Full and Final Satisfaction When Challenging the Appointment of Arbitrators - International Law Office

Introduction
Facts
Decision
Comment

Introduction

The Supreme Court of India recently made an important pronouncement regarding full and final satisfaction in the context of Section 11 of the Arbitration and Conciliation Act 1996.(1) In National Insurance Company Ltd v Boghara Polyfab Pvt Ltd the Supreme Court ruled that pursuant to an application under Section 11 of the act, a claim for appointment cannot be rejected on the grounds that the party had executed a settlement agreement or discharge voucher if the validity of the agreement or voucher is disputed by the other party.(2)

Facts

The respondent had obtained a standard fire and special perils policy from the appellant to cover its goods in its godowns. The respondent's goods were damaged and it accordingly made a claim under the policy. According to the surveyor's preliminary report, the net assessed loss (payable to the respondent) was Rs31,826,025. However, this amount was not accepted by the appellant company, which calculated the net assessed loss as Rs23,401,740. The respondent alleged that it had been coerced by the appellant to issue an undated 'discharge in advance', acknowledging the receipt of Rs23,401,740 in a full and final settlement.

Subsequently, the respondent issued a legal notice to the appellant, alleging that the amount due was Rs31,826,025 and demanding payment of the difference with interest. The notice further stated that if the appellant failed to pay the aforesaid amount within 15 days, the notice should be treated as a notice invoking arbitration. The appellant stated that no payment was due (on the grounds of full and final satisfaction) and refused to refer the dispute to arbitration.

The respondent filed an application under Section 11 of the Arbitration and Conciliation Act before the chief justice of the Bombay High Court, who appointed an arbitrator. The appellant challenged the order appointinon the grounds that the contract had been discharged and the party issuing the discharge could not thereafter make a fresh claim nor take recourse to arbitration.

Decision

The Supreme Court held that the chief justice or his designate (the default appointing authority under the Arbitration and Conciliation Act) can exercise jurisdiction under Section 11 of the act by considering whether there was accord and satisfaction or a discharge of contract by performance. If either case is evident, he will refuse to refer the dispute to arbitration. Alternatively, if the chief justice or his designate concludes that the full and final settlement receipt or discharge voucher was the result of fraud, coercion or undue influence, he must hold that there was no discharge of the contract and consequently refer the dispute to arbitration.

Comment

The implications of this judgment when read with the Supreme Court judgment in SBP & Co v Patel Engineering Ltd(3) are as follows:

• In an application under Section 11 of the Arbitration and Conciliation Act, if the satisfaction or discharge of contract is denied on the grounds of the discharge having been obtained by fraud or force, the chief justice or his designate can enter into discussions on the merits of the case. Hence, the chief justice or his designate must determine whether the accord and satisfaction or discharge of contract by performance has been obtained by force or fraud.
• The jurisdiction in such proceedings is a summary jurisdiction, which means there will be no detailed trial on the issue. Thus, issues such as fraud and coercion, which may be a party's sole defence, may be decided without a detailed trial.
• A party's dispute of a full and final settlement will result in the other party having to decide whether to begin arbitration proceedings or seek a summary decision on the issue under Section 11 of the Arbitration and Conciliation Act.
• The fact that the judgment of the chief justice or his designate is subject to limited judicial overview may restrict the ability to challenge the issue once the order has been given (ie, during the challenge to the award).

For further information on this topic please contact Vijayendra P Singh or Aashish Gupta at Amarchand & Mangaldas & Suresh A Shroff & Co by telephone (+91 11 2692 0500) or by fax (+ 91 11 2692 4900) or by email (vijayendra.singh@amarchand.com or aashish.gupta@amarchand.com).

Endnote

(1) Section 11 of the act deals with the appointment of an arbitrator in case of default in appointment under the arbitration agreement.

(2) (2009) 1 SCC 267.

(3) (2005) 8 SCC 618.