/coercion/undue influence, he will have
to hold that there was no discharge of the contract and
consequently refer the dispute to arbitration. Alternatively,
where the Chief Justice/his designate is satisfied prima c
facie that the discharge voucher was not issued voluntarily and the claimant was under some compulsion or
coercion, and that the matter deserved detailed consideration, he may instead of deciding the issue himself, re-
-
~
fer the matter to the arbitral tribunal with a specific direcD
tion that the said question should be decided in the first
instance. [Para 27] [672-A-F]
1.6 In the present case, on the date when the discharge voucher was signed and given by the respondent,
the payment of admitted amount for the claim had not been
E
made. It was made after receiving the voucher. Therefore,
at the time of signing the voucher by the respondent and
at the time of delivery of voucher by the respondent to
~ i
the appellant, the contents of the voucher that the said
amount had been received, that such amount had been
F
received in full and final settlement of all claims, and that
in consideration of such payment, the company was absolved from any further liability, are all false and not supported by consideration. [Para 30] [675-C-E]
1.7 On the facts and circumstances and the settled G
·-
position of law, the court is prima facie of the view that
~
there is no accord and satisfaction in this case, and hence,
the dispute is arbitrable. But it is still open to the appellant to lead evidence before the arbitrator, to establish that
H
642
SUPREME COURT REPORTS
[2008] 13 S.C.R.
A there is a valid and binding discharge of the contract by
way of accord and satisfaction. It is clarified that nothing
stated by the High Court or this Court should be construed
as expression of any final opinion on the issue whether
there was accord and satisfaction nor as expression of
8 any views on merits of any claim or contentions of the
parties. [Paras 31 and 32] [675-F-G; 676-A-B]
SBP and Co. vs. Patel Engineering Ltd. 2005 (8) SCC
618 - held inapplicable.
c
State of Maharashtra v. Nav Bharat Builders 1994 Supp
(3) SCC 83; Mis. P K. Ramaiah and Co. v. Chairman and
Managing Director, National Thermal Power Corpn. 1994
Supp (3) SCC 126; Nathani Steels Ltd. v. Associated Constructions 1995 Supp (3) SCC 324 - distinguished.
D
Damodar Valley Corporation v. K. K.Kar 1974 (1) SCC
)' -
141; Mis. Bharat Heavy Electricals Ltd., Ranipur v. Mis. Amar
Nath Bhan Prakash 1982 (1) SCC 625; Union of India vs. L.
K. Ahuja and Co. 1988 (3) SCC 76; Jayesh Engineering Works
v. New India Assurance Co. Ltd. 2000 (10) SCC 178; ChairE man and Managing Director, NTPC Ltd. v. Reshmi Construetions, Builders and Contractors 2004 (2) SCC 663; Ambica
Construction v. Union of India 2006 (13) SCC 475; Union of
India v. Kishorilal Gupta and Bros. 1960 (1) SCR 493; Payana
Reena Saminathan vs. Pana Lana Palaniappa 41 IA 142;
~ -
F United India Insurance Co. Ltd. vs. Ajmer Singh Cotton and
General Mills 1999 (6) SCC 400; National Insurance Co. Ltd.
'IS. Nipha Exports (P) Ltd. 2006 (8) SCC 156; National Insurance Co. Ltd., vs. Sehtia Shoes 2008 (5) sec 400; Central
Inland Water Transport Corporation Ltd. vs. Brojo Nath
G Ganguly 1986 (3) SCC 156; Indian Drugs and Pharmaceutical.s Ltd. vs. lndo Swiss Synthetic Can Manufacturing Ltd. 1996
(1) sec 54 - referred to.
..
