Holding

The arbitration agreement survives the discharge of the contract, and the dispute over the settlement is arbitrable; the court must only ascertain the existence of the arbitration agreement under Section 11(6) and refer the matter to arbitration.

Summary

SBI General Insurance issued a fire insurance policy to Krish Spinning, which settled the first fire claim by a discharge voucher and payment of Rs 84,19,579. Krish Spinning later disputed the quantum of the settlement, alleging coercion, and invoked the arbitration clause in the policy by filing a Section 11(6) application for appointment of an arbitrator. The insurer contended that the full and final settlement barred arbitration and that the arbitration agreement was extinguished. The Supreme Court held that, under the doctrine of separability, the arbitration agreement survives the discharge of the substantive contract and any dispute over the settlement itself is arbitrable. The Court clarified that the referral court’s role under Section 11(6) (and Section 11(6‑A)) is limited to a prima‑facie check of the existence of an arbitration agreement, not a detailed inquiry into the merits of the accord and satisfaction claim. Accordingly, the appointment of Justice K.A. Puj as arbitrator was upheld and the stay on arbitration was vacated.

Issues considered

Whether the execution of a discharge voucher constituting a full and final settlement bars the invocation of arbitration.
What is the scope and standard of judicial scrutiny applicable to a Section 11(6) application when the defendant raises a plea of accord and satisfaction.
How does the decision in In Re: Interplay Between Arbitration Agreements and the Indian Stamp Act affect the powers of the referral court under Section 11 of the Arbitration and Conciliation Act, 1996.

Legislation cited

Arbitration and Conciliation Act, 1996s. 11, s. 11(6), s. 11(6-A), s. 16, s. 34, s. 37, s. 5, s. 8, s. 9
Indian Contract Act, 1872s. 63
Indian Stamp Act, 1899
Insurance Act, 1938s. 64UM
Limitation Act, 1963

Subjects

Execution of a discharge voucherFull and final settlementInvocation of arbitrationJudicial scrutinyApplication under Section 11(6)Plea of accord and satisfactionEffect of In Re: Interplay decisionPowers of referral courtAppointment of arbitratorContract dischargePresumption of separabilityDoctrine of separabilityArbitral autonomyJudicial non-interferenceNegative competence-competenceArbitration clauseAdmission of liabilityQuantum of liabilityDeadwood claim

Judgment

[2024] 7 S.C.R. 840 : 2024 INSC 532

SBI General Insurance Co. Ltd.
v.
Krish Spinning
(Civil Appeal No. 7821 of 2024)
18 July 2024
[Dr Dhananjaya Y. Chandrachud, CJI, J.B. Pardiwala*
and Manoj Misra, JJ.]

Issue for Consideration
Issue arose whether the execution of a discharge voucher towards
the full and final settlement between the parties would operate as
a bar to invoke arbitration; as regards the scope and standard of
judicial scrutiny that an application u/s. 11(6) of the Arbitration and
Conciliation Act 1996 can be subjected to when a plea of “accord
and satisfaction” is taken by the defendant; and as regards the effect
of the decision of this Court in In Re: Interplay Between Arbitration
Agreements under the Arbitration and Conciliation Act 1996 and
the Stamp Act 1899 on the scope of powers of the referral court
u/s. 11 of the Act, 1996.

Headnotes†
Arbitration and Conciliation Act, 1996 – s. 11 – Appointment of
an arbitrator – Execution of a discharge voucher towards the
full and final settlement between the parties, if would operate
as a bar to invoke arbitration – Arbitration agreement contained
in a substantive contract, if survives even after the underlying
contract is discharged by “accord and satisfaction” – Scope
and standard of judicial scrutiny that an application u/s. 11(6)
can be subjected to when a plea of “accord and satisfaction”
is taken by the defendant:
Held: Although ordinarily no arbitrable disputes may subsist
after execution of a full and final settlement, yet 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

* Author
[2024] 7 S.C.R. 841

SBI General Insurance Co. Ltd. v. Krish Spinning

satisfaction” – Once the full and final settlement of the original
contract itself becomes a matter of dispute and disagreement
between the parties, then such a dispute can be categorised
as one arising “in relation to” or “in connection with” or “upon”
the original contract which can be referred to arbitration in
accordance with the arbitration clause contained in the original
contract, notwithstanding the plea that there was a full and final
settlement between the parties – Where the parties are not
ad idem over accepting the execution of the no-claim certificate
or the discharge voucher, such disputed discharge voucher may
itself give rise to an arbitrable dispute – Thus, the position is
that ordinarily, the Court while acting in exercise of its powers
u/s. 11, will only look into the existence of the arbitration
agreement and would refuse arbitration only as a demurrer
when the claims are ex-facie frivolous and non-arbitrable – On
facts, existence of the arbitration agreement as contained in the
insurance policy not disputed by the appellant-insurer – Dispute
raised by the claimant being one of quantum and not of liability,
prima facie, falls within the scope of the arbitration agreement –
Dispute regarding “accord and satisfaction” as raised by the
appellant does not pertain to the existence of the arbitration
agreement, and can be adjudicated upon by the arbitral tribunal as
a preliminary issue – Appointment of the former Judge of the High
Court as an arbitrator to resolve the disputes between the parties
upheld. [Paras 59, 93, 135, 136]
Arbitration and Conciliation Act, 1996 – Arbitration agreement
contained in a substantive contract, if survives even after
the underlying contract is discharged by “accord and
satisfaction”:
Held: Arbitration for the purpose of resolving any dispute pertaining
to any claim which has been “fully and finally settled” between
the parties can only be invoked if the arbitration agreement
survives even after the discharge of the substantive contract –
Arbitration agreement, by virtue of the presumption of separability,
survives the principal contract in which it was contained – Even
if the contracting parties, in pursuance of a settlement, agree to
discharge each other of any obligations arising under the contract,
this does not ipso facto mean that the arbitration agreement too
would come to an end, unless the parties expressly agree to do
the same – Intention of the parties in discharging a contract by
842 [2024] 7 S.C.R.

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“accord and satisfaction” is to relieve each other of the existing
or any new obligations under the contract – Such a discharge of
obligations under the substantive contract cannot be construed to
mean that the parties also intended to relieve each other of their
obligation to settle any dispute pertaining to the original contract
through arbitration – Although ordinarily no arbitrable disputes
may subsist after execution of a full and final settlement, yet
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”. [Paras 48, 49, 51, 53, 54]
Arbitration and Conciliation Act 1996 – s. 11 – Powers of
the referral court under, as regards the appointment of an
arbitrator – Scope of – Effect of the decision in In Re: Interplay
Between Arbitration Agreements under the Arbitration and
Conciliation Act 1996 and the Indian Stamp Act 1899:
Held: In view of the observations made by this Court in In Re:
Interplay’s case that the High Court and the Supreme Court at
the stage of appointment of arbitrator shall examine the existence
of a prima facie arbitration agreement and not any other issues,
it is clear that the scope of enquiry at the stage of appointment
of arbitrator is limited to the scrutiny of prima facie existence of
the arbitration agreement, and nothing else – Thus, it is difficult
to hold that the observations made in Vidya Drolia’s case and
adopted in NTPC v. SPML’s case that the jurisdiction of the referral
court when dealing with the issue of “accord and satisfaction” u/s.
11 extends to weeding out ex-facie non-arbitrable and frivolous
disputes would continue to apply despite the subsequent decision
in In Re: Interplay’s case. [Paras 113-114]
Arbitration and Conciliation Act 1996 – s. 11 – Powers of
the referral court under, as regards the appointment of an
arbitrator – Scope of – Effect of the decision in In Re: Interplay
Between Arbitration Agreements under the Arbitration and
Conciliation Act 1996 and the Indian Stamp Act 1899 – Principle
of arbitral autonomy-judicial non-interference, principle of
negative competence-competence, and judicial interference
under the Act, 1996, explained. [Paras 96-112]
[2024] 7 S.C.R. 843

SBI General Insurance Co. Ltd. v. Krish Spinning

Contract – Discharge of – Discharge by performance –
Discharge by “accord and satisfaction” or by “full and final
settlement” – Explanation of:
Held: Contract between parties can come to an end by the
performance thereof by both the parties, that is, by the fulfilment
of all the obligations in terms of the original contract – This is
discharge by performance – Alternatively, the contract may also
be discharged by substitution of certain new obligations in place of
the obligations contained in the original contract, and subsequent
performance of the substituted obligations – Substituted obligations
are referred to as ‘accord’ and the discharge of the substituted
obligations is referred to as ‘satisfaction’ – This is discharge by
“accord and satisfaction” or by “full and final settlement” in common
parlance – Written confirmation of discharge by “accord and
satisfaction” can also be in the form of a full and final discharge
voucher or a No-Dues or a No Claims Certificate issued by one
of the parties acknowledging that there are no outstanding claims
and that such a party has received the full and final payment to
its satisfaction – Concept of discharge of a contract by “accord
and satisfaction” is embodied in s. 63 of the Contract Act, 1872,
which provides that the promisee may, inter alia, accept any
substituted obligation in place of the original promise made to
him, and such acceptance on the part of the promisee would
amount to the discharge of the contract – Once a contract has
been fully performed, it can be said to have been discharged
by performance – Once the contract has been discharged by
performance, neither any right to seek performance, nor any
obligation to perform remains under it – However, whether there
has been a discharge of contract or not is a mixed question of law
and fact, and if any dispute arises as to whether a contract has
been discharged or not, such a dispute is arbitrable as per the
mechanism prescribed under the arbitration agreement contained
in the underlying contract. [Paras 40-42, 46, 47]
Arbitration and Conciliation Act, 1996 – s. 16 – Presumption
of separability – Doctrine of separability:
Held: Arbitration agreement, by virtue of the presumption of
separability, survives the principal contract in which it was
contained – s. 16(1) which is based on Art.16 of the UNCITRAL
Model Law on International Commercial Arbitration, 1985 embodies
the presumption of separability – Two aspects to the doctrine of
844 [2024] 7 S.C.R.

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separability as contained in the 1996 Act are that an arbitration
clause forming part of a contract is treated as an agreement
independent of the other terms of the contract; and decision by
the arbitral tribunal declaring the contract as null and void does
not, ipso facto, make the arbitration clause invalid – Fundamental
premise governing the doctrine of separability is that the arbitration
agreement is incorporated by the parties to a contract with the
mutual intention to settle any disputes that may arise under or in
respect of or with regard to the underlying substantive contract,
and thus by its inherent nature is independent of the substantive
contract. [Paras 49-51]
Arbitration and Conciliation Act 1996 – s. 11(6) – Appointment
of an arbitrator – Case of M/s Arif Azim Co. Ltd. v. M/s Aptech
Ltd. on applicability of Limitation Act, 1963 to an application
for appointment of arbitrator u/s. 11(6), and the power of the
court to decline to make a reference u/s. 11 where the claims
are ex-facie and hopelessly time barred – Clarification:
Held: It is clarified that while determining the issue of limitation
in exercise of the powers u/s.11(6) the referral court should limit
its enquiry to examining whether s.11(6) application has been
filed within the period of limitation of three years or not – Date
of commencement of limitation period for this purpose shall have
to be construed as per the decision in Arif Azim’s case – It is
further clarified that the referral courts, at the stage of deciding
an application for appointment of arbitrator, must not conduct an
intricate evidentiary enquiry into the question whether the claims
raised by the applicant are time barred and should leave that
question for determination by the arbitrator – Such approach gives
true meaning to the legislative intention underlying s.11(6-A), and
also to the view taken in In Re: Interplay’s case – Observations
made in Arif Azim’s case are accordingly clarified – Effect of the
said clarification is only to streamline the position of law, so as to
bring it in conformity with the evolving principles of modern-day
arbitration, and to avoid the possibility of any conflict that may
arise in future. [Paras 133-134]
Arbitration and Conciliation Act; 1996 – s. 11 – Petition for
appointment of an arbitrator – Preliminary objection that
the arbitration clause as contained in the insurance policy
not attracted as no admission of liability on the part of the
appellant, whereas the said arbitration clause envisages
[2024] 7 S.C.R. 845

SBI General Insurance Co. Ltd. v. Krish Spinning

reference to arbitration only in cases where liability is admitted,
and there is a dispute as regards the quantum of liability:
Held: No merit in the said plea – Appellant-insurer admitted its
liability with respect to the first claim and had even disbursed
certain amount in pursuance of the signing of the advance
discharge voucher by the respondent-insured – Thus, a clear case
of admission of liability by the appellant – However, the quantum
of liability is in dispute as the amount claimed by the respondent
is at variance with the amount admitted by the appellant – Thus,
the dispute being one of quantum and not of liability, falls within
the ambit of the conditional arbitration clause as contained in the
insurance policy. [Paras 36, 37]
Arbitration and Conciliation Act, 1996 – s. 11 – Petition for
appointment of an arbitrator – Plea that the claim sought to
be referred to arbitration is a deadwood claim and thus, the
application for appointment of arbitrator ought to have been
rejected:
Held: Notice invoking arbitration was sent by the respondent-
insured to the appellant-insurer on 02.03.2020 and the petition
seeking appointment of arbitrator u/s. 11(6) was filed before the
High Court on 25.10.2021 – Thus, the arbitration petition was filed
before the High Court much prior to the expiry of the limitation
period of three years – Further, the notice invoking arbitration was
also sent by the respondent well within time from the date of the
accrual of the cause of action – Thus, it cannot, be said that the
claim is a deadwood claim or the arbitration application before the
High Court was time-barred. [Para 38]

Case Law Cited
In Re: Interplay Between Arbitration Agreements under the
Arbitration and Conciliation Act 1996 and the Indian Stamp Act
1899 [2023] 15 SCR 1081 : 2023 INSC 1066 – followed.
M/s Arif Azim Co. Ltd. v. M/s Aptech Ltd. [2024] 3 SCR 73 : 2024
INSC 155 – clarified.
Oriental Insurance Company Ltd. v. Dicitex Furnishing Ltd. [2019]
14 SCR 389 : (2020) 4 SCC 621; National Insurance Co. Ltd. v.
Boghara Polyfab [2008] 13 SCR 638 : (2009)1 SCC 267; New
India Assurance Co. Ltd. v. Genus Power Infrastructure Ltd. [2014]
12 SCR 360 : (2015) 2 SCC 424; Payana Reena Saminathan v.
846 [2024] 7 S.C.R.

