India: Effect Of Full And Final Settlement On Arbitration Proceedings

Last Updated: 29 August 2019
Article by Srishti Singhania and Harshita Gupta

Case analysis of United India Insurance Company Limited v. Antique Art Exports Private Limited1

Co-authored by: Ms. Harshita Gupta, 3rd year student of three year LL.B. program of Jindal Global Law School

Factual Matrix

Antique Art Exports, the respondent/ claimant was running a factory and purchased two Standard Fire and Special Perils Insurance Policies. A few months later, two fire accidents happened in the factory on September 25, 2013 and on October 25, 2013, leading to the insurance claims. United India Insurance Company, the appellant, recruited a third company as surveyors and an investigator to submit their report. Subsequently, the appellant company notified the respondent/claimant via email that their claim for fire on October 25, 2013 for Rs. 2,81,44,413/- was approved. Further, the mail mentioned that in order for this payment to be released, the claimant was required to submit certain additional documents. The respondent replied on the same date, accepting the computed amount of the claim so approved and provided the additional documents as asked. The claim for fire on September 25, 2013 was settled at Rs. 2,20,36,840/-.

The dispute arose on July 27, 2016, almost eleven weeks after the full and final discharge of the claim, when the respondent claimed that they were coerced to accept the settlement and they were victims of fraud and undue influence. Thereafter, an application was filed by the respondent in the Delhi High Court under Section 11(6) of the Arbitration and Conciliation Act, 1996 ("the Act"). The Delhi High Court relied solely upon Section 11(6A) of the Act and observed, "once there is existence of arbitration agreement, acceptance of the payment disbursed by the appellant company, whether it was under coercion or undue influence, is a matter to be examined by the arbitrator" and accordingly proceeded to appoint a sole arbitrator to adjudicate the dispute between the parties.

Issue before the Supreme Court

Whether or not was the respondent justified in invoking Section 11(6) of the Act and whether mere allegation that the acceptance of compensation was under coercion or undue in absence of prima facie evidence sufficient for appointment of an arbitrator?

Contentions of the Appellant

  1. The contract or claim ceases to survive upon settlement of claim and receipt of compensation by claimant. Relied upon the judgment in New India Assurance Co. Ltd. v. Genus Power Infrastructure Ltd.2 and argued that having received the payment without any 'demur or protest', it was not open for the respondent to object the claim and allege it was under coercion and undue influence in absence of any supporting evidence. 
  1. It was submitted that Section 11(6A) of the Act comes into picture when subsisting arbitral disputes require adjudication by an arbitrator. Here, however an arbitral dispute does not subsist because the final settlement was reached with the consent of the parties involved, and with their due accord and satisfaction.

Contentions of the Respondent

  1. Objection is limited to the conduct of the procedure wherein the respondent was not in fair bargaining position and because of being under obvious financial stress had to accept the computed amount.
  1. It is contended that mere acceptance of the claim in such circumstances does not vitiate the right of the respondent to establish that it was under undue influence, coercion and thus involuntary. Also, due to existence of an arbitration clause in the agreement, it would be appropriate for an arbitrator to examine the circumstances surrounding the acceptance of claim amount.

Supreme Court's Ruling

The arbitration clause in the insurance contract was not disputed. The Court relied on the case of National Insurance Co. Ltd. v. Boghara Polyfab (P) Ltd.3 which laid down examples illustrating as to when claims are subject to arbitration and when they are not in case the parties execute a full and final settlement between themselves. However, the illustrations are not exhaustive and there is no rule to thumb to decide and it depends of facts of each individual case.

Firstly, when a claim is referred to conciliation or pre-litigation Lok Adalat, and the parties negotiate and reach a settlement then it is signed by parties and attested by the conciliator or by the members of the Lok Adalat. So, there is a bar on arbitration because the settlement has been reached by way of accord and settlement. Secondly, with regards to disputed claims when on settlement, the agreed amount is paid and the contractor issues a full and final receipt and the contract is discharged with accord and satisfaction then the contract and disputes thereof cease to exist leading to a bar on arbitration. Thirdly, for instance in a work contract, the payment claimed is of Rs. 10 Lakhs but the employer admits claim for only Rs. 6 lakhs and asks to accept it and sign, only then the amount would be released. Clearly the contractor here is under economic duress on account of coercion by employer thus there is no bar on arbitration. Fourthly, in an insurance claim by an insured when loss is suffered, the insured is informed that unless the claimant furnishes a full and final voucher for a specified amount (less than the amount claimed), the entire claim would be subject to rejection. The claimant agrees and issues an undated discharge voucher in full and final settlement. Thereafter, the admitted amount is paid. The accord and satisfaction is not voluntary and is in duress, compulsion and coercion. Thus, in such a situation there is no bar on arbitration. Lastly, in a claim for damages when there is voluntary reduction in amount claimed by the claimant so as to avoid litigation and achieve timely settlement, later a dispute arising from such set of facts would not be arbitrable and it acts as a bar on arbitration.

