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14 January 2021
There are several ways in which parties can discharge their contractual obligations. For example, the doctrine of accord and satisfaction allows parties to discharge their contractual obligations by performing certain modified obligations or by novating or rescinding the existing contract.(1) In other words, a liability arising out of a breach of contract can be discharged by a new agreement (an 'accord'), wherein the parties mutually agree a new consideration, forfeiting their right of action against their previous contractual obligations.(2) The 'satisfaction' is the discharge of the substituted obligations. Central to this is the consent and mutual agreement of all parties involved.
The doctrine and its use in India have been derived from the common law.(3) Section 63 of the Contract Act 1872 embodies the principle of discharge of contract by accord and satisfaction.(4) The jurisprudence encompasses contract law, tort law and, more recently, arbitration law, bringing to the fore the issue of whether:
As a defence against this doctrine, and to escape fulfilling their contractual obligations or have the substituted consideration or agreement rendered void, parties often argue that the consent given was not freely obtained but was the result of:
This is seen in contractual disputes but more often in cases involving insurance claims, wherein the claimant often settles for an amount less than the claimed amount and gives up all claims and rights via the execution of a discharge certificate or voucher due to an unequal bargaining position. The Supreme Court has held that this defence is acceptable only in insurance disputes wherein a prima facie case has been made by the party and not in commercial contract cases wherein it is assumed that both parties have equal bargaining power.(5)
National Insurance Company Limited v Boghara Polyfab Private Limited is one of the most important judgments that has held that a claim for arbitration cannot be rejected solely on the ground that a settlement agreement or discharge voucher has been executed by the claimant if the claimant disuptes the settlement agreement's validity. If one party that has executed and issued a discharge voucher or settlement can prove coercion, fraud or undue influence, discharge of the contract in light of the voucher or settlement is rendered void and cannot be relied upon. Consequently, the disputes between the parties would be arbitrable.(6) Paragraph 29 of the abovementioned judgment further lists three circumstances where it is clear that the arbitration agreement contained in a contract cannot be invoked when the contract has been discharged via performance or accord and satisfaction:
(a) Where the obligations under a contract are fully performed and discharge of the contract by performance is acknowledged by a full and final discharge voucher/receipt. Nothing survives in regard to such discharged contract.
(b) Where the parties to the contract, by mutual agreement, accept performance of altered, modified and substituted obligations and confirm in writing the discharge of contract by performance of the altered, modified or substituted obligations.
(c) Where the parties to a contract, by mutual agreement, absolve each other from performance of their respective obligations (either on account of frustration or otherwise) and consequently cancel the agreement and confirm that there is no outstanding claims or disputes.
This principle may not apply where both parties are businesspersons and the contract is a commercial transaction.(7) In other words, the principle will not apply where the contracting parties' bargaining power is equal or almost equal. Rather, it will apply only in cases where there is an inequality of bargaining power in favour of one party. Further, in these cases, the provisions will be read against the party which has drafted the contract following the principle of contra proferentum, which also has limited applicability in commercial transactions.
Boghara Polyfab also set out categories for determining which preliminary issues must be referred to an arbitrator and which must be adjudicated by the courts when their intervention is sought for the appointment of an arbitral tribunal under Section 11 of the Arbitration and Conciliation Act 1996. Barring the determination of whether there is an arbitration agreement and whether the applicant is a party thereto, the remaining issues can be referred to the arbitrator. While identifying and setting out the three categories, the judgment referred to the landmark seven-bench judgment SBP v Patel Engineering Limited,(8) which delved into Section 11 of the Arbitration and Conciliation Act 1996 and held that the courts' power to appoint an arbitrator under Section 11 is a judicial power. It further held that the determination of whether a contract has been discharged by accord and satisfaction is a mixed question of fact and law which the courts have the power to decide. However, this decision has been legislatively overruled by subsequent amendments to the act.
Several judgments post-Boghara Polyfab have applied the same ruling. For instance, the 2011 decision Union of India v Master Construction Company(9) relied on Boghara Polyfab and held that when considering a claim that a discharge voucher was obtained via fraud, coercion or undue influence, "the Chief Justice/his designate must look into this aspect to find out at least, prima facie, whether or not the dispute is bona fide and genuine".
With the insertion of Section 6A into Section 11 of the Arbitration and Conciliation Act 1996 by the Arbitration and Conciliation Amendment Act 2015 (2015 amendment act), judicial intervention and examination when appointing an arbitrator on the application of a party has been limited to examining the existence of an arbitration agreement; the remaining issues, preliminary or otherwise, must be referred to the arbitral tribunal for adjudication.