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Pana Lana Palaniappa (1913-14) 41 IA 142; National Agricultural
Coop. Marketing Federation India Ltd. v. Gains Trading Ltd. (2007)
5 SCC 692; R.L. Kalathia and Company v. State of Gujarat [2011]
1 SCR 391 : (2011) 2 SCC 400; Damodar Valley Corporation v.
K.K. Kar [1974] 2 SCR 240 : (1974) 1 SCC 141; Bharat Heavy
Electricals Ltd. v. Amar Nath Bhan Prakash (1982) 1 SCC 625;
P.K. Ramaiah and Company v. Chairman and Managing Director,
National Thermal Power Corporation (1994) Supp 3 SCC 126;
Nathani Steels Ltd. v. Associated Constructions (1995) Supp 3
SCC 324; Jayesh Engineering Works v. New India Assurance
Co. Ltd. (2000) 10 SCC 178; Konkan Railway Corpn. Ltd. v.
Rani Construction (P) Ltd. [2002] 1 SCR 728 : (2002) 2 SCC
388; SBP & Co. v. Patel Engg. Ltd. [2005] Supp. 4 SCR 688 :
(2005) 8 SCC 618; Union of India v. Master Construction Co.
[2011] 5 SCR 853 : (2011) 12 SCC 349; Duro Felguera, S.A. v.
Gangavaram Port Ltd. [2017] 10 SCR 285 : (2017) 9 SCC 729;
United India Insurance Co. Ltd. v. Antique Art Exports Pvt. Ltd.
[2019] 5 SCR 521 : (2019) 5 SCC 362; Mayavati Trading Private
Limited v. Pradyut Deb Burman [2019] 12 SCR 123 : (2019) 8
SCC 714; Uttarakhand Purv Sainik Kalyan Nigam Ltd. v. Northern
Coal Field Ltd. [2019] 14 SCR 999 : (2020) 2 SCC 455; Union
of India v. Pradeep Vinod Construction Company [2019] 17 SCR
64 : 2019 INSC 1241; DLF Home Developers Ltd. v. Rajapura
Homes (P) Ltd. [2021] 12 SCR 1 : (2021) 16 SCC 743; BSNL
v. Nortel Networks (India) (P) Ltd. [2021] 2 SCR 644 : (2021) 5
SCC 738; Indian Oil Corporation Limited v. NCC Limited [2022]
13 SCR 660 : (2023) 2 SCC 539; NTPC Ltd. v. SPML Infra Ltd.
[2023] 2 SCR 846 : (2023) SCC OnLine SC 389; Vidya Drolia &
Ors. v. Durga Trading Corporation [2019] 3 SCR 465 : (2021) 2
SCC 1 – referred to.
Heyman v. Darwins Ltd. [1942] AC 356; Hayter v. Nelson [1990]
2 Lloyd’s Rep. 265, 272; Colmar Impex v. PAZ, 1968 Rev.
Arb. 149, 155 (Colmar Cour d’Appeal); Prima Paint Corp.
v. Flood & Conklin Manufacturing, 388 U.S. 395 (U.S. S.Ct.
1967); Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S.
440 (U.S. S.Ct. 2006); Howsam v. Dean Witter Reynolds, Inc.,
537 U.S. 79, 84 (U.S. S.Ct. 2002); PacifiCare Health Systems,
Inc. v. Book, 538, U.S. 401 (U.S. S. Ct. 2003); Dillon v. BMO
Harris Bank, NA, 856 F.3d 330, 333 (4th Cir. 2017); Escobar v.
Celebration Cruise Operator, Inc., 805 F.3d 1279, 1288-89 (11th
Cir. 2015) – referred to.
[2024] 7 S.C.R. 847

SBI General Insurance Co. Ltd. v. Krish Spinning

Books and Periodicals Cited
Gary B. Born, Internation Commercial Arbitration, 3rd Ed. (2021),
pp. 685, 696, 1251 – referred to.

List of Acts
Arbitration and Conciliation Act, 1996; Arbitration and Conciliation
(Amendment) Act, 2015; Arbitration Act, 1940; Limitation Act,
1963; Contract Act, 1872; UNCITRAL Model Law on International
Commercial Arbitration, 1985.

List of Keywords
Execution of a discharge voucher; Full and final settlement between
the parties; Invocation of arbitration; Judicial scrutiny; Application u/s.
11(6) of the Arbitration and Conciliation Act 1996; Plea of “accord
and satisfaction”; Effect of the decision of this Court in In Re:
Interplay Between Arbitration Agreements under the Arbitration and
Conciliation Act 1996 and the Stamp Act 1899; Powers of the referral
court u/s. 11 of the Act, 1996; Appointment of an arbitrator; Contract;
Discharge by performance; Discharge by “accord and satisfaction”
or by “full and final settlement”; Substantive contract; Presumption of
separability; Doctrine of separability; Principal of arbitral autonomy;
Principle of judicial non-interference; Principle of negative competence-
competence; Judicial interference under the Act, 1996; Arbitration
clause; Admission of liability; Quantum of liability; Deadwood claim.

Case Arising From
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 7821 of 2024
From the Judgment and Order dated 01.12.2023 of the High Court
of Gujarat at Ahmedabad in PUAA No. 209 of 2021
With
Civil Appeal No. 7822 of 2024
Appearances for Parties
Saurav Agrawal, Madhav Misra, Ketan Paul, Arjun Bose, Ms. Shubhi
Pandey, Ms. Astha Nishad, Rajat Abhale, Rajat Chhabra, Shivam
Chaudhary, Ms. Chakshu Purohit, Advs. for the Appellant.
Rakesh Malhotra, Bharat Malhotra, Kushal Malhotra, Ms. Savita
Singh, Advs. for the Respondent.
848 [2024] 7 S.C.R.

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Judgment / Order of the Supreme Court
Judgment
J. B. Pardiwala, J.:
For the convenience of exposition, this judgment is divided into the
following parts: -
INDEX*

A. FACTUAL MATRIX.............................................................. 3
B. SUBMISSIONS ON BEHALF OF THE APPELLANT........ 14
C. SUBMISSIONS ON BEHALF OF THE RESPONDENT..... 16
D. ISSUES FOR DETERMINATION........................................ 18
E. ANALYSIS........................................................................... 19
i. Whether the execution of a discharge voucher
towards the full and final settlement between
the parties would operate as a bar to invoke
arbitration?.................................................................. 21
a. Whether the arbitration agreement contained in
a substantive contract survives even after the
underlying contract is discharged by “accord and
satisfaction”?........................................................... 25
ii. What is the scope and standard of judicial scrutiny
that an application under Section 11(6) of the Act,
1996 can be subjected to when a plea of “accord
and satisfaction” is taken by the defendant?............ 31
iii. What is the effect of the decision of this Court in
In Re: Interplay Between Arbitration Agreements
under the Arbitration and Conciliation Act 1996
and the Indian Stamp Act 1899 on the scope of
powers of the referral court under Section 11 of
the Act, 1996?.......................................................... 65
a. Arbitral Autonomy.................................................... 66
b. Negative Competence-Competence........................ 69
c. Judicial Interference under the Act, 1996............... 71
F. CONCLUSION 84

* Ed. Note: Pagination as per the original Judgment.
[2024] 7 S.C.R. 849

SBI General Insurance Co. Ltd. v. Krish Spinning

1. Leave granted.
2. Since the issues raised in both the captioned appeals are the same,
the subject-matter also being the same and the parties are also the
same, they were taken up analogously for hearing and are being
disposed of by this common judgment and order.
3. The SLP(C) No. 7220 of 2024 arises from the impugned judgment
and order dated 22.09.2023 passed by the High Court of Gujarat at
Ahmedabad in Arbitration Petition No. 209 of 2021 wherein the High
Court after assigning detailed reasons for allowing the application
filed by the respondent for the appointment of an arbitrator, directed
that the said application be listed before the appropriate bench in
accordance with the roster for the purpose of passing appropriate
order for appointment of arbitrator.
4. The SLP(C) No. 3792 of 2024 arises from the impugned judgment
and order dated 01.12.2023 passed by the High Court of Gujarat
at Ahmedabad in Arbitration Petition No. 209 of 2021 wherein
relying upon the judgment and order dated 22.09.2023 referred to
above passed by a co-ordinate bench in the self-same arbitration
application, the High Court allowed the application of the respondent
for the appointment of an arbitrator and thereby appointed Justice
K.A. Puj, former Judge of the High Court of Gujarat as an arbitrator
to resolve the disputes between the parties.
A. FACTUAL MATRIX
5. The appellant, SBI General Insurance Co. Ltd., is a Private Sector
General Insurance Company engaged in the business of providing
general insurance to its customers, having one of its offices at 1st
floor, Shukan Business Centre, Swastik Cross Road, C.G. Road,
Navrangpura, Ahmedabad.
6. The respondent, M/s Krish Spinning, is a partnership firm registered
under the provisions of the Indian Partnership Act, 1932, and is
engaged in the business of manufacturing and spinning of cotton
filaments at its factory premises situated at Survey No. 845, Ghodasar,
Nenpur, Taluka Memdabad.
7. The respondent obtained a standard fire and special perils (material
damage) insurance policy from the appellant on 31.03.2018 for a
850 [2024] 7 S.C.R.

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total sum insured of Rs 7,20,00,000/- with the period of insurance
being 31.03.2018 to 30.03.2019.
8. During the period of insurance cover, two incidents of fire took place
at the factory premises of the respondent, as a result of which the
respondent suffered loss of assets such as cotton stocks in the form
of raw materials, semi-finished goods, electrical installations, plant
and machinery.
9. The first incident of fire took place on 28.05.2018 in which the
respondent claims to have suffered a total loss amounting to Rs
1,76,19,967/-. The second incident of fire took place on 17.11.2018
wherein the respondent claims to have suffered a total loss amounting
to Rs 6,32,25,967/-. It is pertinent to observe that the present appeals
pertain only to the dispute arising from the settlement of claim relating
to the first incident of fire which took place on 28.05.2018.
10. After the first incident of fire that took place, M/s Paresh Shah &
Associates was appointed as the surveyor by the appellant company
on 29.05.2018 under Section 64UM of the Insurance Act, 1938. The
surveyor visited the factory premises of the respondent on a number
of occasions between 29.05.2018 and 29.08.2018 for the purpose
of assessing the extent of loss suffered by the respondent in the
fire accident, and accordingly prepared the final survey report dated
30.12.2018. In the said report, it was inter alia observed that the
fire could not have been caused by any external factor, and that it
could have been caused by spontaneous combustion due to humid
temperatures. The quantum of loss suffered by the respondent, after
accounting for deductions under multiple heads was assessed by
the surveyor at Rs 84,19,579/-.
11. Although the respondent had initially submitted its claim bill dated
27.07.2018 claiming Rs 1,76,19,967/- from the appellant, yet on
24.12.2018, a consent letter was issued by the respondent to the
surveyor accepting the assessment of loss made by the surveyor,
i.e., at Rs 84,19,579/-. In the consent letter, the respondent stated
that in view of the detailed discussion it had with the surveyor as
regards the volumetric calculation of the quantity of cotton bales said
to have been damaged, it was ready to accept the quantity to be
3,17,085.30 kg as against its initial claim of 4,41,111.58 kg.
[2024] 7 S.C.R. 851

SBI General Insurance Co. Ltd. v. Krish Spinning

12. After addressing the consent letter as aforesaid to the surveyor, the
respondent signed an advance discharge voucher dated 04.01.2019,
confirming the receipt of Rs 84,19,579/- from the appellant as the full
and final settlement towards their claim. The discharge voucher also
stated, inter alia, that the respondent was discharging the appellant
of the liability arising under its claim.
13. Subsequent to the signing of the advance discharge voucher, the
appellant released the claim settlement amount of Rs 84,08,957/-
on 31.01.2019.
14. Thereafter, in relation to the claim arising out of the second fire
incident, the appellant released a total amount of Rs 4,86,67,050/- in
three instalments. The third and final instalment of Rs 2,23,67,050/-
was released on 14.10.2019.
15. On 25.10.2019, that is eleven days after the receipt of the third and
final instalment in relation to the claim arising out of the second fire
incident, the respondent dropped one letter by hand delivery at the
office of the appellant. The respondent, inter alia, stated in the said
letter that a copy of the surveyor’s final assessment report was not
provided to it despite earlier requests. The respondent alleged that
it had to sign the final discharge voucher as it was badly in need of
money. The respondent further stated in its letter that it had been
unable to take any action due to non-receipt of the surveyor’s report.
The appellant refused to accept the letter and returned it back to the
respondent. The contents of the letter are reproduced hereinbelow:
“Date:- 25/10/2019
To,
The Manager,
SBI General Insurance Company,
Ahmedabad.
Subject: - Fire claim no.513768 for loss dated 28/05/2018.
Respected Sir,
In connection to the above, we have requested you to
provide the copy of the complete survey report along
with all enclosures thereof to enable us to understand
the calculations made by the surveyor to arrive at the
gross and net loss / damage. Please note that despite our
852 [2024] 7 S.C.R.