2. Obtaining of undated receipts-in-advance in regiud
to regular/routine payments by government departments
H and corporate sector is an accepted practice which has
NATIONAL INSURANCE 00. LTD. v. M/S. BOGHARA 643
POLYFAB PVT. LTD.
come to stay due to administrative exigencies and ac- · A
counting necessities. The routine insistence by some
Government Departments, statutory Corporations and
Government Companies for issue of undated 'no due
certificates' or a 'full and final settlements vouchers' acknowledging receipt of a sum which is smaller than the 8
claim in full and final settlement of all claims, as a condition precedent for releasing even the admitted dues, is
unfair, irregular and illegal and requires to be deprecated.
[Para 26) (671 C-D; 671 F-H]
Case Law Reference
c
1960 (1) SCR 493
Referred to.
Para 13
1996 (1) sec 54
Referred to.
Para 14
2005 (8) sec 618
Held inapplicable. Para 15
,
..,
D
41 IA 142
Referred to.
Para 20
1994 Supp (3) sqc 83 Distinguished.
Para 22
1994 Supp (3) SCC 126 Distinguished.
Para 22
1995 Supp (3) SCC 324 Distinguished.
Para 22
E
1974 (1) sec 141
Referred to.
Para 23
19s2 (1 J sec 625
Referred to.
Para 23
1988 (3) sec 76
Referred to.
Para 23
?)
2000 (10) sec 178
Referred to.
Para 23
F
2004 (2) sec 663
Referred to.
Para 23
2006 (13) sec 475
Referred to.
Para 23
1999 (6) sec 400
Referred to.
Para 25
2006 (8) sec 156
Referred to.
Para 25
G
2008 (5) sec 400
Referred to.
Para 25
~
1986 (3) sec 156
Referred to.
Para 25
CIVILAPPELLATE JURISDCTION: Civil Appeal No. 5733
of 2008
H
644
SUPREME COURT REPORn
(2008] 13 S.C.R.
A
From the Judgment and Order date :l 19.4.2007 of the High
Court of Judicature at Bombay in A.A.~ :>. 182/2006
Parag P. TripathiASG, Vishnu Meh a, Sakshi Mittal, Varun
Sarin and Pramod Dayal for the Appell< nt.
B
T.R. Andhyarujina, Atul Chitale, SL chitra Atul Chitale and
Sunina Dutta for the Resμondent.
The Judgment of the Court was de livered by
R.V.RAVEENDRAN, J. 1. Leave granted. Heard both
c counsel. The question involved in this a 1peal is whether a dispute raised by an insured, after giving a ull and final discharge
voucher to the insurer, can be referred ti: arbitration.
The brief facts :
D
2. The res:')ondent (Insured) obtain !d a standard Fire and
,.,.
'
Special Perils (with a floater) Policy from I !1e appellant ('Insurer')
to cover its goods in its godowns situat1 d at Surat for the period 4.8.2003 to 3.8.2004. The sum in rnred was Rs. Three
crores, subsequently increased to Rs. Si:: crores. On 27.5.2004
E the respondent requested the insurer tc increase the sum insured by another Rs. six crores for a per :id of two months. Accordingly, the appellant issued an addit onal endorsement increasing the sum insured by another Rt pees six crores, in all
Rupees twelve crores. The respondent alleges that the additional endorsement cover issued by the appellant was for 69
.._,
~
F days, that is from 27.5.2004 to 3.8.2004. The appellant alleges
that the additional endorsement cover~ ,as for a period of 60
days from 27.5.2004 to 26.7.2004. (Nota The appellant claims
that during subsequent investigations, i came to light that its
AAO (Dilip Godbole) had delivered to th'! respondent, a comG puter generated Additional Endorsement i unauthorisedly altered
by hand) showing the period of addition< cover as 69 days up
to 3.8.2004. and departmental proceedin is have been initiated
~
against the said officer).
