Whether a dispute raised by an Insured after giving a Full and Final Discharge Voucher to the Insurer can be referred to Arbitration – Ananya Pratap Singh

Supreme Court of India:  Whether a dispute raised by an Insured after giving a Full and Final Discharge Voucher to the Insurer can be referred to Arbitration

In Arabian Exports Private Ltd. v. National Insurance Company Ltd. 2025 INSC 630, the Supreme Court decided the issue of whether a dispute raised by an Insured after giving a full and final Discharge Voucher to the Insurer can be referred to Arbitration. In deciding this issue, the court examined the concept of discharge of insurance claim by accord and satisfaction of the insured and what are consequences if an insured, after receiving partial claims from insurer, invokes arbitration for balance amount of claim inter alia contending that the signing of discharge voucher was vitiated by fraud, coercion and duress.

Factual Matrix

Appellant, an exporter of meat company in India, purchased a Standard Fire and Special Perils Policy from the Respondent insurance company insuring its meat processing and cold storage unit. Appellant also took a Fire Declaration Policy insuring all its stock-in-trade and finished products stored in its cold storage plant.

On the date of accident, due to unprecedented and very heavy rainfall, Appellant’s factory premises was completely flooded and got submerged under water for several hours. Since all modes of communications were hampered, the incident went unnoticed for next 02 days. However, the Appellant incurred severe loss both to its plant and machinery lying in its cold storage unit as well as stock lying in the plant.

Appellant intimated the loss to the Respondent after 03 days of incident and requested for appointment of Surveyor. Appellant claimed damages under both policies. Respondent’s appointed surveyor acknowledged loss suffered by the Appellant. But the surveyor report was not provided to the Appellant.

Respondent failed to make payments to the Appellant. After substantial delay of about 03 years, Respondent asked Appellant to sign an undated standard settlement discharge voucher for a substantially lower amount. Due to financial constraints, the Respondent signed the discharge voucher and received the amount mentioned therein pertinently only in respect of the Fire Declaration Policy.

The two insurance policies had a similarly worded arbitration clause. Appellant while reserving its right to claim the difference of amount it claimed versus amount it received, requested Respondent to pay the balance. Respondent refused to make payments and therefore the Appellant invoked arbitration while nominating its arbitrator. Respondent even refuse to refer the disputes to arbitration. This resulted in Appellant filing an application under Section 11 of the Indian Arbitration & Conciliation Act, 1996 (‘Arbitration Act’) before the High Court for appointment of arbitrator.

The Section 11 court observed that since the payments made by the Respondent were accepted by the Appellant under the discharge voucher as full and final settlement without any demur after encashing the settlement cheque and the dispute was invoked thereafter, no arbitrator could be appointed by the Court. The decision of the High Court was challenged before the Supreme Court in the present proceedings.

Parties Contentions

Before the Supreme Court, the Appellant contended that since the Appellant had accepted the amounts under the discharge voucher due to financial duress and was under compulsion, the settlement by an undated discharge voucher cannot constitute accord and satisfaction on the part of Appellant. According to Appellant, this was because the claim was pending for long and the creditors were after Appellant for payment.

Further, as per Appellant, in any event the discharge voucher was signed only in respect of Fire Declaration Policy and not Standard Fire and Special Perils Policy. Appellant also relied on a circulars issued by insurance regulatory authority of India i.e., Insurance Regulatory and Development Authority of India (‘IRDA’) clarifying that execution of vouchers as full and final discharge did not foreclose the rights of the policy holders to seek higher compensation before any judicial fora or any other fora established by law.

Per contra, the Respondent argued that the present case is squarely covered by the decision of the Supreme Court of India in Nathani Steels Ltd. Vs. Associated Constructions (1995) Supp (3) SCC 324 wherein the Court inter alia held that once a dispute or difference between the parties arising out of a contract is amicably settled by the parties, unless such settlement is set aside in proper proceedings, it is not open to one of the parties to the settlement to further seek arbitration. Further as per Respondent, there has been no pleadings of coercion or duress by the Appellant and therefore the question of coercion or duress vitiating accord and satisfaction does not arise. Furthermore according to Respondent, there are no documents on record filed by the Appellant to prove that Appellant was pressurised into settlement.

As far as the argument of discharge voucher being signed only for Fire Declaration Policy is concerned, the Respondent contended that the discharge voucher did not contain any statement to the effect that the settlement was only for one policy and therefore, the settlement was effective for both policies.