The Supreme Court further relied on Union of India v. Master Construction Co.4, and observed that if the claimant's reason for a dispute with respect to validity of a settlement agreement lacks credibility on the first instance, then such disputes need not be referred to arbitration at all. The Court opined that the Chief Justice or his designate should exercise power under Section 11(6) of the Act when the party alleging fraud, coercion or undue influence, substantiates this claim by placing sufficient and relevant material before them and mere plea on these accounts would not suffice. In the present case, the averment was made eleven weeks after the settlement of the claim and there was no substantial evidence to support the allegation.

The Court held that the letter of subrogation was signed voluntarily and not under coercion or undue influence. The claim, in fact, was settled with due accord and satisfaction of both the parties, leaving no arbitral dispute in its wake, to be examined by an arbitrator, who is to be appointed under section 11(6) of the Act.

The Court further criticized the High Court order and observed that the High Court had committed an error in passing its order and was wrong in adopting a mechanical approach in its adjudicatory process.

Analysis

Section 11(6) of the Act deals with procedure of appointment as agreed upon by the parties and  pertains to situations where parties voluntarily agree through documents towards appointment of an arbitrator and in situations where either a party fails to comply with such procedure to act or when the arbitrators fail to reach an agreement or where the institution fails to perform functions laid down in the procedure, then the parties may request the Supreme Court or the High Court to appoint an arbitrator so that the matter can be settled.

The issue in the present case is not with respect to the procedure followed but with respect to resorting to arbitration in the first place. The insurance company is of the view that since the amount claimed was agreed upon amicably between the parties without exercise of any coercive means or putting the respondent claimant in a tight spot. The claimant is wrong is asserting that they were made to agree to the amount by exercise of undue influence. The parties entered into the agreement with eyes wide open and under no compulsion, had the opportunity to negotiate when the first email was sent; however, no objection or any discontentment was raised at that time.

The Supreme Court referred to the case of National Insurance Company Limited v. Boghara Polyfab Private Limited5 which deals with the question of whether a dispute remains even after parties have concluded the contract or transaction by recording their satisfaction. There, the Court opined that when a contract has been performed in its entirety, it amounts to discharge of contract by performance and then the contract comes to an end. In regards to such fulfilled contracts, neither the right to ask for specific performance nor any obligation to perform remains. Therefore, a dispute ceases to exist. A similar contention has been raised by the counsel for the appellant company in the present case.

The Supreme Court in the present case has been right in following this precedent in the sense that when both the parties to the contract have confirmed via writing (here via email correspondence), that they have fully and finally discharged their obligation and no outstanding claims or disputes exist, then the courts are not to refer any subsequent claim or dispute stemming from that transaction to arbitration, thereby reversing the High Court order. If, respondent claimant had been successful in establishing that their discharge agreement was on account of fraud/coercion/undue influence practiced by the insurance company then the discharge of contract by such agreement would have been rendered void and the matter would be arbitrable. However, in the present case there is absence of evidence to prove such allegations.

The case of New India Assurance Company Limited v. Genus Power Infrastructure Limited4 has a similar set of facts as the present case. There the Court delved upon the tenability of the claim by the respondent claimant which said that they had signed the letter due to extreme financial difficulties, under duress, coercion and undue influence exercised by the appellant. The Court observed that the plea raised by the respondent was bereft of details and particulars; it was a mere assertion because the respondent did not protest when the letter was signed and issued notice after three weeks. The Court opined that if it is found that such plea is an afterthought or lacks credibility, then the matter should be put to rest there and then. The Court also observed that the financial position of the respondent was not so precarious that they would have had to sign under undue influence. Thus, it was held that the claim was settled voluntarily and free from coercion and that no arbitrable dispute existed between the parties.

Further, the Court relied upon the case of Union of India and Others v. Master Construction Co.6, where the learned judge opined that when a claimant contends that settlement has been obtained by fraud/coercion/undue influence and the other side contests the correctness of such allegation, the Chief Justice or his designate must look into this aspect and find out prima facie the genuineness of such claim. The Court also observed that the cost of arbitration is quite high and just because one party presses for arbitration based on pleas not supported by evidence, it would be unfair to the other party to drag them to arbitration based on an allegation which lacks credibility or is malafide.

The cases do not define what could be the prima facie evidence but on a plain reading of facts of a case it can be fairly determined if the instance of fraud/coercion/undue influence is present or not. This judgment in United India Insurance Company Limited v. Antique Art Exports Private Limited, relies heavily on the law settled by the precedents and the Supreme Court has made it clear that mere existence of an arbitration agreement does not mean that an arbitrator is to be appointed in event of a dispute, instead the Judges need to satisfy themselves first that a prima facie case based upon the credibility of such allegations exists and then appoint an arbitrator.

Footnotes

1 (2019) 5 SCC 362

2  (2015) 2SCC 424

3  (2009) 1 SCC 267

4  (2011) 12 SCC 349

5  (2009) 1 SCC 267

6  (2015) 2SCC 424

7  (2011) 12 SCC 349

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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