H
3. On 5.8.2004, the respondent re~ orted loss/damage to
-f
NATIONAL INSURANCE CO. LTD. v MIS. BOGHARA
645
POLYFAB PVT. LTD. [R.V.RAVEENDRAN, J.]
their stocks on account of heavy rains and flooding which took A
place on 2/3.8.2004 and made a claim in that behalf. The surveyor submitted a preliminary report dated 14.8.2004 followed
by a final survey report dated 6.12.2004 according to which the
.._
net assessed loss (payable to respondent) was Rs.3, 18,26,025/
-. The said sum was arrived at on the basis that the sum insured s
was Rs.12 crores, the actual value of stocks in the godowns at
risk was Rs.8,15,99,149/-, value of damaged goods was
Rs.5,22,81,001/-, and the recoverable salvage value was
Rs.1,87,79,922/-. The appellant informed the surveyor by letter
dated 1.3.2005 that there was an error in the net assessed loss c
arrived at by the surveyor as it assumed the sum insured as
Rs.12 crores up to 3.8.2004 whereas the sum insured was only
Rs.6 crores after 26.7.2004 till 3.8.2004, and therefore instructed the surveyor to prepare the final report regarding net
assessed loss by taking the sum insured as only Rupees six 0
crores. The surveyor therefore gave an addendum to the final
survey report on 22.3.2005 reassessing the net loss by taking
the sum insured as only Rupees six crores. The value of goods
at risk, the value of damaged goods and the value of recoverable salvage remained unaltered. By modifying the percentage
of insurance at 75.53%, the 'Net Assessed Loss' was re-worked
E
as Rs.2,34,01,740/-. The respondent protested against the loss
being assessed by taking the sum insured as only Rupees six
crores. The claim and the dispute were pending consideration
for a considerable time.
F
4. The respondent alleged that the appellant forced the
respondent to accept a lower settlement; that the appellant informed the respondent that unless and until the respondent issued an undated 'Discharge voucher-in-advance' (in the prescribed form) acknowledging receipt of Rs.2,33,94,964/- in full G
and final settlement, no amount would be released towards the
claim; that in that behalf, the appellant sent the format of the
discharge voucher to be signed by respondent on 21.3.2006;
that on account of the non-release of the claim, it was in a dire
financial condition and it had no alternative but to yield to the
H
646
SUPREME COURT REPOF TS
[2008] 13 S.C.R
A coercion and pressure applied by thi · appellant; that therefore
the respondent signed and gave thE said discharge voucher,
undated, as required by the insurer du1 ng the last week of March,
2006. The payment was released b ,' the appellant only after
B
c
. D
E
F
receiving the said discharge-vouche . It is extracted below:
"NATIONAL INSURANC:: COMPANY LTD.
REGO. OFFICE: 3, MIDJLETON STREET,
POST BOX N0.9229, ::OLKATA 700071
FORM ACL - 10(1)
Loss voucher Non Motor & PA
Received from National lnsuranc ':Company Limited through
its policy issuing office (herein af :r called the Company) the
sum of Rs.2,33,94,964.00 (Rupe =s two crore thirty three lakh
ninety four thousand nine hundn 'd sixty four only) in full and
final settlement of all my/our clair ·1s in respect of the property
lost or damaged due to others or or about 03/08/2004 under
Policy No.250501/11/03/310000( 145.
In consideration of such payme 11t I/we hereby absolve the
Company from all liability preser 1: or future arising directly or
indirectly out of the said loss or d 1 mage under the said policy.
Further I/We hereby assign to tt : company my/our rights to
the affected property stolen whi :h shall in the event of their
recovery be the property of the :ompany. I/We even agree
that the sum insured under the i aid policy stand reduced by
the amount paid under the next ·enewal."
Sd/-
5. Simultaneously, the respo 1dent lodged a complaint
dated 24.3.2006 with the lnsuranci: Regulatory and DevelopG mentAuthority wherein, after settin~ out the facts, it alleged:
"We lodged a claim with our insu :rs immediately and pursued
the matter with them. Even after ·:he Surveyor Mr. Mehernosh
Todiwala of M/s. Bhatawadekar I : Co. had submitted his report
on 22nct March, 2005, the insure 1·s refused to settle our claim
H
on various counts. We had varic .is meetings at the Divisional,
-+
NATIONAL INSURANCE CO. LTD. v. M/S. BOGHARA 647
POLYFAB PVT. LTD. [R.V.RAVEENDRAN, J.]