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request, we have not received the copy of survey report,
which shows your arrogant approach.
At this stage, we wish to inform you that you have taken our
consent on the amount assessed by the surveyor. We have
signed the working sent by you. During the said period,
there was another fire in our factory, in which the entire
stock, building, plant and machinery have been damaged
and we were badly in need of money, hence considering
you being a reputed insurance company, you must have
examined the assessment made by the surveyor and on
that trust bearing in mind, we have signed the working
sheet of assessments and voucher is also signed by us
in your office as you have informed that we would get the
payment immediately. But the same was also delayed
beyond reasonable time.
Now, since our auditors and bankers would like to know
the grounds considering which, the balance amount of our
claim is not considered by you / surveyor, you are once
again requested to provide the copy of survey report along
with all the documents submitted to you by the surveyor,
based on which, the claim has been settled and paid by you.
Since we have not received the copy of surveyor report,
we are unable to take further action. Once again, you are
requested to provide the copy of survey report along with
all enclosures thereof.
Please consider this letter as a notice.
Yours Faithfully
For KRISH SPINNING”
16. The respondent, on the same day, sent an email to the appellant
with a copy of the aforesaid letter calling upon the respondent to
take appropriate and necessary action. The contents of the said
email are reproduced hereinbelow:
“Sir,
This is in reference to the above subject, today at around
04:00 pm, or personnel visited your office to hand over a
letter requesting you to provide the complete survey report
[2024] 7 S.C.R. 853