Observations of the Supreme Court

The Supreme Court observed as under:-

• The view taken by the Supreme Court in Nathani (supra)was taken in the context of an amicable settlement arrived at between the parties in the presence of a third party and reduced to writing.
• In Nathani (supra), the Court held that if there is an amicable settlement of the dispute between the parties unless such settlement is set aside in proper proceedings, it would not be open to one of the parties to invoke arbitration. Therefore, the crucial expression here is ‘amicable settlement’.
• The decision in Nathani (supra) was explained by the Supreme Court in National Insurance Company Limited Vs. Boghara Polyfab Private Limited (2009) 1 SCC 267 wherein a two-Judge Bench noted that in Nathani (supra), the Court on examination of the facts of that case was satisfied that there were negotiations leading to voluntary settlement between the parties in all pending disputes. Thus the contract was discharged by ‘accord and satisfaction’.
• The Bench categorized such claims under two categories. In the first category there would be cases where there is bilateral negotiated settlement of pending disputes, such settlement having been reduced to writing either in the presence of witnesses or otherwise. Nathani(supra) falls in this category.
• In the second category of cases, there would be ‘no dues/claims certificate’ or ‘full and final settlement discharge vouchers’ insisted upon and taken, either in a printed format or otherwise, as a condition precedent for release of the admitted dues. In the latter group of cases, the disputes are arbitrable.
• Mere execution of a full and final settlement receipt or a discharge voucher cannot be a bar to arbitration even when validity thereof is challenged by the claimant on the ground of fraud, coercion or undue influence.
• The Bench further distinguished Nathani (supra) by clarifying that the observations made that unless the settlement is set aside in proper proceedings, it would not be open to a party to the settlement to invoke  arbitration was with reference to a plea of ‘mistake’ taken by the claimant and not with reference to allegations of fraud, undue influence or coercion.
• Further, the said decision was rendered in the context of the provisions of the Arbitration Act, 1940. The perspective of the Arbitration and Conciliation Act 1996 is different from the Arbitration Act, 1940.
• In any case, as per the settled position of law, a court while deciding an application seeking appointment of arbitrator should only consider the aspect of whether there exist an arbitration agreement between the parties – nothing more, nothing less. (Duro Felguera, S.A. Vs. Gangavaram Port Ltd (2017) 9 SCC 729
• Further, in Vidya Drolia vs. Durga Trading Corporation (2021) 2 SCC 1, the Court inter alia held that subject matter qua arbitrability cannot be decided at the stage appointment of arbitrator unless it is a clear case of dead wood. At that stage, the court has to appoint an arbitrator unless a party has established a prima facie case of nonexistence of a valid arbitration agreement. The court should refer a matter if the validity of the arbitration agreement cannot be determined on a prima facie basis. The rule should be: when in doubt, do refer.
• In Oriental Insurance Company Ltd. Vs. Dicitex Furnishing Ltd. (2020) 4 SCC 621, while deciding a similar case as the one at hand, the Supreme Court inter alia observed that at the stage of appointment of arbitrator, the court is required to ensure that an arbitrable dispute exist; it has to be prima facie convinced about the genuineness or credibility of the plea of coercion; it cannot be too particular about the nature of the plea which naturally has to be made and established in the arbitral proceeding. If the courts were to take a contrary approach, there would be the danger of denying a forum to the claimant altogether. Thus, the Court upheld the concept of economic duress and held that notwithstanding signing of discharge voucher and accepting the amount offered, the dispute is still arbitrable and pleading in the application seeking appointment of arbitrator cannot be conclusive whether there is fraud, coercion or undue influence or otherwise.
• In SBI General Insurance Co. Ltd. Vs. Krish Spinning 2024 SCC OnLine SC 1754, the Supreme Court held that even if the contracting parties in pursuance to a settlement agree to discharge each other of any obligations arising under the contract it is does not ipso facto mean that the arbitration agreement too would come to an end, unless the parties expressly agree to do the same.
• In SBI (supra), the Court also held that any dispute pertaining to the full and final settlement itself by necessary implication being a dispute arising out of or in relation to or under the substantive contract would not be precluded from reference to arbitration as the arbitration agreement contained in the original contract continues to be in existence even after the parties have discharged the original contract by ‘accord and satisfaction’.

Conclusion

In view therefore, the Supreme Court observed that the doctrine of Kompetenz-Kompetenz is now firmly embedded in the arbitration jurisprudence in India. The Court further noted that this doctrine is based on the principle that an arbitral tribunal is competent to rule on its own jurisdiction including on the issue of existence or validity of an arbitration agreement. In Court’s view, the object is to minimize judicial intervention which is an acknowledgment of the concept of party autonomy.

Applying the above position of law on the facts of the case, the Supreme Court held that High Court was wrong in rejecting the application seeking appointment of arbitrator. As per Supreme Court, the question as to whether the Appellant was compelled to sign the standardized voucher/advance receipt forwarded to it by the Respondent out of economic duress and whether notwithstanding receipt of partial amount, the claim to arbitration is sustainable or not are clearly within the domain of the arbitral tribunal. In the interest of time, the Court itself appointed an arbitrator to resolve the disputes between the parties through arbitration.