Regional and even the Head Office of the insurers, but to no
A
avail.
In March, 2005, the insurer company forced us to accept a
lower settlement and we were told that we would have to
agree to a lower settlement to ensure expeditious settlement
of the claim. Accordingly on and around the 15th of March,
B
2005 nearly 8 months after the loss we gave our forced consent
to the lower settlement offered in the hope that the claim
amount would be received immediately.
Thereafter for the next 1 year, the insurers failed to settle our
claim and made us run from pillar to post for the settlement. c
Finally on March 21st 2006 the insurers have sent us a voucher
for the sum of Rs.2,33,94,94 which considering our dire
financial condition, and the continuous failed promises from
the insurers, we have had no choice but to accept.
D
Sir, subsequent to the loss, since we could not pay our
international suppliers on time they almost completely stopped
all our shipments. This has resulted in tremendous financial
loss to us. We have lost our long hard earned reputation in
the market by becoming defaulters. The insurers have
E
deliberately starved our unit of funds to ruin us financially.
You will appreciate that we are how faced with a situation
where we have no choice but to accept the payment being
released to us unconditionally as the insurers have made it
~
~
very clear that the payment will not be released if there is any
conditional discharge of the vouchers. In order to safeguard
F
our right to claim the difference amount and any other claims
arising out of the financial losses incurred by us a direct result
of the deliberate delay in settlement of our claim by the
insurers, we make a humble request to the l.R.D.A. to take up
the matter with the insurers to ensure that justice prevails and G
we are ~id the entire compensation due to us."
•
6. The respondent also issued a !egal notice dated
27.5.2006 wherein it was alleged that the amount due by the
insurer was Rs.3, 18,26,025/-, and that under duress and implicit coercion, it had accepted the payment of Rs.2,33,94.!;164/ H
648
SUPREME COURT REPORTE
[2008] 13 S.C.R.
A -, by signing and handing over a 'full and f nal discharge voucher'.
By the said notice, the respondent demanded the difference
amount with interest at the rate of ·12% per annum from
6.12.2004 (date of final survey report) till the date of payment.
The respondent also informed the appellant that if payment was
B not so made within 15 days, the notic~ should be treated as
notice invoking arbitration. The appellant by its reply dated
2.8.2006, rejected the said demand. Tl1e appellant contended
that the respondent had unconditionally c ccepted the claim settlementamount fully and finally; that respo 1dent had not registered
c any protest while accepting the claim cheque; that the amount
payable was arrived at amicably after cliscussing all aspects of
the claim with the insured and at no juncture any protest was
expressed; and that therefore the que~.tion of invoking the provision for arbitration did not arise.
D
7. In view of appellant's refusal to agree for arbitr:ation, the
..,.
respondent filed an application under :;ection 11 of the Arbitration & Conciliation Act, 1996 ('Act' for s 1ort) in the Bombay High
Court. The said petition was resisted ty the appellant by reiterating that the respondent had accepted the payment of
E Rs.233,94,964/- in full and final settlement and therefore, the
respondent could not invoke the arbitration clause.
8. The learned Chief Justice of the Bombay High Court
exercising power under section 11 of the Act, allowed the petiF
tion by order dated 19.4.2007. Afte; 1:onsidering the fa:::ts, he
was of the view that there was a serious dispute between the
>-
'
parties as to whether 'discharge voucher' was given voluntarily
or under pressure or coercion, and tllat required to be settled
by the Arbitral Tribunal. He therefo;e appointed Sri Justice
S.N.Variava as the sole arbitrator. The learned Chief Justice
G left open the question whether there was any coercion/undue
influence in regard to issue of full and final settlement discharge
voucher by the respondent, and permitted the parties to lead
'
evidence before the arbitrator on that question. The said order
is challenged by the insurer in this appeal by special leave.
