[This post is co-authored by our guest, Manasi M. Kalvit. Manasi is a lawyer with the Dispute Resolution team at Tatva Legal, Mumbai and can be reached at manasikalvit@gmail.com]

In United Insurance Co. Ltd v. Antique Art Exports Pvt. Ltd., the Supreme Court refused to appoint an arbitrator on grounds that the underlying insurance claim stood settled between the parties on accord and satisfaction, leaving no arbitral disputes to be referred to an arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996 (Arbitration Act/Act).

It was argued that the settlement of the insurance claim was a result of fraud, coercion and undue influence and the veracity of these submissions must be adjudicated by an arbitral tribunal. Notwithstanding the limitations imposed by section 11(6A) of the Act, the Supreme Court held that the applicant failed to establish even a prima-facie case on the merits of its allegations and reversed the Delhi High Court’s decision allowing the application for appointment of an arbitrator.

Factual Background

The Respondent had purchased an insurance policy from the Appellant (Insurance Company). Subsequent to an incident of fire in its factory, the Respondent made insurance claims before the Insurance Company. The latter obtained a fact-finding report from a surveyor to assess the Respondent’s claims and accordingly addressed an email proposing a full and final settlement of the Respondent’s claims along with the supporting details of the computation of amounts to be paid thereunder. The Respondent accepted the aforesaid proposal in terms of the Insurance Company’s email.

After almost 11 weeks of the receipt of the amount under full and final settlement of the insurance claim, the Respondent alleged that the Insurance Company coerced and forced the Respondent to sign on the dotted lines of a pre-signed discharge voucher. Accordingly, the Respondent filed a Section 11 application before the Delhi High Court seeking appointment of an arbitrator based on the arbitration clause contained in the insurance policy.

Given that the existence of an arbitration agreement was not disputed, the High Court relied on Section 11(6A) of the Act to observe that an arbitrator must be appointed. It was also observed that it was for the arbitrator, not the court, to decide whether there was a valid discharge of contract or the acceptance of payment was under fraud, undue influence or coercion.

Supreme Court’s ruling

On appeal, the Supreme Court discussed two main questions. First, whether the settlement of insurance claim lead to discharge of the contract, and consequently of the arbitration clause. Second, whether the signing of discharge voucher was voluntary or under fraud, coercion or undue influence.

While answering the first question, the Court clarified that the settlement of a claim leading to discharge cannot by itself act as a bar to appoint an arbitrator. This has to be determined on a case-by-case basis. This applies even when the validity of the discharge is challenged by the claimant on the ground of fraud, coercion or undue influence. The Court placed reliance on its previous judgement in National Insurance Company Limited v. Boghara Polyfab Private Limited (2008) [Boghara Polyfab], where the court observed as follows:

“26. When we refer to a discharge of contract by an agreement signed by both the parties or by execution of a full and final discharge voucher/receipt by one of the parties, we refer to an agreement or discharge voucher which is validly and voluntarily executed. If the party which has executed the discharge agreement or discharge voucher, alleges that the execution of such discharge agreement or voucher was on account of fraud/coercion/undue influence practiced by the other party and is able to establish the same, then obviously the discharge of the contract by such agreement/voucher is rendered void and cannot be acted upon. Consequently, any dispute raised by such party would be arbitrable.

While answering the second question, the Supreme Court relied on its previous decisions in Boghara Polyfab and New India Assurance  v. Genus Power Infrastructure (2014) to observe that a mere plea of fraud, coercion or undue influence in itself is not enough to negate a discharge; the alleging party must establish a prima-facie case by placing satisfactory material on record before the Chief Justice or his designate. As such, the Chief Justice or his designate can look into this aspect to determine whether a genuine dispute before exercising the power under Section 11(6).

The Respondent relied on the Supreme Court’s landmark decision in Duro Felguera v. Gangavaram Port Limited (2017) to argue that Section 11(6A) strictly limits the court’s power to examine the mere existence of an arbitration agreement. The Supreme Court in the present case observed that the exposition in Duro Fulguera is ‘a general observation about the effect of the amended provisions’ and means that ‘preliminary disputes are to be examined by the arbitrator and are not for the Court to be examined within the limited scope available for appointment of arbitrator under Section 11(6)’. In the same breath, the Supreme Court went on to observe that the appointment of an arbitrator is a ‘judicial function’ as opposed to a mere administrative function.