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of our fire claim no.-513768 for loss dated 28/05/2018.
You, in turn returned the letter without accepting it, asking
to get the letter signed by our Mr. Ashwinkumar N. Kacha
and resubmit the same.
We wish to inform that Mr. Ashwinkumar Kacha is busy with
medical emergency, and we will submit the letter signed
by him, when he is relieved from the medical emergency.
Attached herewith, is the copy of the said letter for your
kind reference and necessary action.
Thanks & Regards”
17. The appellant replied to the aforesaid letter as well as the email vide
the letter dated 07.11.2019 refuting the allegations of the respondent
by stating that the assessment of loss was personally explained by
the surveyor to the representative of the respondent who in turn
had taken an informed decision of accepting the settlement amount
and signing the consent letter and the advance discharge voucher.
A copy of the survey report was also provided to the respondent
along with the reply letter. The contents of the said reply letter are
reproduced hereinbelow:
“SBI GENERAL INSURANCE
Dt: 07/11/2019
To
M/s Krish Spinning
Survey No. 845, Nenpur Haidarvas Road,
Ghodsar Gam,
Tal: Mehmdabad,
Gujarat-387110
(M): 9377071329
Dear Sir,
Re: Claim No. 513768 under Policy No. 9006820 Date
of Loss: 28/05/2018 Sub: Reply of Your letter dated
25/10/2019
We refer to your letter dated 25/10/2019, wherein you
have made reference of previous communications asking
for copy of survey report. We have reviewed our records
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and we regret to inform that we are not able to locate any
communication in our record through which a request was
made seeking copy of Survey Report of Surveyor M/s
Paresh Shah & Associates. Unless proved otherwise, we
are accordingly considering your letter dated 25/10/2019
as first communication requesting for copy of survey report.
We reiterate that loss assessment was personally explained
to Mr. Ashwin kacha from your office on 24th December
2018 at our Ahmedabad office and only after understanding
the assessment, Mr. Kacha had taken an informed decision
of signing the consent letter. This consent letter was also
followed with an advance discharge voucher which was
submitted by your office in response to our settlement offer.
Furthermore, the payment remittance for claim settlement
amount was carried out on 8th January 2019 which is
within 15 days from the date of submission of consent
letter and thus there was no delay beyond reasonable
time as alleged in your letter.
As requested in your referred letter, we are pleased to
attach copy of survey report that forms basis of claim
remittance. You may also note that loss assessment arrived
by surveyor in attached survey report is in line with loss
workings reviewed with Mr. Kacha.
Yours Sincerely
For SBI General Insurance Company Ltd.,
(Sd)
Authorized Signatory”
18. On 02.03.2020, the respondent issued a legal notice calling upon
the appellant to release the balance payment of the claim amount
arising out of the first fire incident. The respondent, in the said
notice, alleged, inter alia, that he had signed the consent letter and
the advance discharge voucher under the apprehension that if he
would not have signed the said documents, then the claim in relation
to the second fire incident, which was pending on the date of the
signing of the discharge voucher, would have been detrimentally
affected. Thus, the discharge voucher could be said to have been
signed under coercion, undue influence, and without free will and
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volition of the respondent. The respondent further stated that it had
sent the protest letter dated 25.10.2019 immediately after receiving
the final instalment in relation to the claim arising out of the second
fire incident. The respondent further stated that in the event of
the appellant’s denial or failure to pay the balance amount within
a period of 15 days, the legal notice should be treated as notice
invoking arbitration.
19. The appellant replied to the aforesaid legal notice on 16.03.2020
refuting the allegations made by the respondent, alleging them to
be mala fide and an after-thought. The appellant stated that the
discharge voucher signed by the respondent was unqualified and on
his own free will and volition. It was further stated by the appellant
that the amount being claimed by the respondent was not due in
the first place, thereby making the dispute not one of quantum but
one of liability, and therefore the arbitration agreement would not be
attracted to the dispute raised.
20. As the parties were unable to arrive at any amicable resolution of
the dispute, and as no arbitrator was nominated by the appellant
in response to the notice invoking arbitration, the respondent, on
25.10.2021 filed a petition for the appointment of arbitrator under
Section 11(6) of the Arbitration and Conciliation Act, 1996 (hereinafter
“the Act, 1996”) before the High Court.
21. The case of the respondent before the High Court was that as against
the loss of Rs 1,76,19,967/- suffered by it, the appellant company
paid only Rs 84,19,579/- and thus it was not completely indemnified.
It was also argued that the appellant had not explained why at the
time of obtaining the consent letter an amount of Rs 92,00,388/- was
deducted from the total amount claimed.
22. The appellant, on the other hand, contested the arbitration petition
filed by the respondent on the ground that the claim raised by the
respondent herein was stale and having once signed the consent
letter dated 24.12.2018, it was not open for it to turn around and
raise a dispute. The appellant also contended that it was open for the
court to look into the question of arbitrability at the stage of deciding
the Section 11 petition.
23. The High Court, having regard to the aforesaid submissions of the
parties, held that the dispute in question was falling in the realm of
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adjudication and the same is the function to be discharged by an
arbitrator. Placing reliance on the decision of this Court in Oriental
Insurance Company Ltd. v. Dicitex Furnishing Ltd. reported in
(2020) 4 SCC 621, the High Court held that if the dispute existing
between the parties could be referred to arbitration under the
arbitration agreement, then appointment of arbitrator has to follow.
Some pertinent observations made by the High Court are extracted
hereinbelow:
“6. Therefore, on one hand, the company has taken a
stand that the petitioner is paid the amounts due and
payable under the policy and that there is no need to
refer the disputes to the arbitration under clause 13 of
the policy, on the other hand, the petitioner disputes such
case on various grounds. It was stated that amount of Rs.
92,00,388/-is wrongfully deducted while making payment
of Rs. 84,19,579/ inasmuch as total claim lodged was Rs.
1,76,19,967/-.
6.1 Therefore, the above aspects indeed travels to the
adjudicatory realm, which is the function to be discharged
by the arbitrator. When the claim is disputed, it is the
arbitrator who may competently decide the claim.
Arbitrability of the dispute is also to be decided by the
arbitrator. While exercising the powers under section 8 of
the Arbitration and Conciliation Act, 1996, such questions
cannot be gone into by this Court and when there is an
arbitration clause, the aspects are to be decided by the
arbitrator for such purpose.
6.2 Following observations of the Supreme Court in
Oriental Insurance Company Ltd. vs. Dicitex Furnishing
Ltd. [(2020) 4 SCC 621], may be pertinently noticed,
“...an application under Section 11(6) is in the form
of a pleading which merely seeks an order of the
court, for appointment of an arbitrator. It cannot
be conclusive of the pleas or contentions that the
claimant or the concerned party can take, in the
arbitral proceedings. At this stage, therefore, the
court which is required to ensure that an arbitrable
dispute exists, has to be prima facie convinced
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about the genuineness or credibility of the plea of
coercion; it cannot be too particular about the nature
of the plea, which necessarily has to be made and
established in the substantive (read: arbitration)
proceeding. If the court were to take a contrary
approach and minutely examine the and plea judge
its credibility or reasonableness, there would be
a danger of its denying a forum to the applicant
altogether, because rejection of the application
would render the finding (about the finality of the
discharge and its effect as satisfaction) final, thus,
precluding the applicant of itsright event to approach
a civil court.”
6.3 In the proceedings under section 8 of the Arbitration Act,
it is not the function of the Court to examine in detail, the
extant and nature of dispute, if dispute exist is referable to
the arbitration clause occurring in the agreement between
the parties, the appointment of arbitrator has to follow.
6.4 It is observed that this Court has not expressed any
opinion on merits of the dispute and arbitrability thereof.
6.5 In view of the above discussion, the prayer made in
the present application for appointment of arbitrator shall
have to be adverted to.
7. In the result, the Registry is directed to list the same
before the appropriate Bench in accordance with roster for
the purpose of passing the order regarding appointment
of arbitrator.”
24. The aforesaid observations were made by the High Court in its
order dated 22.09.2023 which has been impugned by the appellant
in SLP(C) No. 7220 of 2024. After making the above quoted
observations in favour of the respondent, the High Court directed
that the arbitration application be listed before an appropriate bench
in accordance with the roster. In pursuance of the said order, the
matter came to be listed before the Chief Justice of the High Court,
wherein an order for appointment of arbitrator was passed. The
said order dated 01.12.2023 has been impugned by the appellant
in SLP(C)No. 3792 of 2024.
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B. SUBMISSIONS ON BEHALF OF THE APPELLANT
25. Mr Ketan Paul, the learned counsel appearing on behalf of the
appellant, submitted that a full and final settlement was arrived at
between the parties thereby indicating that a distinct understanding
was arrived at between them. No plea or assertion has been made by
the respondent, nor any prima facie evidence has been adduced to
establish that the appellant had made the execution of the discharge
voucher a pre-condition to the payment of the claim, or offered the
amount on a “take it or leave it basis”. Seen thus, the test laid down
by this Court in paragraph 52(iv) of the National Insurance Co. Ltd.
v. Boghara Polyfab reported in (2009)1 SCC 267 can neither be
said to have been alleged nor satisfied.
26. It was further submitted that there has been an inordinate delay
on the part of the respondent in levelling allegations of coercion.
Such allegations came to be so levelled for the first time in the
arbitration notice dated 02.03.2020, that is, almost 14 months after
the payment of the subject claim and five months after the payment
of the second claim. The counsel submitted that the claim amount
as per the assessment of the loss by the surveyor was known to the
respondent since 24.12.2018, thereby indicating that the allegations
of coercion were an afterthought.
27. In support of his aforesaid submission, the counsel placed reliance
on the decision of this Court in NTPC Ltd. v. SPML Infra Ltd.
reported in (2023) SCC OnLine SC 389. He submitted that even
when examined through the “eye of the needle” test, the claim
could be said to be deadwood and the arbitration application ought
to have been rejected by the High Court on this count alone. The
counsel also placed reliance on the decision of this Court in New
India Assurance Co. Ltd. v. Genus Power Infrastructure Ltd.
reported in (2015) 2 SCC 424 to submit that arbitration ought to be
refused in case of inordinate delay in raising the dispute or levelling
allegations of coercion by the party seeking the referral of disputes
to arbitration.
28. One another submission made by the counsel was that the pleadings
of the respondent lack the basic material particulars about any
alleged coercion and the poor financial condition of the respondents.
It was further submitted that even in the arbitration notice all that the
respondents have stated is that had they not signed the discharge
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voucher in respect of the first claim, their second claim also would
have been affected.
29. The counsel submitted that the letter dated 25.10.2019 addressed
by the respondent cannot be said to be a protest letter as the letter
only asked for a copy of the surveyor’s report to be provided and
no allegation of any coercion or any demand for any amount was
even raised in the said letter. The counsel finally submitted that
a discharge voucher for effecting the full and final settlement in
relation to the second claim was also signed by the respondent on
30.09.2019, which was accepted and no dispute has been raised
in the last five years, which indicates that the appellant acted in a
bona fide manner as per the prescribed norms.
C. SUBMISSIONS ON BEHALF OF THE RESPONDENT
30. Ms Savita Singh, the learned counsel appearing on behalf of the
respondent, at the outset submitted that her client had to succumb
before the surveyor on account of acute economic distress and also
on account of pendency of huge amount of claim with the appellant,
i.e., around Rs 8 crore cumulatively arising out of the two claims. The
respondent was also under pressure from other financial institutions
from whom loan had been availed.
31. The counsel further submitted that the circumstances were such that
her client had to issue the discharge voucher, otherwise payment
towards the admitted amount would not have been released and her
client would have been put in immense difficulties. She submitted that
mere signing of the discharge voucher by her client would not imply
that there was consensus in arriving at the full and final settlement.
The counsel submitted that the coercion, though subtle, was very
much real and thus in such a situation where the settlement is not
voluntary, but under duress, the arbitration clause can be invoked
to refer the disputes to arbitration.
32. The counsel also submitted that it cannot be said that there was an
inordinate delay in raising the plea of coercion as the letter dated
25.09.2019 was sent by her client to the appellant within 11 days
of the receipt of final payment in relation to the second insurance
claim. However, the appellant provided a copy of the surveyor’s
report only on 07.11.2019 based on which the notice of arbitration
was issued on 02.03.2020.
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33. The counsel, in the last, submitted that the issues raised by the
appellant are subject matter of arbitration by the tribunal and not
of the referral court, which has to limit its scrutiny to the issue of
arbitrability in view of the settled position of law.
D. ISSUES FOR DETERMINATION
34. Having heard the learned counsel appearing for the parties and
having gone through the materials on record, the following three
questions fall for our consideration: -
i. Whether the execution of a discharge voucher towards the full
and final settlement between the parties would operate as a
bar to invoke arbitration?
ii. What is the scope and standard of judicial scrutiny that an
application under Section 11(6) of the Act, 1996 can be
subjected to when a plea of “accord and satisfaction” is taken
by the defendant?
iii. What is the effect of the decision of this Court in In Re: Interplay
Between Arbitration Agreements under the Arbitration and
Conciliation Act 1996 and the Indian Stamp Act 1899 on
the scope of powers of the referral court under Section 11 of
the Act, 1996?
E. ANALYSIS
35. Clause 13 of the insurance policy issued in favour of the respondent
contains the following arbitration clause:
“13) If any dispute or difference shall arise as to the
quantum to be paid under this Policy (liability being
otherwise admitted) such difference shall independently
of all other questions be referred to the decision of a sole
arbitrator to be appointed in writing by the parties to or if
they cannot agree upon a single arbitrator within 30 days
of any party invoking arbitration the same shall be referred
to a panel of three arbitrators, comprising of arbitrators,
one to be appointed by each of the parties to the dispute/
difference and the third arbitrator to be appointed by such
two arbitrators and arbitration shall be conducted under
and in accordance with the provision of the Arbitration and
Conciliation Act, 1996.
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It is clearly agreed and understood that no dispute
or difference shall be referrable to arbitration as
hereinbefore proved, if the Company has disputed or
not accepted liability under or in respect of this policy.
It is hereby expressed stipulated and declared that it
shall be a condition precedent to any right of action or
suit upon this Policy that the award by such arbitrator/
arbitrators of the amount of the loss or damaged shall
be first obtained”
36. A preliminary objection was raised on behalf of the appellant that
the arbitration clause as contained in the insurance policy referred to
above is not attracted in the present case as there is no admission
of liability on the part of the appellant, whereas the said arbitration
clause envisages reference to arbitration only in cases where liability
is admitted and there is a dispute as regards the quantum of liability.
37. However, we find no merit in the aforesaid submission of the appellant.
It is evident from the record that the appellant had admitted its liability
with respect to the first claim and had even disbursed an amount of
Rs 84,19,579/- in pursuance of the signing of the advance discharge
voucher by the respondent. Thus, it is clearly a case of admission
of liability by the appellant. However, the quantum of liability is in
dispute as the amount claimed by the respondent is at variance with
the amount admitted by the appellant. Thus, the dispute being one of
quantum and not of liability, it falls within the ambit of the conditional
arbitration clause as contained in the insurance policy.
38. One another preliminary objection raised by the appellant was that
the claim sought to be referred to arbitration is a deadwood claim
and thus the application for appointment of arbitrator ought to have
been rejected at the outset by the High Court. It is clear from the
facts as discussed in the preceding paragraphs that the notice
invoking arbitration was sent by the respondent to the appellant on
02.03.2020 and the petition seeking appointment of arbitrator under
Section 11(6) of the Act, 1996 was filed before the High Court on
25.10.2021. Thus, the arbitration petition was filed before the High
Court much prior to the expiry of the limitation period of three years.
Further, the notice invoking arbitration was also sent by the respondent
well within time from the date of the accrual of the cause of action.
Considered thus, it cannot, by any stretch of imagination, be said that
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the claim is a deadwood claim or the arbitration application before
the High Court was time-barred.