H
-t
NAllONAL INSURANCE CO. LTD. v. M/S. BOGHARA 649
POLYFAB PVT. LTD. [R.V.RAVEENDRAN, J.]
The rival contentions :
A
9. Learned counsel for the appellant contended that once
the insurance claim was settled and the insured received payment and issued a full and final discharge voucher, there was
discharge of the contract by accord and satisfaction. As a result, neither the contract nor any claim survived. It is submitted
B
that when a discharge voucher was issued by the respondent,
acknowledging receipt of the amount paid by the appellant, in
full and final settlement and confirming that there are no pending claims against the appellant, such discharge voucher should
be accepted on its face value as a discharge of contract by full C
and final settlement. Consequently, it should entail ipso jure,
rejection in limine of any subsequent claim or any request for
reference of any dispute regarding any claim to arbitration. It
was also contended that having received the payment under
the said discharge voucher, the respondent cannot, while reD
taining and enjoying the benefit of the full and final payment,
challenge the validity or correctness of the discharge voucher.
The appellant contends that the subsequent claim of the respondent ought not to have been referred to arbitration. In support of
its contentions, reliance was placed on three decisions of this E
Court in State of Maharashtra v. Nav Bharat Builders [1994
Supp (3) SCC 83], M/s. P K. Ramaiah & Co. v. Chairman &
Managing Director, National Thermal Power Corpn. [1994
Supp (3) SCC 126] and Nathani Steels Ltd. v. Associated Constructions [1995 Supp (3) SCC 324].
F
10. On the other hand the respondent contended that the
scope of proceeding under section 11 of the Act was limited. It
is submitted that once the petitioner establishes that the contract between the parties contains an arbitration agreement, and ·
that the dispute raised is in respect of a claim arising out of G
such contract, the dispute has to be referred to arbitration; that
any contention by the appellant that there is discharge of the
contract by issue of full and final discharge voucher is a matter
for the arbitral tribunal to examine and decide, and cannot be
held out as a threshold bar to arbitration; and that the question
H
650
SUPREME COURT REPORTS
[2008] 13 S.C.R.
A whether there was accord and satis .. action, or whether there
was discharge of a contract by perforrnance, is itself a question
that is clearly arbitrable. It is alternatively submitted that when
the Chief Justice or his designate is required to consider whether
the claimant has issued a full and fi ial discharge voucher in
B settlement of all claims, any objection to the validity of such discharge voucher should also be consic ered. It is pointed out that
where the discharge voucher is given under threat or coercion,
resulting in economic duress and compulsion, such discharge
voucher is not valid nor binding on the claimant, and the dispute
C relating to the claim survives for consideration and is arbitrable.
According to respondent, where the person on whom the claim
is made, withholds the admitted amount to coerce and compel
the claimant to accept a smaller payment in full and final settlement and give a discharge voucher, t1ere is no accord and satisfaction in the eye of law; and the c ischarge voucher will not
D come in the way of a genuine and bona fide dispute being raised
regarding the balance of the claim and seeking reference of
such claim to arbitration. In support of the said contentions, reliance was placed on the decisions of this Court in Damodar
Valley Corporation v. K. K.Kar [1974 (1) SCC 141], M/s. Bharat
E Heavy Electricfils Ltd., Ranipur ~·. Mis. Amar Nath Bhan
Prakash [1982 (1) SCC 625], Union oflndia vs. L. K. Ahuja &
Co. [1988 (3) SCC 76], Jayesh Eng'neering Works v. New India Assurance Co. Ltd. [2000 (10) SCC 178], Chairman & Managing Director, NTPC Ltd. v. Reshr1i Constructions, Builders
F & Contractors [2004 (2) SCC 663], and Ambica Construction
~ •
v. Union of India [2006 (13) SCC 4~'5].