In the 2019 case United India Insurance Company Limited v Antique Art Exports Private Limited, it was held that there cannot be a rule under which mere allegation of a discharge voucher being obtained by fraud, coercion or undue influence by the other party is sufficient to appoint an arbitrator unless the party can produce prima facie evidence to substantiate the same. However, no rule of thumb was set out to determine what prima facie constitutes a bona fide dispute, and this is to be decided by a judge on a case-by-case basis when deciding to invoke Section 11(6) of the Arbitration and Conciliation Act 1996.(10)
However, Antique Art was soon subjected to judicial scrutiny by a three-judge bench of the Supreme Court. Mr Justice Nariman in Mayavati Trading Private Limited v Pradyuat Deb Burman held that Boghara Polyfab and Antique Art stand, in part, legislatively overruled by the 2015 amendment act. Therefore, the three categories set out in Boghara Polyfab regarding which issue fell within the purview of the court and the threshold set out in Antique Art (regarding the determination of which disputes should be referred to arbitration, which would have included going into whether accord and satisfaction had taken place) has been legislatively overruled. Accordingly, the Supreme Court or high court, when considering applications under Sections 11(4) to 11(6) of the Arbitration and Conciliation Act 1996, must confine themselves to the examination of the existence of an arbitration agreement and leave all other preliminary issues to be decided by the arbitral tribunal.(11)
On the other hand, in relation to commercial disputes, the Supreme Court in WAPCOS Limited v Salma Dam Joint Venture adjudicated an appeal whereby the high court had, in exercise of its powers under Section 11(6) of the Arbitration and Conciliation Act 1996, appointed a sole arbitrator. On the question of whether an arbitration agreement subsists between the parties after amending the original agreement, it was held that in a commercial setting, parties often enter into a settlement and, in such cases, cannot be later allowed to take a plea of coercion or duress. Once the disputes are settled and the parties are satisfied, the matter is closed for all purposes; therefore, the arbitration petition was held to be unmaintainable.(12)
In general, a mere plea of fraud, coercion, duress or undue influence is insufficient; the party raising such an allegation must establish the same. The question that has arisen in this regard is whether the courts, when appointing an arbitrator, should delve into this controversy or leave it for the arbitral tribunal to determine. In the context of insurance claims, especially when an application under Section 11 of the Arbitration and Conciliation Act 1996 has been preferred, it is common for the court only to examine the existence of the arbitration agreement and appoint the arbitral tribunal. On the other hand, in a commercial dispute, accord and satisfaction can be posed as a strong defence by a party contesting arbitration and the same can be used to deter arbitral proceedings by seeking a preliminary adjudication on jurisdiction. However, the scope of judicial intervention in a commercial dispute, when exercising the powers set out under Section 11 of the Arbitration and Conciliation Act 1996, with respect to such a question remains to be determined affirmatively.
One question remains: what factors should be considered to establish whether the doctrine of accord and satisfaction applies in the context of obtaining consent via fraud, coercion or undue influence? The courts have stated that there is no standard or rule of thumb to establish a prima facie case, which leaves room for speculation and varies greatly across the courts. With varying standards in certain jurisdictions, it is easy for frivolous suits to be accepted in some courts and genuine suits be rejected in others, rendering this mechanism futile. A semblance of criteria or a threshold should be introduced to ensure consistency and greater effectiveness. Some points of consideration for establishing a prima facie case could be:
The jurisprudence regarding judicial involvement via Section 11 of the Arbitration and Conciliation Act 1996 is long and complex. While the current legal position set out in Mayavati Trading is good with respect to institutional arbitration and reigning in judicial involvement, with respect to disputes regarding the existence of an arbitration agreement or clause in light of the doctrine of accord and satisfaction, it remains to be seen what the efficacy of a declaration, discharge voucher or settlement agreement would be and how the courts should really evaluate these. Due to Mayavati Trading, the courts cannot delve into whether accord and satisfaction has taken place legitimately and, accordingly, whether an arbitration agreement is valid.
On the other hand, if Boghara Polyfab and Patel Engineering were followed, although Section 11 is administrative in nature, if the courts get into validity and allow extensive trials to take place every time, despite the existence of such documents, this calls into question the significance of a discharge voucher or settlement agreement. While an entire segment of genuine applicants being left out is not a preferable option, neither is applicants being stuck in this vicious circle. This issue is unique to the doctrine of accord and satisfaction.
To ensure minimal judicial intervention alongside the primacy of institutional arbitration, the best recourse to this issue can be found in the 246th Report of the Law Commission, which recommends minimal judicial intervention and a prima facie threshold for applications under Section 11(6A). While Section 11(6A) has been removed via the Arbitration and Conciliation (Amendment) Act 2019 (although not put into effect), the current legal position should be amended only in the context of accord and satisfaction and only to the extent that the courts should be allowed to examine whether the applicant has a prima facie case. Further, instead of allowing extensive trials, a short yet reasonable period should be introduced to examine applications and either dismiss them or refer the suit to arbitration. As suggested above, the threshold for making out a prima facie case could include:
For further information on this topic please contact Ajay Bhargava, Aseem Chaturvedi, Shivank Diddi or Khushbu Singh at Khaitan & Co by telephone (+91 11 4151 5454) or email (firstname.lastname@example.org, email@example.com, firstname.lastname@example.org or email@example.com). The Khaitan & Co website can be accessed at www.khaitanco.com.
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