The Supreme Court held that the Respondent had failed to provide any prima facie evidence on record to support its claim of fraud, coercion or undue influence. Accordingly, the Court was satisfied that the arbitration clause no longer existed and the Respondent’s claim had been settled with accord and satisfaction – leaving no arbitral dispute subsisting under the insurance policy.

Comment

It is important to analyze the extent to which the court can deviate from a strict interpretation of the term “confine” provided under  Section 11(6A). Pertinently, section 11(6A) of the Act reads as follows:

(6A) The Supreme Court or, as the case may be, the High Court, while considering any application under sub-section (4) or sub-section (5) or sub-section (6), shall, notwithstanding any judgment, decree or order of any Court, confine to the examination of the existence of an arbitration agreement.

Is it permissible for a section 11 court, for certain reasons, to traverse outside its limited mandate to determine the mere existence of an arbitration agreement?

The Law Commission of India in its 246th Report examined the scope and nature of permissible pre-arbitral judicial intervention, while appointing an arbitrator under Section 11 of the Act. While recommending the insertion of section 11(6A), the Law Commission recommended that ‘the judicial authority shall not refer the parties to arbitration only if it finds that there does not exist an arbitration agreement or that it is null and void. If the judicial authority is of the opinion that prima facie the arbitration agreement exists, then it shall refer the dispute to arbitration, and leave the existence of the arbitration agreement to be finally determined by the arbitral tribunal.

Therefore, the Law Commission clearly intended to limit the scope of judicial intervention in the process of appointing an arbitrator under Section 11(6). Effectively, this should mean that the Court will not have power to decide a variety of issues, including preliminary questions regarding the existence of an arbitration clause, while appointing an arbitrator.

In the present case, however, the Supreme Court found that a section 11 court is entitled to make a prima-facie determination of the merits when the underlying contract is claimed to be discharged by accord and satisfaction. Curiously, the key judgments relied upon by the Supreme Court, ie Boghara Polyfab and New India, were decided by prior to the enactment of the 2015 amendments.

Section 11(6A) seeks to confine the scope of judicial intervention to determining the existence the arbitration agreement. In United Insurance – where the existence of an arbitration clause remained undisputed – the Court broadened its scope to conduct a prima facie examination on the validity of the parties’ discharge. If one of the parties claim that the discharge of contract was obtained by fraud and the underlying contract includes an arbitration clause, who should decide validity of the discharge?

In concurrence with the Delhi High Court’s finding in the present case, it is submitted that it is well within the jurisdiction of an arbitrator to decide the aforesaid question. As such, given the undisputed existence of an arbitration agreement, a section 11 court should ideally appoint an arbitrator notwithstanding a seemingly clear discharge of the contract. In addition to the clear mandate of section 11(6A), an arbitral reference may enable parties to lead evidence on the validity of any purported discharge before the arbitral tribunal. This is something a Section 11 court (high court or supreme court) cannot, and most likely will not, do. For this reason as well, the validity of a discharge may be best left to the mandate of an arbitral tribunal.

Based on the Supreme Court’s recent decision in Gareware Wall Ropes v Coastal Marine (2019), critics may argue that an arbitration agreement must not simply exist on paper, but also in the eyes of the law. As such, one may argue that an arbitration agreement in a discharged contract cannot exist under law. However, this would not be correct since the Supreme Court has maintained its position – even in United Insurance – that an alleged discharge of the main contract does not necessarily lead to a discharge of the arbitration agreement.

Given the recent inconsistency in the judicial interpretation of Sections 11 and 11(6A), perhaps it would be beneficial if a larger bench of the Supreme Court settles the precise extent of judicial intervention permitted in an application under Section 11.

–  Manasi M. Kalvit and Ritvik M. Kulkarni

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s