11. In reply, the learned counsel for the appellant submitted that the decisions relied on by the respondent were all rendered by two-Judge Benches of thii; Court, whereas the deciG sion in Nathani Steels relied on by the appellant, was rendered
'uy a three-Judge Bench; and therefore the principle laid down
in Nathani Steels that there can be no reference to arbitration
wherever there is a full and final sett ement, resulting in the discharge of the contract, holds the field and will have to be folH lowed in preference to the other decisions.
NATIONAL INSURANCE CO. LTD. v. M/S. BOGHARA
651
POLYFAB PVT. LTD. [R.V.RAVEENDRAN, J.]
The questions for consideration :
A
12. In this case existence of an arbitration clause in the
contract of insurance is not in dispute. It provides that "if any
~ ..
dispute or difference shall arise as to the quantum to be paid
•
under this. policy (liability being otherwise admitted) such differB
ence shall, independently to all other questions be referred to
the decision of a sole Arbitrator." The rival contentions give rise
to the following question for our consideration :
In what circumstances, a court will refuse to refer a dispute
relating to quantum to arbitration, when the contract c
specifically provides for reference of disputes and
differences relating to the quantum to arbitration? In
particular, what is the position when a respondent in an
application under section 11 of the Act, resists reference
to arbitration on the ground that petitioner has issued a full
D
¥
and final settlement discharge voucher and the petitioner
contends that he was constrained to issue it due to
coercion, undue influence and economic compulsion?
13. In Union of India v. Kishorilal Gupta & Bros. [1960 (1)
SCR 493), this Court considered the question whether the arbiE
tration clause in the contract will cease to have effect, when the
contract stood discharged as a result of settlement. While answering the question in the affirmative, a three Judge Bench of
this Court culled out the following general principles as to when
'
-c
arbitration agreements operate and when they do not operate:
F
-
(i)
An arbitration clause is a collateral term of a contract
distinguished from its substantive terms; but none
the less it is an integral part of it.
(ii)
Howsoever comprehensive the terms of an arbitration G
clause may be, the existence of the contract is a
necessary condition for its operation; and the
...
arbitration clause perishes with the contract.
(iii) A contract may be non est in the sense that it never
came legally into existence or it was void ab initio.
H
652
SUPREME COURT REPORTS
[2008] 13 S.C.R.
A
In that event, as the original contract has no legal
existence, the arbitration clause also cannot operate,
for along with the original contract, it is also void.
(iv)
Though the contract was validly executed, the parties
•
B
may put an end to it as if it had never existed and
•
substitute a new contract for it, solely governing their
rights and liabilities. In such an event, as the original
contract is extinguished by the substituted one, the
arbitration clause of the original contract perishes
with it.
c
(v)
Between the two extremes referred to in paras (c)
and (d), are the cases where the contract may come
to an end, on account of repudiation, frustration,
breach etc. In these cases, it is the performance of
D
the contract that has come to an end, but the contract
is still in existence for certain limited purposes, in
v
respect of disputes arising under it or in connection
with it. When the contracts subsist for certain
purposes, the arbitration clauses in those contracts
E
operate in respect of those purposes.
The principle stated in para (i) is now given statutory recognition in section 16(1 )(a) of the Act. The principle in para (iii)
has to be now read subject to section 16( 1 )(b) of the Act. The
principles in paras (iv) and (v) are clear and continue to be apF plicable. The principle stated in para (ii) requires further eluci-
)>-
~
dation with reference to contracts discharged by performance
or accord and satisfaction.
14. The decision in Kishori/al Gupta was followed and reiterated in several decisions including Naithani Jute Mills Ltd.
G vs. Khya/iram Jagannath (AIR 1968 SC 522), Oamodar Valfey Corporation vs. K. K. Kar [1974 (1) SCC 141] and Indian
Drugs & Pharmaceuticals Ltd. vs. Inda Swiss Synthetic Gem
r
Manufacturing Co. Ltd. (1996 (1) SCC 54). In Oamodar Valley
Co1poration, this Court observed :
H
-1
NATIONAL INSURANCE CO. LTD. v. IVl/S. BOGHARA
653
POLYFAB PVT. LTD. [R.V.RAVEENDRAN, J.]