39. Having rejected the aforesaid two preliminary objections raised by the
appellant, the question that now remains to be examined is whether,
in the facts of the present case, the respondent could have invoked
arbitration after having signed the consent letter dated 24.12.2018
and the advance discharge voucher dated 04.01.2019.
i. Whether the execution of a discharge voucher towards the
full and final settlement between the parties would operate
as a bar to invoke arbitration?
40. A contract between parties can come to an end by the performance
thereof by both the parties, that is, by the fulfilment of all the
obligations in terms of the original contract. This is referred to as
discharge by performance. Alternatively, the contract may also be
discharged by substitution of certain new obligations in place of
the obligations contained in the original contract, and subsequent
performance of the substituted obligations. The substituted
obligations are referred to as ‘accord’ and the discharge of the
substituted obligations is referred to as ‘satisfaction’. It is referred
to as discharge by “accord and satisfaction” or by “full and final
settlement” in common parlance.
41. A written confirmation of discharge by “accord and satisfaction”
can also be in the form of a full and final discharge voucher or a
No-Dues or a No-Claims Certificate issued by one of the parties
acknowledging that there are no outstanding claims and that such
a party has received the full and final payment to its satisfaction. In
the insurance sector, the general practice is that the insurer obtains
undated discharge vouchers from the insured in advance by making
the insured to sign on dotted lines before processing the payment
in respect of the claims of the insured.
42. The concept of discharge of a contract by “accord and satisfaction”
is embodied in Section 63 of the Indian Contract Act, 1872, which
provides that the promisee may, inter alia, accept any substituted
obligation in place of the original promise made to him, and such
acceptance on the part of the promisee would amount to the discharge
of the contract. Section 63 along with the illustrations is reproduced
hereinbelow:
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“63. Promisee may dispense with or remit performance of
promisee.—Every promisee may dispense with or remit,
wholly or in part, the performance of the promisee made
to him, or may extend the time for such performance,
or may accept instead of it any satisfaction which he
thinks fit.
Illustrations
(a) A promises to paint a picture for B. B afterwards
forbids him to do so. A is no longer bound to perform
the promise.
(b) A owes B 5,000 rupees. A pays to B, and B accepts,
in satisfaction of the whole debt, 2,000 rupees paid at the
time and place at which the 5,000 rupees were payable.
The whole debt is discharged.
(c) A owes B 5,000 rupees. C pays to B 1,000 rupees,
and B accepts them, in satisfaction of his claim on A. This
payment is a discharge of the whole claim.
(d) A owes B, under. a contract, a sum of money, the amount
of which has not been ascertained. A, without ascertaining
the amount, gives to B, and B, in satisfaction thereof,
accepts, the sum of 2,000 rupees. This is a discharge of
the whole debt, whatever may be its amount.
(e) A owes B 2,000 rupees, and is also indebted to other
creditors. A makes an arrangement with his creditors,
including B, to pay them a [composition] of eight annas
in the rupee upon their respective demands. Payment to
B of 1,000 rupees is a discharge of B’s demand.”
(Emphasis supplied)
43. The Privy Council in Payana Reena Saminathan v. Pana Lana
Palaniappa reported in (1913-14) 41 IA 142 defined the term “accord
and satisfaction” as follows:
“… The ‘receipt’ given by the appellants and accepted
by the respondent, and acted on by both parties proves
conclusively that all the parties agreed to a settlement of
all their existing disputes by the arrangement formulated
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in the ‘receipt’. It is a clear example of what used to be
well known as common law pleading as ‘accord and
satisfaction by a substituted agreement’. No matter what
were the respective rights of the parties inter se they are
abandoned in consideration of the acceptance by all for
a new agreement. The consequence is that when such
an accord and satisfaction takes place the prior rights
of the parties are extinguished. They have in fact been
exchanged for the new rights; and the new agreement
becomes a new departure, and the rights of all the parties
are fully represented by it.”
(Emphasis supplied)
44. As discussed in the preceding paragraphs, the appellant has
contested that once a full and final settlement was arrived at between
the parties, the insurance contract between the parties could be
said to have been discharged. Once the contract stood discharged,
it was not open to the respondent to resile from the settlement and
invoke the arbitration clause, as no obligations remained to be fulfilled
under the contract pursuant to the discharge of the contract. In other
words, it is the contention of the appellant that as no arbitrable
disputes remained after a full and final settlement was arrived at,
there was nothing left to be referred to the arbitrator and hence the
appointment of arbitrator being an exercise in futility, should not have
been undertaken by the High Court.
45. To answer the aforesaid contention of the appellant, the question
that needs to be considered is whether the “full and final settlement”
of claims arising under a contract, is by itself sufficient to preclude
any future arbitration in respect of such settled claims?
46. It is indeed so that once a contract has been fully performed, it
can be said to have been discharged by performance. Once the
contract has been discharged by performance, neither any right to
seek performance, nor any obligation to perform remains under it.
47. However, whether there has been a discharge of contract or not is
a mixed question of law and fact, and if any dispute arises as to
whether a contract has been discharged or not, such a dispute is
arbitrable as per the mechanism prescribed under the arbitration
agreement contained in the underlying contract.
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a. Whether the arbitration agreement contained in a
substantive contract survives even after the underlying
contract is discharged by “accord and satisfaction”?
48. Arbitration for the purpose of resolving any dispute pertaining to any
claim which has been “fully and finally settled” between the parties
can only be invoked if the arbitration agreement survives even after
the discharge of the substantive contract.
49. The arbitration agreement, by virtue of the presumption of separability,
survives the principal contract in which it was contained. Section
16(1) of the Act, 1996 which is based on Article 16 of the UNCITRAL
Model Law on International Commercial Arbitration, 1985 (hereinafter,
“Model Law”) embodies the presumption of separability. There are
two aspects to the doctrine of separability as contained in the Act,
1996: -
i. An arbitration clause forming part of a contract is treated as
an agreement independent of the other terms of the contract.
ii. A decision by the arbitral tribunal declaring the contract as null
and void does not, ipso facto, make the arbitration clause invalid.
50. The doctrine of separability was not part of the legislative scheme
under the Arbitration Act, 1940. However, with the enactment of the
Act, 1996, the doctrine was expressly incorporated. This Court in
National Agricultural Coop. Marketing Federation India Ltd. v.
Gains Trading Ltd. reported in (2007) 5 SCC 692, while interpreting
Section 16 of the Act, 1996, held that even if the underlying contract
comes to an end, the arbitration agreement contained in such a
contract survives for the purpose of resolution of disputes between
the parties.
51. The fundamental premise governing the doctrine of separability is that
the arbitration agreement is incorporated by the parties to a contract
with the mutual intention to settle any disputes that may arise under
or in respect of or with regard to the underlying substantive contract,
and thus by its inherent nature is independent of the substantive
contract.
52. In Heyman v. Darwins Ltd. reported in [1942] AC 356, it was held
by the House of Lords that the repudiation or breach of a contract
does not extinguish the arbitration agreement as it survives for the
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purpose of resolution of any outstanding claims arising out of the
breach. It was observed thus:
“I am, accordingly, of the opinion that what is commonly
called repudiation or total breach of a contract, whether
acquiesced in by the other party or not, does not abrogate
the contract, though it may relieve the injured party of the
duty of further fulfilling the obligations which he has by the
contract undertaken to the repudiating party. The contract
is not put out of existence, though all further performance
of the obligations undertaken by each party in favour
of the other may cease. It survives for the purpose of
measuring the claims arising out of the breach, and the
arbitration clause survives for determining the mode of
their settlement. The purposes of the contract have failed,
but the arbitration clause is not one of the purposes of
the contract.”
(Emphasis supplied)
53. Thus, even if the contracting parties, in pursuance of a settlement,
agree to discharge each other of any obligations arising under the
contract, this does not ipso facto mean that the arbitration agreement
too would come to an end, unless the parties expressly agree to do
the same. The intention of the parties in discharging a contract by
“accord and satisfaction” is to relieve each other of the existing or any
new obligations under the contract. Such a discharge of obligations
under the substantive contract cannot be construed to mean that the
parties also intended to relieve each other of their obligation to settle
any dispute pertaining to the original contract through arbitration.
54. Although ordinarily no arbitrable disputes may subsist after execution
of a full and final settlement, yet 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”.
55. The aforesaid position of law has also been consistently followed
by this Court as evident from many decisions. In Boghara Polyfab
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(supra), while rejecting the contention that the mere act of signing
a “full and final discharge voucher” would act as a bar to arbitration,
this Court held as follows:
“44. … None of the three cases relied on by the appellant
lay down a proposition that mere execution of a full and
final settlement receipt or a discharge voucher is a bar to
arbitration, even when the validity thereof is challenged
by the claimant on the ground of fraud, coercion or undue
influence. Nor do they lay down a proposition that even
if the discharge of contract is not genuine or legal, the
claims cannot be referred to arbitration. […]”
56. Again, in R.L. Kalathia and Company v. State of Gujarat reported
in (2011) 2 SCC 400, it was re-iterated that the mere issuance of the
no-dues certificate would not operate as a bar against the raising of
genuine claims even after the date of issuance of such certificate.
The relevant observations are extracted hereinbelow:
“13. From the above conclusions of this Court, the following
principles emerge:
(1) Merely because the contractor has issued “no-dues
certificate”, if there is an acceptable claim, the court cannot
reject the same on the ground of issuance of “no-dues
certificate”.
(ii) Inasmuch as it is common that unless a discharge
certificate is given in advance by the contractor, payment
of bills are generally delayed, hence such a clause in
the contract would not be an absolute bar to a contractor
raising claims which are genuine at a later date even after
submission of such “no-claim certificate”.
(iii) Even after execution of full and final discharge voucher/
receipt by one of the parties, if the said party is able to
establish that he is entitled to further amount for which
he is having adequate materials, he is not barred from
claiming such amount merely because of acceptance of
the final bill by mentioning “without prejudice” or by issuing
“no-dues certificate”.
(Emphasis supplied)
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57. The position that emerges from the aforesaid discussion is that there
is no rule of an absolute kind which precludes arbitration in cases
where a full and final settlement has been arrived at. In Boghara
Polyfab (supra), discussing in the context of a case similar to the
one at hand, wherein the discharge voucher was alleged to have
been obtained on ground of coercion, it was observed that the
discharge of a contract by full and final settlement by issuance of
a discharge voucher or a no-dues certificate extends only to those
vouchers or certificates which are validly and voluntarily executed.
Thus, if the party said to have executed the discharge voucher or
the no dues certificate alleges that the execution was on account
of fraud, coercion or undue influence exercised by the other party
and is able to establish such an allegation, then the discharge of
the contract by virtue of issuance of such a discharge voucher or no
dues certificate is rendered void and cannot be acted upon.
58. It was further held in Boghara Polyfab (supra) that the mere execution
of a full and final settlement receipt or a discharge voucher would
not by itself operate as a bar to arbitration when the validity of such
a receipt or voucher is challenged by the claimant on the ground
of fraud, coercion or undue influence. In other words, where the
parties are not ad idem over accepting the execution of the no-claim
certificate or the discharge voucher, such disputed discharge voucher
may itself give rise to an arbitrable dispute.
59. Once the full and final settlement of the original contract itself
becomes a matter of dispute and disagreement between the parties,
then such a dispute can be categorised as one arising “in relation
to” or “in connection with” or “upon” the original contract which can
be referred to arbitration in accordance with the arbitration clause
contained in the original contract, notwithstanding the plea that there
was a full and final settlement between the parties.
ii. What is the scope and standard of judicial scrutiny that
an application under Section 11(6) of the Act, 1996 can be
subjected to when a plea of “accord and satisfaction” is
taken by the defendant?
60. Whether the issue as regards the validity of the full and final
settlement is to be determined by the referral court acting under
Section 11 of the Act, 1996 or by the arbitral tribunal has been
considered in a number of decisions of this Court. Some of these
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decisions have also delineated the extent and standard of enquiry
which can be undertaken at the stage of Section 11 petition.
We shall discuss these decisions in detail for the benefit of the
exposition of the law on the subject.
61. One of the earliest decisions dealing with the issue of “full and final
settlement” in the specific context of an application for appointment
of arbitrator under the Arbitration Act, 1940 was rendered by a two-
Judge Bench of this Court in Damodar Valley Corporation v. K.K.
Kar reported in (1974) 1 SCC 141. It was observed, inter alia, that any
dispute arising in relation to the validity of the discharge by “accord
and satisfaction” would be covered by the arbitration agreement
contained in the original contract, and thus should be referred to
the arbitral tribunal for determination. The relevant observations are
extracted hereinbelow:
“4. On these facts the short question for determination
is: where one of the parties refers a dispute or disputes
to arbitration and the other party takes a plea that there
was a final settlement of all claims, is the Court, on an
application under Sections 9(b) and 33 of the Act, entitled
to enquire into the truth and validity of the averment as
to whether there was or was not a final settlement on the
ground that if that was proved, it would bar a reference
to the arbitration inasmuch as the arbitration clause itself
would perish.
xxx xxx xxx
6. It appears to us that the question whether there has
been a full and final settlement of a claim under the
contract is itself a dispute arising “upon” or “in relation
to” or “in connection with” the contract. These words are
wide enough to cover the dispute sought to be referred.
The respondent’s contention is that the contract has
been repudiated by the appellant unilaterally as a result
of which he had no option but to accept that repudiation
because if the appellant was not ready to receive the
goods he could not supply them to him or force him to
receive them. In the circumstances, while accepting the
repudiation, without conceding that the appellant had a
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right to repudiate the contract, he could claim damages
for breach of contract. Such a claim for damages is a
dispute or difference which arises between himself and the
appellant and is ‘upon’ or ‘in relation to’ or ‘in connection
with’ the contract.
7. The contention that has been canvassed before us is
that as there has been a full and final settlement under
the contract, the rights and obligations under the contract
do not subsist and consequently the arbitration clause
also perishes along with the settlement. If so, the dispute
whether there has or has not been a settlement cannot
be the subject of an arbitration. There is, in our view, a
basic fallacy underlying this submission. A contract is
the creature of an agreement between the parties and
where the parties under the terms of the contract agree
to incorporate an arbitration clause, that clause stands
apart from the rights and obligations under that contract,
as it has been incorporated with the object of providing a
machinery for the settlement of disputes arising in relation
to or in connection with that contract. The questions of
unilateral repudiation of the rights and obligations under
the contract or of a full and final settlement of the contract
relate to the performance or discharge of the contract.
Far from putting an end to the arbitration clause, they
fall within the purview of it. A repudiation by one party
alone does not terminate the contract. It takes two to
end it, and hence it follows that as the contract subsists
for the determination of the rights and obligations of the
parties, the arbitration clause also survives. This is not a
case where the plea is that the contract is void, illegal or
fraudulent etc. in which case, the entire contract along
with the arbitration clause is non est, or voidable. […]”
(Emphasis supplied)
62. In Bharat Heavy Electricals Ltd. vs. Amar Nath Bhan Prakash
reported in (1982) 1 SCC 625 it was observed by this Court that
the question whether there was discharge of the contract by “accord
and satisfaction” or not is a dispute liable to be resolved by the
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arbitral tribunal and the court ought to appoint an arbitrator in such
matters when a party approaches it seeking relief for the same. It
was observed thus:
“1. It appears from the order of the High Court impugned
in the appeal that the High Court has not correctly
appreciated the position that the question whether there