"A contract is the creature of an agreement between the parties
A
and where the parties under the terms of the contract agree
to incorporate an arbitration clause, that clause stands apart
from the rights and obligations under that contract, as it has
been incorporated with the object of providing a machinery for
)-
the settlement of disputes arising in relation to or in connection
B
with that contract. The questions of unilateral repudiation of
the rights and obligations under the contract or of a full and
final settlement of the contract relate to the performance or
discharge of the contract. Far from putting an end to the
arbitration clause, they fall within the purview of it. A repudiation
by one party alone does not terminate the contract. It takes .C
two to end it, and hence it follows that as the contract subsists
for the determination of the rights and obligations of the parties,
the arbitration clause also survives. This is not a case where
the plea is that the contract is void, illegal or fraudulent etc.,
"!'
in which case, the entire contract along with the arbitration
D
clause is non est, or voidable. As the contract is an outcome
of the agreement between the parties it is equally open to the
parties thereto to agree to bring it to an end or to treat it us if
it never existed. It may also be open to the parties to terminate
the previous contract and substitute in its place a new contract
or alter the original contract in such a way that it cannot
E
subsist. In all these cases, since the entire contract is put an
end to the arbitration clause, which is a part of it, also perishes
along with it."
,#
...
15. Section 16 of the Act bestows upon the arbitral tribunal, the competence to rule on its own jurisdiction. Sub-section
F
(1) of the section reads thus :
4
"16. Competence of arbitral tribunal to rule on its
.
jurisdiction. - (1) The arbitral tribunal may rule on its own
jurisdiction, including ruling on any objections with respect G
to the existence or validity of the arbitration agreement,
and for that purpose, -
'
...
(a)
an arbitration clause which forms part of a contract
shall be treated as an agreement independent of the
other terms of the contract; and
H
654
SUPREME COURT REPORTS
[2008] 13 S.C.R
A
(b)
a decision by the arbitral tribunal that the contract is
null and void shall not entail ipso Jure the invalidity of
the arbitration clause.
In SBP & Co. vs. Patel Engineering Ltd. - 2005 (8) SCC
618, a seven Judge Bench of this Court considered the scope
B
of section 11 of the Act and held that the scheme of section 11
of the Act required the Chief Justice or his designate to decide
whether there is an arbitration agreement in terms of Section 7
of the Act before exercising his power under Section 11 (6) of
the Act and its implications. It was of the view that sub-sections
C
(4), (5) and (6) of section 11 of the new Act, combined the power
vested in the court under sections 8 and 20 of the old Act (Arbitration Act, 1940). This Court held :
D
E
F
G
H
"It is necessary to define what exactly the Chief Justice,
approached with an application under Section 11 of the Act,
is to decide at that stage. Obviously, he has to decide his own
jurisdiction in the sense, whether the party making the motion
has approached the right High Court. He has to decide whether
there is an arbitration agreement, as defined in the Act and
whether the person who has made the request before him, is
a party to such an agreement. It is necessary to indicate that
he can also decide the question whether the claim was a dead
one; or a long barred claim that was sought to be resurrected
and whether the parties have concluded the transaction by
recording satisfaction of their mutual rights and obligations or
by receiving the final payment without objection. It may not be
possible at that stage, to decide whether a live claim made,
is one which comes within the purview of the arbitration clause.
It will be appropriate to leave that question to be decided by
the arbitral tribunal on taking evidence, along with the merits
of the claims involved in the arbitration. The Chief Justice has
to decide whether the applicant has satisfied the conditions
for appointing an arbitrator under Section 11 (6) of the Act. For
the purpose of taking a decision on these aspects, the Chief
Justice can either proceed on the basis of affidavits and the
cfocuments produced or take such evidence or get such
evidence recorded, as may be necessary. We think that
~
NATIONAL INSURANCE CO. LTD. v. M/S. BOGHARA .655
POLYFAB PVT LTD. [RVRAVEENDRAN, J]
adoption of this procedure in the context of the Act would best
A
serve the purpose sought to be achieved by the Act of
expediting the process of arbitration, without too many
approaches to the court at various stages of the proceedings
before the Arbitral tribunal."
"47.(iv) The Chief Justice or the designated judge will have
B
the right to decide the preliminary aspects as indicated in the
earlier part of this judgment. These will be, his own jurisdiction,
to entertain the request, the existence of a valid arbitration
agreement, the existence or otherwise of a live ciaim, .the
existence of the condition for the exercise of his power and c
on the qualifications of the arbitrator or arbitrators."
: Ii
{emphasis supplied)
This Court also examined the 'competence' of the arbitral
tribunal to rule upon its own jurisdiction and about the existence D
"'
of the arbitration clause, when the Chief Justice or his designate had appointed the Arbitral Tribunal under section 11 of the
Act, after deciding upon such jurisdictional issue. This Court
held:
"We are inclined to the view that the decision of the Chief E
Justice on the issue of jurisdiction and the existence of a .vaiid
arbitration agreement would be binding on the parties when
the matter goes to the arbitral tribunal".
"Section 16 is said to be the recognition of the principle of
, -1
Kompetenz - Kompetenz. The fact that the arbitral tribunal
F
has the competence to rule on its own jurisdiction and to
define the contours of its jurisdiction, only means that when
such issues arise before it, the Tribunal can and possibly,
ought to decide them. This can happen when the parties have
gone to the arbitral tribunal without recourse to Section 8 or
G
11 of the Act. But where the jurisdictional issues are decided
under these Sections, before a reference is made, Section
16 cannot be held to empower the arbitral tribunal to ignore
the decision given by the judicial authority or the Chief Justice
before the reference to it was made. The competence to
decide does not enable the arbitral tribunal to get over the
H
•
A
B
656
SUPREME COURT REPORTS
[2008) 13 S.C.R.
finality conferred on an order passed prior to its entering upon
the reference by the very statute that creates it. That is the
position arising out of Section 11 (7) of the Act read with Section
16 thereof. The finality given to the order of the Chief Justice
on the matters within his competence under Section 11 of the
Act, are incapable of being reopened before the arbitral
tribunal."
16. It is thus clear that when a contract contains an arbitration clause and any dispute in respect of the said contract is
referred to arbitration without the intervention of the court, the
c Arbitral Tribunal can decide the following questions affecting its
jurisdiction: (a) whether there is an arbitration agreement; (b)
whether the arbitration agreement is valid; (c) whether the contract in which the arbitration clause is found is null and void and
if so whether the invalidity extends to the Arbitration clause also.
0
It follows therefore that if the respondent before the Arbitral Tribunal contends that the contract has been discharged by reason of the claimant accepting payment made by the respondent in full and final settlement, and if the claimant counters it by
contending that the discharge voucher was extracted from him
E by practicing fraud, undue influence, or coercion, the arbitral
tribunal will have to decide whether the discharge of contract
was vitiated by any circumstance which rendered the discharge ·
voidable at the instance of the claimant. If the arbitral tribunal
comes to the conclusion that there was a valid discharge by
voluntary execution of a discharge voucher, it will refuse to exF
amine the claim on merits, and reject the claim as not maintainable. On the other hand, ifthe arbitral tribunal comes to the conclusion that such discharge of contract was vitiated by any circumstance which rendered it void, it will ignore th.e same and
proceed to decide the claim on merits.
G
17. Where the intervention of the court is sought for appointment of an Arbitral Tribunal under section 11, the duty of
the Chief Justice or his designate is defined in SBP & Co. This
Court identified and segregated the preliminary issues that may
H arise for consideration in an application under section 11 of the
NATIONAL INSURANCE CO. LTD. v. MIS. BOGHARA
657
POLYFAB PVT. LTD.