was discharge of the contract by accord and satisfaction
or not, is a dispute arising out of the contract and is liable
to be referred to arbitration and hence the application of
the Respondent under Section 20 of the Indian Arbitration
Act should have been allowed and the matters in dispute
between the parties, including the question whether or
not there was discharge of the contract by accord and
satisfaction should have been referred to arbitration.”
(Emphasis supplied)
63. However, the position on the issue witnessed a change with
subsequent decisions of this Court in P.K. Ramaiah and Company
v. Chairman and Managing Director, National Thermal Power
Corporation reported in 1994 Supp (3) SCC 126 and Nathani
Steels Ltd. v. Associated Constructions reported in 1995 Supp
(3) SCC 324.
64. In P.K. Ramaiah (supra), the decision in Damodar Valley (supra)
was distinguished on facts, and it was held that once “full and final
settlement” is arrived at, no arbitral dispute subsists, and hence
there can be no referral to arbitration. The relevant observations
made therein are as follows:
“6. [….] If there is an arbitrable dispute, it shall be referred
to the named arbitrator. But there must exist a subsisting
dispute. Admittedly the appellant acknowledged in writing
accepting the correctness of the measurements as well as
the final settlement and received the amount. Thereafter
no arbitrable dispute arise for reference.
xxx xxx xxx
8. […] Accordingly, we hold that the appellant having
acknowledged the settlement and also accepted
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measurements and having received the amount in full
and final settlement of the claim, there is accord and
satisfaction. There is no existing arbitrable dispute for
reference to the arbitration. The High Court is, therefore,
right in its finding in this behalf. The appeals are dismissed
but in the circumstances without costs.”
65. In Nathani Steels (supra), relying upon the decision in P.K. Ramaiah
(supra) it was observed thus:
“3. […] It would thus be seen that once there is a full
and final settlement in respect of any particular dispute
or difference in relation to a matter covered under the
Arbitration clause in the contract and that dispute or
difference is finally settled by and between the parties,
such a dispute or difference does not remain to be an
arbitrable dispute and the Arbitration clause cannot be
invoked even though for certain other matters, the contract
may be in subsistence. […]”
66. It is important to note that the aforesaid four decisions were rendered
in the context of appointment of arbitrator under the Arbitration Act,
1940. With the introduction of the Act, 1996, a different regime came
into being insofar as the question of appointment of arbitrator is
concerned. In Jayesh Engineering Works v New India Assurance
Co. Ltd. reported in (2000) 10 SCC 178, dealing with an application
for appointment of arbitrator under the Act, 1996, a position similar
to the one taken in Amar Nath (supra) was taken by this Court.
It was held thus:
“1. […] Whether any amount is due to be paid and how far
the claim made by the Appellant is tenable are matters to
be considered by the Arbitrator. In fact, whether the contract
has been fully worked out and whether the payments have
been made in full and final settlement are questions to
be considered by the Arbitrator when there is a dispute
regarding the same. […]”
67. While the aspect of “accord and satisfaction” in the specific context
of the appointment of arbitrator has been discussed by this Court
on numerous occasions, we also deem it necessary to refer to and
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discuss some important decisions touching upon the contours of the
power of the referral court under Section 11 of the Act, 1996 as they
directly affect the issue at hand.
68. The role to be played by the Chief Justice or his designate in the
appointment of an arbitrator has been at the heart of number of
decisions of this Court. In Konkan Railway Corpn. Ltd. v. Rani
Construction (P) Ltd. reported in (2002) 2 SCC 388, a five-Judge
Bench of this Court observed that the power exercised by the referral
court under Section 11 of the Act, 1996 is an administrative power
and thus the Chief Justice or his designate do not have to decide any
preliminary issue at that stage. Accordingly, it held that any issues
pertaining to non-arbitrability, validity and existence of the arbitration
agreement are to be decided by the arbitrator.
69. The aforesaid view occupied the field till a seven-Judge Bench of
this Court in SBP & Co. v. Patel Engg. Ltd. reported in (2005) 8
SCC 618, characterised the power conferred upon the Chief Justice
or his designate under Section 11 of the Act, 1996 as a judicial
power and not merely administrative power. This Court held that the
Chief Justice or his designate had the right to decide all preliminary
issues at the referral stage under Section 11(6) of the Act, 1996.
The Court took such view on the premise that Section 16 of the
Act, 1996, which empowers the Arbitral Tribunal to rule on its own
jurisdiction, applies only when the parties go before the Tribunal
without having taken recourse to Sections 8 or 11 respectively of
the Act, 1996 first.
70. In Boghara Polyfab (supra), this Court examined the extent of
judicial interference at the stage of referral under Section 11(6) of
the Act, 1996 as laid down in SBP & Co. (supra) and elucidated
three categories of issues which could arise before the referral court
as follows:
“22.1. The issues (first category) which the Chief Justice/
his designate will have to decide are:
(a) Whether the party making the application has
approached the appropriate High Court.
(b) Whether there is an arbitration agreement and whether
the party who has applied under Section 11 of the Act, is
a party to such an agreement.
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22.2. The issues (second category) which the Chief Justice/
his designate may choose to decide (or leave them to the
decision of the Arbitral Tribunal) are:
(a) Whether the claim is a dead (long-barred) claim or a
live claim.
(b) Whether the parties have concluded the contract/
transaction by recording satisfaction of their mutual rights
and obligation or by receiving the final payment without
objection.
22.3. The issues (third category) which the Chief Justice/
his designate should leave exclusively to the Arbitral
Tribunal are:
(i) Whether a claim made falls within the arbitration clause
(as for example, a matter which is reserved for final decision
of a departmental authority and excepted or excluded
from arbitration).
(ii) Merits or any claim involved in the arbitration.”
71. The decision in Boghara Polyfab (supra) was followed in a number
of subsequent decisions of this Court. In Union of India v. Master
Construction Co. reported in (2011) 12 SCC 349, this Court held
that while deciding an application under Section 11(6) of the Act,
1996, the referral court must satisfy itself that the allegations raised
against the full and final discharge voucher were at least prima facie
bona fide and genuine. Applying the said reasoning to the facts
before it, this Court held that the dispute was not a bona fide one
and declined to refer the matter to arbitration. The relevant extracts
are reproduced hereinbelow:
“18. In our opinion, there is no rule of the absolute kind.
In a case where the claimant contends that a discharge
voucher or a no-claim certificate as been obtained by
fraud and the other side contests the correctness, the
Chief Justice must look into this aspect to find out at least,
prima facie whether or not the dispute is bona fide and
genuine. Where the dispute raised by the claimant with
regard to validity of the discharge voucher or no-claim
certificate or settlement agreement, prima facie, appears
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to be lacking in credibility, there may not be a necessity
to refer the dispute for arbitration at all.
xxx xxx xxx
23. The present case in our opinion appears to be
a case falling in the category of exception noted in
Boghara Polyfab[(2009) 1 SCC 267](p.284, para 25). As
to the financial duress or coercion, nothing of this kind
is established prima facie. Mere allegation that no-claim
certificates have been obtained under financial duress and
coercion, without there being anything more to suggest that,
does not lead to an arbitrable dispute. The conduct of the
contractor clearly shows that “no-claim certificates” were
given by it voluntarily, the contractor accepted the amount
voluntarily and the contract was discharged voluntarily.”
(Emphasis supplied)
72. In New India Assurance (supra), this Court, relying upon Boghara
Polyfab (supra) and Master Construction Co. (supra), upon
examining the Section 11 petition held that a mere bald assertion
of fraud, undue influence or coercion would not warrant referral
of disputes to arbitration, if the matter had already been fully and
finally settled between the parties. The relevant observations are
reproduced hereinbelow:
“10. In our considered view, the plea raised by the
Respondent is bereft of any details and particulars, and
cannot be anything but a bald assertion. Given the fact
that there was no protest or demur raised around the time
or soon after the letter of subrogation was signed, that
the notice dated 31.03.2011 itself was nearly after three
weeks and that the financial condition of the Respondent
was not so precarious that it was left with no alternative
but to accept the terms as suggested, we are of the firm
view that the discharge in the present case and signing
of letter of subrogation were not because of exercise of
any undue influence. Such discharge and signing of letter
of subrogation was voluntary and free from any coercion
or undue influence. In the circumstances, we hold that
upon execution of the letter of subrogation, there was full
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and final settlement of the claim. Since our answer to the
question, whether there was really accord and satisfaction,
is in the affirmative, in our view no arbitrable dispute existed
so as to exercise power Under Section 11 of the Act. The
High Court was not therefore justified in exercising power
Under Section 11 of the Act.”
(Emphasis supplied)
73. The net effect of the decisions in SBP & Co. (supra) and Boghara
Polyfab (supra) was that the scope for interference available to the
referral courts when acting under Section 11 of the Act, 1996 was
substantially expanded. The referral courts were conferred with
the discretion to conduct mini trials and indulge in the appreciation
of evidence on the issues concerned with the subject matter of
arbitration. The Law Commission of India in its 246th report took
note of the issue of significant delays being caused to the arbitral
process due to enlarged scope of judicial interference at the stage
of appointment of arbitrator and suggested as follows:
i. First, that the power of appointment conferred upon the Chief
Justice be devolved on to the Supreme Court and the High
Court, as the case may be; and
ii. Secondly, the power of appointment under Section 11 be
clarified to be an administrative power and not a judicial one.
iii. Thirdly, the scope of interference under Sections 8 and 11
respectively of the Act, 1996 be restricted only to those cases
where the court finds that no arbitration agreement exists or
is null and void.
74. The Law Commission suggested the insertion of Section 11(6-A) in the
Act, 1996. The aforesaid recommendations of the Commission were
taken note of by the Parliament and accordingly the Act, 1996 was
amended in 2015 to incorporate Section 11(6-A), which reads thus:
“(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.”
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75. Interestingly, Section 11(6-A) was omitted by the 2019 amendment to
the Act, 1996 on the basis of a report of the High-Level Committee
to Review the Institutionalisation of Arbitration Mechanism in India.
However, in the absence of the omission being notified, Section
11(6-A) of the Act, 1996 continues to remain on the statute book
and thus has to be given effect as such.
76. The impact of the addition of Section 11(6-A) was elaborately
discussed by this Court in Duro Felguera, S.A. v. Gangavaram
Port Ltd reported in (2017) 9 SCC 729 as follows:
“48. […] From a reading of Section 11(6-A), the intention
of the legislature is crystal clear i.e. the court should
and need only look into one aspect—the existence of an
arbitration agreement. What are the factors for deciding
as to whether there is an arbitration agreement is the next
question. The resolution to that is simple—it needs to be
seen if the agreement contains a clause which provides
for arbitration pertaining to the disputes which have arisen
between the parties to the agreement.
xxx xxx xxx
59. The scope of the power under Section 11(6) of the 1996
Act was considerably wide in view of the decisions in SBP
and Co. [(2005) 8 SCC 618] and Boghara Polyfab [(2009)
1 SCC 267]. This position continued till the amendment
brought about in 2015. After the amendment, all that the
courts need to see is whether an arbitration agreement
exists—nothing more, nothing less. The legislative
policy and purpose is essentially to minimise the Court’s
intervention at the stage of appointing the arbitrator and
this intention as incorporated in Section 11(6-A) ought to
be respected.”
(Emphasis supplied)
77. Despite the decision in Duro Felguera (supra), this Court in United
India Insurance Co. Ltd. v. Antique Art Exports Pvt. Ltd. reported
in (2019) 5 SCC 362, while dealing with the issue of “full and final
settlement” in the context of appointment of an arbitrator, held that
mere bald allegation by a party that the discharge voucher was
obtained under coercion or undue influence would not entitle it to
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seek referral of the dispute to arbitration unless it is able to produce
prima facie evidence of the same during the course of proceedings
under Section 11(6) of the Act, 1996. Important paragraphs from the
said decision are extracted hereinbelow:
“15. From the proposition which has been laid down by this
Court, what reveals is that a mere plea of fraud, coercion
or undue influence in itself is not enough and the party
who alleged is under obligation to prima facie establish
the same by placing satisfactory material on record before
the Chief Justice or his Designate to exercise power under
Section 11(6) of the Act, which has been considered by
this Court in New India Assurance Co. Ltd. case [...]
xxx xxx xxx
17. It is true that there cannot be a rule of its kind that
mere allegation of discharge voucher or no claim certificate
being obtained by fraud/coercion/undue influence practised
by other party in itself is sufficient for appointment of the
arbitrator unless the claimant who alleges that execution
of the discharge agreement or no claim certificate was
obtained on account of fraud/coercion/undue influence
practised by the other party is able to produce prima facie
evidence to substantiate the same, the correctness thereof
may be open for the Chief Justice/his Designate to look
into this aspect to find out at least prima facie whether
the dispute is bona fide and genuine in taking a decision
to invoke Section 11(6) of the Act.
18. In the instant case, the facts are not in dispute that
for the two incidents of fire on 25-9-2013 and 25-10-2013,
the appellant Company based on the Surveyor›s report
sent emails on 5-5-2016 and 24-6-2016 for settlement of
the claims for both the fires dated 25-9-2013 and 25-10-
2013 which was responded by the respondent through
email on the same date itself providing all the necessary
information to the regional office of the Company and also
issued the discharge voucher in full and final settlement
with accord and satisfaction. Thereafter, on 12-7-2016, the
respondent desired certain information with details, that too
was furnished and for the first time on 27-7-2016, it took
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a U-turn and raised a voice of undue influence/coercion
being used by the appellant stating that it being in financial
distress was left with no option than to proceed to sign
on the dotted lines. As observed, the phrase in itself is
not sufficient unless there is a prima facie evidence to
establish the allegation of coercion/undue influence, which
is completely missing in the instant case.
19. In the given facts and circumstances, we are satisfied
that the discharge and signing the letter of subrogation
was not because of any undue influence or coercion as
being claimed by the respondent and we find no difficulty
to hold that upon execution of the letter of subrogation, the
claim was settled with due accord and satisfaction leaving
no arbitral dispute to be examined by an arbitrator to be
appointed under Section 11(6) of the Act.
20. The submission of the learned counsel for the
respondent that after insertion of sub-section (6-A) to
Section 11 of the Amendment Act, 2015 the jurisdiction
of this Court is denuded and the limited mandate of the
Court is to examine the factum of existence of an arbitration
and relied on the judgment in Duro Felguera, S.A. v.
Gangavaram Port Ltd. [Duro Felguera, S.A. v. Gangavaram
Port Ltd. (2017) 9 SCC 729 : (2017) 4 SCC (Civ) 764] The
exposition in this decision is a general observation about
the effect of the amended provisions which came to be
examined under reference to six arbitrable agreements
(five agreements for works and one corporate guarantee)
and each agreement contains a provision for arbitration
and there was serious dispute between the parties in
reference to constitution of Arbitral Tribunal whether there
has to be Arbitral Tribunal pertaining to each agreement. In
the facts and circumstances, this Court took note of sub-
section (6-A) introduced by the Amendment Act, 2015 to
Section 11 of the Act and in that context observed that the
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) of the Act. Suffice it to say that appointment of an
arbitrator is a judicial power and is not a mere administrative
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function leaving some degree of judicial intervention; when
it comes to the question to examine the existence of a
prima facie arbitration agreement, it is always necessary
to ensure that the dispute resolution process does not
become unnecessarily protracted.
21. In the instant case, prima facie no dispute subsisted
after the discharge voucher being signed by the respondent
without any demur or protest and claim being finally settled
with accord and satisfaction and after 11 weeks of the
settlement of claim a letter was sent on 27-7-2016 for
the first time raising a voice in the form of protest that the
discharge voucher was signed under undue influence and
coercion with no supportive prima facie evidence being
placed on record in absence thereof, it must follow that
the claim had been settled with accord and satisfaction
leaving no arbitral dispute subsisting under the agreement
to be referred to the arbitrator for adjudication.
22. In our considered view, the High Court has committed
a manifest error in passing the impugned order and
adopting a mechanical process in appointing the arbitrator
without any supportive evidence on record to prima facie
substantiate that an arbitral dispute subsisted under the
agreement which needed to be referred to the arbitrator
for adjudication.”
(Emphasis supplied)
78. It is pertinent to observe that in Antique Art (supra) the Court placed
reliance on the decisions in Master Construction (supra) and New
India Assurance (supra). Both these decisions were delivered before
the insertion of Section 11(6-A) by the 2015 amendment to the Act,
1996. Thus, this Court in Antique Art (supra) failed to take into
account the legislative intent behind the introduction of Section 11(6-
A), which was also succinctly explained in Duro Felguera (supra).
79. A three-Judge Bench of this Court in Mayavati Trading Private
Limited v. Pradyut Deb Burman reported in (2019) 8 SCC 714
overruled the decision in Antique Art (supra) and clarified that the
position of law existing prior to the 2015 amendment to the Act, 1996
under which referral courts had the power to examine the aspect
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of “accord and satisfaction” had come to be legislatively overruled
by Section 11(6-A) of the Act, 1996. The Court, while affirming the
reasoning given in Duro Felguera (supra), observed thus:
“10. This being the position, it is clear that the law prior
to the 2015 Amendment that has been laid down by this
Court, which would have included going into whether
accord and satisfaction has taken place, has now been
legislatively overruled. This being the position, it is difficult
to agree with the reasoning contained in the aforesaid
judgment [United India Insurance Co. Ltd. v. Antique Art
Exports (P) Ltd. (2019) 5 SCC 362 : (2019) 2 SCC (Civ)
785], as Section 11(6-A) is confined to the examination
of the existence of an arbitration agreement and is to be
understood in the narrow sense as has been laid down in
the judgment in Duro Felguera, SA [Duro Felguera, SA v.
Gangavaram Port Ltd. (2017) 9 SCC 729 : (2017) 4 SCC
(Civ) 764] — see paras 48 & 59
11. We, therefore, overrule the judgment in Antique Art
Exports (P) Ltd. [United India Insurance Co. Ltd. v. Antique
Art Exports (P) Ltd. (2019) 5 SCC 362 : (2019) 2 SCC
(Civ) 785] as not having laid down the correct law but
dismiss this appeal for the reason given in para 3 above.”
(Emphasis supplied)
80. A two-Judge Bench of this Court in Uttarakhand Purv Sainik Kalyan
Nigam Ltd. v. Northern Coal Field Ltd. reported in (2020) 2 SCC
455 was called upon to determine the scope of judicial interference
at the stage of Section 11(6) petition wherein the plea of claims being
time barred was taken by the defendant. Referring to the principal of
competence-competence enshrined in Section 16 of the Act, 1996
and the legislative intent behind the introduction of Section 11(6-A)
to Act, 1996 by the 2015 amendment, this Court held that the issue
of limitation being a mixed question of law and fact should be best
left to the tribunal to decide. The referral court should restrict its
examination to whether an arbitration agreement between the parties
exists. The relevant observations are reproduced hereinbelow:
“7.10. In view of the legislative mandate contained in
Section 11(6-A), the Court is now required only to examine
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the existence of the arbitration agreement. All other
preliminary or threshold issues are left to be decided
by the arbitrator under Section 16, which enshrines the
kompetenz-kompetenz principle.
7.11. The doctrine of “kompetenz-kompetenz”, also referred
to as “compétence-compétence”, or “compétence de la
recognized”, implies that the Arbitral Tribunal is empowered
and has the competence to rule on its own jurisdiction,
including determining all jurisdictional issues, and the
existence or validity of the arbitration agreement. This
doctrine is intended to minimise judicial intervention, so
that the arbitral process is not thwarted at the threshold,
when a preliminary objection is raised by one of the parties.
The doctrine of kompetenz-kompetenz is, however,
subject to the exception i.e. when the arbitration
agreement itself is impeached as being procured by
fraud or deception. This exception would also apply to
cases where the parties in the process of negotiation, may
have entered into a draft agreement as an antecedent
step prior to executing the final contract. […]7.12. The
legislative intent underlying the 1996 Act is party autonomy
and minimal judicial intervention in the arbitral process.
Under this regime, once the arbitrator is appointed, or the
tribunal is constituted, all issues and objections are to be
decided by the Arbitral Tribunal.
7.13. In view of the provisions of Section 16, and the
legislative policy to restrict judicial intervention at the pre-
reference stage, the issue of limitation would require to
be decided by the arbitrator. Sub-section (1) of Section
16 provides that the Arbitral Tribunal may rule on its own
jurisdiction, “including any objections” with respect to the
existence or validity of the arbitration agreement. Section
16 is as an inclusive provision, which would comprehend
all preliminary issues touching upon the jurisdiction of the
Arbitral Tribunal. The issue of limitation is a jurisdictional
issue, which would be required to be decided by the
arbitrator under Section 16, and not the High Court at the
pre-reference stage under Section 11 of the Act. Once the
existence of the arbitration agreement is not disputed, all
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issues, including jurisdictional objections are to be decided
by the arbitrator.
7.14. In the present case, the issue of limitation was raised
by the respondent Company to oppose the appointment
of the arbitrator under Section 11 before the High Court.
Limitation is a mixed question of fact and law. In ITW
Signode (India) Ltd. v. CCE [ITW Signode (India) Ltd. v.
CCE (2004) 3 SCC 48] a three-Judge Bench of this Court
held that the question of limitation involves a question of
jurisdiction. The findings on the issue of limitation would
be a jurisdictional issue. Such a jurisdictional issue is to
be determined having regard to the facts and the law.
Reliance is also placed on the judgment of this Court in
NTPC Ltd. v. Siemens Atkeingesellschaft [NTPC Ltd. v.
Siemens Atkeingesellschaft (2007) 4 SCC 451], wherein it
was held that the Arbitral Tribunal would deal with limitation
under Section 16 of the 1996 Act. If the tribunal finds that
the claim is a dead one, or that the claim was barred by
limitation, the adjudication of these issues would be on
the merits of the claim. Under sub-section (5) of Section
16, the tribunal has the obligation to decide the plea;
and if it rejects the plea, the arbitral proceedings would
continue, and the tribunal would make the award. Under
sub-section (6) a party aggrieved by such an arbitral award
may challenge the award under Section 34. […]”
(Emphasis supplied)
81. In Union of India v. Pradeep Vinod Construction Company
reported in 2019 INSC 1241 this Court left the issue of “accord and
satisfaction” to be decided by the arbitrator and held thus:
“16. […] On behalf of the Respondent, it has been
seriously disputed that issuance of “No Claim” certificate
as to the supplementary agreement recording accord and
satisfaction as on 06.05.2014 (CA No. 6400/2016) and
issuance of “No Claim” certificate on 28.08.2014 (CA No.
6420/2016) that they were issued under compulsion and
due to undue influence by the railway authorities. We are
not inclined to go into the merits of the contention of the
parties. It is for the arbitrator to consider the claim of the
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Respondent(s) and the stand of the Appellant-railways.
This contention raised by the parties are left open to be
raised before the arbitrator.”
82. Thereafter, a three-Judge Bench of this Court in Vidya Drolia &
Ors v. Durga Trading Corporation reported in (2021) 2 SCC 1
extensively dealt with the scope of powers of the referral court under
Section 8 and 11 respectively of the Act, 1996. It held, inter alia, that
Sections 8 and 11 of the Act, 1996 are complementary to each other
and thus the aspect of ‘existence’ of the arbitration agreement, as
specified under Section 11 should be seen along with its ‘validity’
as specified under Section 8. This Court also held that the exercise
of power of prima facie judicial review to examine the existence of
arbitration agreement also includes going into the validity of the
arbitration agreement and this does not go against the principles
of competence-competence and the presumption of separability.
It further held that the prima facie review of the aspects related to
non-arbitrability may also be undertaken. The relevant observations
are extracted hereinbelow:
“147.4. Most jurisdictions accept and require prima facie
review by the court on non-arbitrability aspects at the
referral stage.
147.5. Sections 8 and 11 of the Arbitration Act are
complementary provisions as was held in Patel Engg. Ltd.
[SBP & Co. v. Patel Engg. Ltd. (2005) 8 SCC 618] The
object and purpose behind the two provisions is identical
to compel and force parties to abide by their contractual
understanding. This being so, the two provisions should
be read as laying down similar standard and not as laying
down different and separate parameters. Section 11 does
not prescribe any standard of judicial review by the court
for determining whether an arbitration agreement is in
existence. Section 8 states that the judicial review at the
stage of reference is prima facie and not final. Prima
facie standard equally applies when the power of judicial
review is exercised by the court under Section 11 of the
Arbitration Act. Therefore, we can read the mandate of
valid arbitration agreement in Section 8 into mandate of
Section 11, that is, “existence of an arbitration agreement”.
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147.6. Exercise of power of prima facie judicial review
of existence as including validity is justified as a court
is the first forum that examines and decides the request
for the referral. Absolute “hands off” approach would be
counterproductive and harm arbitration, as an alternative
dispute resolution mechanism. Limited, yet effective
intervention is acceptable as it does not obstruct but
effectuates arbitration.
147.7. Exercise of the limited prima facie review does
not in any way interfere with the principle of competence-
competence and separation as to obstruct arbitration
proceedings but ensures that vexatious and frivolous
matters get over at the initial stage.
147.8. Exercise of prima facie power of judicial review
as to the validity of the arbitration agreement would save
costs and check harassment of objecting parties when
there is clearly no justification and a good reason not to
accept plea of non-arbitrability. […]
xxx xxx xxx
147.11. The interpretation appropriately balances the
allocation of the decision-making authority between the
court at the referral stage and the arbitrators’ primary
jurisdiction to decide disputes on merits. The court as
the judicial forum of the first instance can exercise prima
facie test jurisdiction to screen and knock down ex facie
meritless, frivolous and dishonest litigation. Limited
jurisdiction of the courts ensures expeditious, alacritous
and efficient disposal when required at the referral stage.”
(Emphasis supplied)
83. This Court further held that the referral court, while exercising its
powers under Sections 8 and 11 respectively of the Act, 1996 could
exercise its powers to screen and knock down ex facie meritless,
frivolous and dishonest litigation so as to ensure expeditious and
efficient disposal at the referral stage.
“148. Section 43(1) of the Arbitration Act states that the
Limitation Act, 1963 shall apply to arbitrations as it applies
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to court proceedings. Sub-section (2) states that for the
purposes of the Arbitration Act and Limitation Act, arbitration
shall be deemed to have commenced on the date referred
to in Section 21. Limitation law is procedural and normally
disputes, being factual, would be for the arbitrator to
decide guided by the facts found and the law applicable.
The court at the referral stage can interfere only when it
is manifest that the claims are ex facie time-barred and
dead, or there is no subsisting dispute. All other cases
should be referred to the Arbitral Tribunal for decision on
merits. Similar would be the position in case of disputed
“no-claim certificate” or defence on the plea of novation
and “accord and satisfaction”. As observed in Premium
Nafta Products Ltd. [Fili Shipping Co. Ltd. v. Premium
Nafta Products Ltd., 2007 UKHL 40 : 2007 Bus LR 1719
(HL)], it is not to be expected that commercial men while
entering transactions inter se would knowingly create a
system which would require that the court should first
decide whether the contract should be rectified or avoided
or rescinded, as the case may be, and then if the contract
is held to be valid, it would require the arbitrator to resolve
the issues that have arisen.”
(Emphasis supplied)
84. Speaking in the specific context of “limitation” and “accord and
satisfaction”, this Court in Vidya Drolia (supra) held that the procedural
and factual disputes, like the one in the present litigation, should be
left for the arbitrator to decide, who in turn, would be guided by the
facts as determined by him and the law applicable. However, while
re-iterating the position established in Mayavati Trading (supra),
i.e., the principal of minimal interference at the stage of Section
11(6) petitions by referral courts in light of the introduction of Section
11(6-A) to the Act, 1996, this Court in Vidya Drolia (supra) carved
out an exceptional category of cases in which interference by the
referral court was permissible thus:
“154.1. Ratio of the decision in Patel Engg. Ltd. [SBP &
Co. v. Patel Engg. Ltd. (2005) 8 SCC 618] on the scope
of judicial review by the court while deciding an application
under Sections 8 or 11 of the Arbitration Act, post the
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amendments by Act 3 of 2016 (with retrospective effect
from 23-10-2015) and even post the amendments vide
Act 33 of 2019 (with effect from 9-8-2019), is no longer
applicable.
154.2. Scope of judicial review and jurisdiction of the court
under Sections 8 and 11 of the Arbitration Act is identical
but extremely limited and restricted.
154.3. The general rule and principle, in view of the
legislative mandate clear from Act 3 of 2016 and Act 33
of 2019, and the principle of severability and competence-
competence, is that the Arbitral Tribunal is the preferred
first authority to determine and decide all questions of
non-arbitrability. The court has been conferred power
of “second look” on aspects of non-arbitrability post the
award in terms of sub-clauses (i), (ii) or (iv) of Section
34(2)(a) or sub-clause (i) of Section 34(2)(b) of the
Arbitration Act.
154.4. Rarely as a demurrer the court may interfere at
Section 8 or 11 stage when it is manifestly and ex facie
certain that the arbitration agreement is non-existent,
invalid or the disputes are non-arbitrable, though the
nature and facet of non-arbitrability would, to some
extent, determine the level and nature of judicial
scrutiny. The restricted and limited review is to check
and protect parties from being forced to arbitrate when
the matter is demonstrably “non-arbitrable” and to cut
off the deadwood. The court by default would refer the
matter when contentions relating to non-arbitrability
are plainly arguable; when consideration in summary
proceedings would be insufficient and inconclusive; when
facts are contested; when the party opposing arbitration
adopts delaying tactics or impairs conduct of arbitration
proceedings. This is not the stage for the court to enter
into a mini trial or elaborate review so as to usurp the
jurisdiction of the Arbitral Tribunal but to affirm and uphold
integrity and efficacy of arbitration as an alternative
dispute resolution mechanism.”
(Emphasis supplied)
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85. As is clear from the aforesaid extract, Vidya Drolia (supra) held that
although the arbitral tribunal is the preferred first authority to determine
the questions pertaining to non-arbitrability, yet the referral court may
exercise its limited jurisdiction to refuse reference to arbitration in
cases which are ex-facie frivolous and where it is certain that the
disputes are non-arbitrable.
86. The decision of this Court in Vidya Drolia (supra) was subsequently
relied upon by a two-Judge Bench of this Court in DLF Home
Developers Ltd. v. Rajapura Homes (P) Ltd. reported in (2021)
16 SCC 743 wherein it was held that the prima facie review as
laid down in Vidya Drolia (supra), in exceptional cases, warrants
interference by the court to protect the wastage of public money.
“21. The jurisdiction of this Court under Section 11
is primarily to find out whether there exists a written
agreement between the parties for resolution of disputes
through arbitration and whether the aggrieved party
has made out a prima facie arbitrable case. The limited
jurisdiction, however, does not denude this Court of its
judicial function to look beyond the bare existence of an
arbitration clause to cut the deadwood. A three-Judge
Bench in Vidya Drolia [Vidya Drolia v. Durga Trading
Corpn. (2021) 2 SCC 1, paras 236, 237, 244.3, 244.4,
244.5, 244.5.1-244.5.3 : (2021) 1 SCC (Civ) 549], has
eloquently clarified that this Court, with a view to prevent
wastage of public and private resources, may conduct
“prima facie review” at the stage of reference to weed out
any frivolous or vexatious claims.”
87. In BSNL v. Nortel Networks (India) (P) Ltd., reported in (2021) 5
SCC 738, this Court explained the scope of primary examination
regarding the aspect of non-arbitrability in the context of time-barred
claims as laid down in Vidya Drolia (supra) thus:
“45. In a recent judgment delivered by a three-Judge
Bench in Vidya Drolia v. Durga Trading Corpn. [Vidya
Drolia v. Durga Trading Corpn. (2021) 2 SCC 1 : (2021)
1 SCC (Civ) 549], on the scope of power under Sections
8 and 11, it has been held that the Court must undertake
a primary first review to weed out “manifestly ex facie
non-existent and invalid arbitration agreements, or
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non-arbitrable disputes”. The prima facie review at the
reference stage is to cut the deadwood, where dismissal
is barefaced and pellucid, and when on the facts and law,
the litigation must stop at the first stage. Only when the
Court is certain that no valid arbitration agreement exists,
or that the subject-matter is not arbitrable, that reference
may be refused.
45.1. […] While exercising jurisdiction under Section 11
as the judicial forum, the court may exercise the prima
facie test to screen and knockdown ex facie meritless,
frivolous, and dishonest litigation. Limited jurisdiction of
the courts would ensure expeditious and efficient disposal
at the referral stage. At the referral stage, the Court can
interfere “only” when it is “manifest” that the claims are
ex facie time-barred and dead, or there is no subsisting
dispute. […]”
(Emphasis supplied)
88. The decision in Vidya Drolia (supra) was applied in the context
of “accord and satisfaction” by a two-Judge Bench of this Court
in Indian Oil Corporation Limited v. NCC Limited reported in
(2023) 2 SCC 539. It was held that although the referral court under
Section 11 of the 1996 Act may look into the aspect of “accord
and satisfaction”, yet it is advisable that in debatable cases and
disputable facts, more particularly in reasonably arguable cases,
the determination of whether accord and satisfaction was actually
present or not should be left to the arbitral tribunal. This Court
also expressed disagreement with the High Court which had held
that post the insertion of Section 11(6-A) to the Act, 1996, the
scope of interference of the referral court in a Section 11 petition
was limited to the aspect of examining the existence of a binding
arbitration agreement qua the parties before it. Relevant extracts
are reproduced hereinbelow:
“90. […] Therefore, even when it is observed and held that
such an aspect with regard to “accord and satisfaction”
of the claims may/can be considered by the Court at
the stage of deciding Section 11 application, it is always
advisable and appropriate that in cases of debatable and
disputable facts, good reasonably arguable case, the
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same should be left to the Arbitral Tribunal. Similar view
is expressed by this Court in Vidya Drolia [Vidya Drolia
v. Durga Trading Corpn. (2021) 2 SCC 1 : (2021) 1 SCC
(Civ) 549].
91. Therefore, in the facts and circumstances of the case,
though it is specifically observed and held that aspects
with regard to “accord and satisfaction” of the claims
can be considered by the Court at the stage of deciding
Section 11(6) application, in the facts and circumstances
of the case, the High Court has not committed any error
in observing that aspects with regard to “accord and
satisfaction” of the claims or where there is a serious
dispute will have to be left to the Arbitral Tribunal.
92. However, at the same time, we do not agree with
the conclusion arrived at by the High Court that after the
insertion of sub-section (6-A) in Section 11 of the Arbitration
Act, scope of inquiry by the Court in Section 11 petition is
confined only to ascertain as to whether or not a binding
arbitration agreement exists qua the parties before it, which
is relatable to the disputes at hand.
93. We are of the opinion that though the Arbitral Tribunal
may have jurisdiction and authority to decide the disputes
including the question of jurisdiction and non-arbitrability,
the same can also be considered by the Court at the
stage of deciding Section 11 application if the facts are
very clear and glaring and in view of the specific clauses
in the agreement binding between the parties, whether the
dispute is non-arbitrable and/or it falls within the excepted
clause. Even at the stage of deciding Section 11 application,
the Court may prima facie consider even the aspect with
regard to “accord and satisfaction” of the claims.
94. Now, so far as the submission on behalf of the
respective parties on the decision of the General
Manager on notified claims in Civil Appeal No. 341
of 2022 arising out of SLP (C) No. 13161 of 2019
is concerned, the General Manager has decided/
declared that the claims are not arbitrable since they
had been settled and the arbitration agreement has
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been discharged under Clause 6.7.2.0 of GCC and no
longer existed/subsisted. As observed hereinabove,
the claims had been settled or not is a debatable and
disputable question, which is to be left to be decided
by the Arbitral Tribunal. Therefore, matters related to
the notified claims in the facts and circumstances of
the case also shall have to be left to be decided by the
Arbitral Tribunal as in the fact situation the aspect of
“accord and satisfaction” and “notified claims” both are
interconnected and interlinked.”
(Emphasis supplied)
89. We find it difficult to agree with the dictum of law as laid in Indian
Oil (supra). While the dictum in Vidya Drolia (supra) allows for
interference by the referral court, it only allows so as an exception
in cases where ex-facie meritless claims are sought to be referred
to arbitration. However, the view taken in Indian Oil (supra) takes a
position which was taken by this Court in Boghara Polyfab (supra),
wherein it was held that the issue of accord and satisfaction could
either be decided by the referring authority or be left for the arbitrator
to decide. This pre-2015 position, as was also pointed in Mayavati
Trading (supra), was legislatively overruled by the 2015 amendment
to the Act, 1996 and the introduction of Section 11(6-A). Thus, in
our view, the intention of this Court in Vidya Drolia (supra) was not
to hold that despite the 2015 amendment, the position regarding
“accord and satisfaction” would continue to be one which was taken
in Boghara Polyfab (supra). Vidya Drolia (supra) only went a step
ahead from the position in Mayavati Trading (supra) to create an
exception that although the rule is to refer all questions of “accord
and satisfaction” to the arbitral tribunal, yet in exceptional cases
and in the interest of expediency, ex facie meritless claims could
be struck down.
90. In NTPC Ltd. v. SPML Infra Ltd. reported in (2023) 9 SCC 385,
a two-Judge Bench of this Court was again faced with the issue
of “accord and satisfaction” in the context of a Section 11 petition
for appointment of arbitrator. Placing reliance on Vidya Drolia
(supra), this Court gave the “Eye of the Needle” test to delineate
the contours of the power of interference which the referral court
may exercise under Section 11 of the Act, 1996. The first prong of
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the said test requires the court to examine the validity and existence
of the arbitration agreement which includes an examination of the
parties to the agreement and the privity of the applicant to the
contract. The second prong of the test requires the court to, as a
general rule, leave all questions of non-arbitrability to the arbitral
tribunal and only as a demurrer reject the claims which are ex-
facie and manifestly non-arbitrable. However, it was clarified that
the standard of the aforesaid scrutiny is only prima facie, that is,
unlike the pre-2015 position, the scrutiny does not entail elaborate
appreciation of evidence and conduct of mini trials by the referral
courts. The relevant observations made therein are reproduced
hereinbelow:
“24. Following the general rule and the principle laid
down in Vidya Drolia [Vidya Drolia v. Durga Trading
Corpn. (2021) 2 SCC 1 : (2021) 1 SCC (Civ) 549], this
Court has consistently been holding that the Arbitral
Tribunal is the preferred first authority to determine
and decide all questions of non-arbitrability. In Pravin
Electricals (P) Ltd. v. Galaxy Infra & Engg. (P) Ltd.
[Pravin Electricals (P) Ltd. v. Galaxy Infra & Engg. (P)
Ltd. (2021) 5 SCC 671, paras 29, 30 : (2021) 3 SCC
(Civ) 307], Sanjiv Prakash v. Seema Kukreja [Sanjiv
Prakash v. Seema Kukreja (2021) 9 SCC 732 : (2021)
4 SCC (Civ) 597] and Indian Oil Corpn. Ltd. v. NCC
Ltd. [Indian Oil Corpn. Ltd. v. NCC Ltd. (2023) 2 SCC
539 : (2023) 1 SCC (Civ) 88], the parties were referred
to arbitration, as the prima facie review in each of these
cases on the objection of non-arbitrability was found to
be inconclusive. Following the exception to the general
principle that the Court may not refer parties to arbitration
when it is clear that the case is manifestly and ex facie
non-arbitrable, in BSNL v. Nortel Networks (India) (P)
Ltd. [BSNL v. Nortel Networks (India) (P) Ltd. (2021) 5
SCC 738 : (2021) 3 SCC (Civ) 352] (hereinafter “Nortel
Networks”) and Secunderabad Cantonment Board v. B.
Ramachandraiah & Sons [Secunderabad Cantonment
Board v. B. Ramachandraiah & Sons (2021) 5 SCC 705 :
(2021) 3 SCC (Civ) 335], arbitration was refused as the
claims of the parties were demonstrably time-barred.
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Eye of the needle
25. The abovereferred precedents crystallise the position
of law that the pre-referral jurisdiction of the Courts under
Section 11(6) of the Act is very narrow and inheres two
inquiries. The primary inquiry is about the existence
and the validity of an arbitration agreement, which also
includes an inquiry as to the parties to the agreement
and the applicant’s privity to the said agreement. These
are matters which require a thorough examination by the
Referral Court. The secondary inquiry that may arise at the
reference stage itself is with respect to the non-arbitrability
of the dispute.
26. As a general rule and a principle, the Arbitral Tribunal
is the preferred first authority to determine and decide all
questions of non-arbitrability. As an exception to the rule,
and rarely as a demurrer, the Referral Court may reject
claims which are manifestly and ex facie non-arbitrable
[Vidya Drolia v. Durga Trading Corpn. (2021) 2 SCC 1,
para 154.4 : (2021) 1 SCC (Civ) 549] […]
27. The standard of scrutiny to examine the non-arbitrability
of a claim is only prima facie. Referral Courts must not
undertake a full review of the contested facts; they must
only be confined to a primary first review [Vidya Drolia v.
Durga Trading Corpn. (2021) 2 SCC 1, para 134 : (2021)
1 SCC (Civ) 549] and let facts speak for themselves. This
also requires the Courts to examine whether the assertion
on arbitrability is bona fide or not. [Vidya Drolia v. Durga
Trading Corpn. (2021) 2 SCC 1 : (2021) 1 SCC (Civ) 549]
The prima facie scrutiny of the facts must lead to a clear
conclusion that there is not even a vestige of doubt that
the claim is non-arbitrable. [BSNL v. Nortel Networks (India)
(P) Ltd. (2021) 5 SCC 738, para 47 : (2021) 3 SCC (Civ)
352] On the other hand, even if there is the slightest doubt,
the rule is to refer the dispute to arbitration [Vidya Drolia
v. Durga Trading Corpn. (2021) 2 SCC 1, para 154.4 :
(2021) 1 SCC (Civ) 549].”
(Emphasis supplied)
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91. The justification given in NTPC v. SPML (supra) for allowing the
scrutiny of arbitrability at the stage of Section 11 petition was that the
referral court is under a duty to protect the parties from being forced
to arbitrate when the matter is demonstrably non-arbitrable, and any
interference by the referral court preventing such ex-facie meritless
arbitration could be termed as legitimate. It was observed thus:
“28. The limited scrutiny, through the eye of the needle, is
necessary and compelling. It is intertwined with the duty
of the Referral Court to protect the parties from being
forced to arbitrate when the matter is demonstrably non-
arbitrable . It has been termed as a legitimate interference
by Courts to refuse reference in order to prevent wastage
of public and private resources [Vidya Drolia v. Durga
Trading Corpn. (2021) 2 SCC 1, para 139 : (2021) 1
SCC (Civ) 549]. Further, as noted in Vidya Drolia [Vidya
Drolia v. Durga Trading Corpn. (2021) 2 SCC 1 : (2021)
1 SCC (Civ) 549], if this duty within the limited compass
is not exercised, and the Court becomes too reluctant to
intervene, it may undermine the effectiveness of both,
arbitration and the Court [Vidya Drolia v. Durga Trading
Corpn. (2021) 2 SCC 1, para 139 : (2021) 1 SCC (Civ)
549]. Therefore, this Court or a High Court, as the case
may be, while exercising jurisdiction under Section 11(6)
of the Act, is not expected to act mechanically merely
to deliver a purported dispute raised by an applicant at
the doors of the chosen arbitrator, as explained in DLF
Home Developers Ltd. v. Rajapura Homes (P) Ltd. [DLF
Home Developers Ltd. v. Rajapura Homes (P) Ltd. (2021)
16 SCC 743, paras 22, 26 : 2021 SCC OnLine SC 781,
paras 18, 20]”
92. The position that emerges from the aforesaid discussion of law on
the subject as undertaken by us can be summarised as follows: -
i. There were two conflicting views which occupied the field under
the Arbitration Act, 1940. While the decisions in Damodar
Valley (supra) and Amar Nath (supra) took the view that the
disputes pertaining to “accord and satisfaction” should be left
to the arbitrator to decide, the view taken in P.K. Ramaiah
(supra) and Nathani Steels (supra) was that once a “full and
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final settlement” is entered into between the parties, no arbitrable
disputes subsist and therefore reference to arbitration must not
be allowed.
ii. Under the Act, 1996, the power under Section 11 was
characterised as an administrative one as acknowledged in
the decision in Konkan Railway (supra) and this continued till
the decision of a seven-Judge Bench in SBP & Co. (supra)
overruled it and significantly expanded the scope of judicial
interference under Sections 8 and 11 respectively of the Act,
1996. The decision in Jayesh Engineering (supra) adopted
this approach in the context of “accord and satisfaction” cases
and held that the issue whether the contract had been fully
worked out and whether payments had been made in full and
final settlement of the claims are issues which should be left
for the arbitrator to adjudicate upon.
iii. The decision in SBP & Co. (supra) was applied in Boghara
Polyfab (supra) and it was held by this Court that the Chief
Justice or his designate, in exercise of the powers available
to them under Section 11 of the Act, 1996, can either look into
the question of “accord and satisfaction” or leave it for the
decision of the arbitrator. However, it also specified that in cases
where the Chief Justice was satisfied that there was indeed
“accord and satisfaction”, he could reject the application for
appointment of arbitrator. The prima facie standard of scrutiny
was also expounded, stating that the party seeking arbitration
would have to prima facie establish that there was fraud or
coercion involved in the signing of the discharge certificate. The
position elaborated in Boghara Polyfab (supra) was adopted
in a number of subsequent decisions, wherein it was held that
a mere bald plea of fraud or coercion was not sufficient for a
party to seek reference to arbitration and prima facie evidence
for the same was required to be provided, even at the stage of
the Section 11 petition.
iv. The view taken by SBP & Co. (supra) and Boghara Polyfab
(supra) was seen by the legislature as causing delays in the
disposal of Section 11 petitions, and with a view to overcome
the same, Section 11(6-A) was introduced in the Act, 1996 to
limit the scope of enquiry under Section 11 only to the extent
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of determining the “existence” of an arbitration agreement. This
intention was acknowledged and given effect to by this Court
in the decision in Duro Felguera (supra) wherein it was held
that the enquiry under Section 11 only entailed an examination
whether an arbitration agreement existed between the parties
or not and “nothing more or nothing less”.
v. Despite the introduction of Section 11(6-A) and the decision
in Duro Felguera (supra), there have been diverging views
of this Court on whether the scope of referral court under
Section 11 of the Act, 1996 includes the power to go into the
question of “accord and satisfaction”. In Antique Art (supra)
it was held that unless some prima facie proof of duress or
coercion is adduced by the claimant, there could not be a
referral of the disputes to arbitration. This view, however, was
overruled in Mayavati Trading (supra) which reiterated the view
taken in Duro Felguera (supra) and held that post the 2015
amendment to the Act, 1996, it was no more open to the Court
while exercising its power under Section 11 of the Act, 1996 to
go into the question of whether “accord and satisfaction” had
taken place.
vi. The decision in Vidya Drolia (supra) although adopted the
view taken in Mayawati Trading (supra) yet it provided that in
exceptional cases, where it was manifest that the claims were
ex-facie time barred and deadwood, the Court could interfere
and refuse reference to arbitration. Recently, this view in the
context of “accord and satisfaction” was adopted in NTPC
v. SPML (supra) wherein the “eye of the needle” test was
elaborated. It permits the referral court to reject arbitration in
such exceptional cases where the plea of fraud or coercion
appears to be ex-facie frivolous and devoid of merit.
93. Thus, the position after the decisions in Mayavati Trading (supra)
and Vidya Drolia (supra) is that ordinarily, the Court while acting in
exercise of its powers under Section 11 of the Act, 1996, will only
look into the existence of the arbitration agreement and would refuse
arbitration only as a demurrer when the claims are ex-facie frivolous
and non-arbitrable.
iii. What is the effect of the decision of this Court in In Re:
Interplay Between Arbitration Agreements under the
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Arbitration and Conciliation Act 1996 and the Indian Stamp
Act 1899 on the scope of powers of the referral court under
Section 11 of the Act, 1996?
94. A seven-Judge Bench of this Court, in In Re: Interplay Between
Arbitration Agreements under the Arbitration and Conciliation
Act 1996 and the Indian Stamp Act 1899 reported in 2023 INSC
1066, speaking eruditely through one of us, Dr Dhananjaya Y.
Chandrachud, Chief Justice of India, undertook a comprehensive
analysis of Sections 8 and 11 respectively of the Act, 1996 and,
inter alia, made poignant observations about the nature of the power
vested in the Courts insofar as the aspect of appointment of arbitrator
is concerned. Some of the relevant observations made by this Court
in In Re: Interplay (supra) are extracted hereinbelow:
“179. […] However, the effect of the principle of competence-
competence is that the arbitral tribunal is vested with the
power and authority to determine its enforceability. The
question of enforceability survives, pending the curing of
the defect which renders the instrument inadmissible. By
appointing a tribunal or its members, this Court (or the
High Courts, as the case may be) is merely giving effect
to the principle enshrined in Section 16. The appointment
of an arbitral tribunal does not necessarily mean that the
agreement in which the arbitration clause is contained as
well as the arbitration agreement itself are enforceable.
The arbitral tribunal will answer precisely these questions.
xxx xxx xxx
185. The corollary of the doctrine of competence-
competence is that courts may only examine whether
an arbitration agreement exists on the basis of the
prima facie standard of review. The nature of objections
to the jurisdiction of an arbitral tribunal on the basis that
stamp-duty has not been paid or is inadequate is such as
cannot be decided on a prima facie basis. Objections of
this kind will require a detailed consideration of evidence
and submissions and a finding as to the law as well as the
facts. Obligating the court to decide issues of stamping at
the Section 8 or Section 11 stage will defeat the legislative
intent underlying the Arbitration Act.
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186. The purpose of vesting courts with certain powers
under Sections 8 and 11 of the Arbitration Act is to facilitate
and enable arbitration as well as to ensure that parties
comply with arbitration agreements. The disputes which
have arisen between them remain the domain of the arbitral
tribunal (subject to the scope of its jurisdiction as defined
by the arbitration clause). The exercise of the jurisdiction
of the courts of the country over the substantive dispute
between the parties is only possible at two stages:
a. If an application for interim measures is filed under
Section 9 of the Arbitration Act; or
b. If the award is challenged under Section 34.
Issues which concern the payment of stamp-duty fall
within the remit of the arbitral tribunal. The discussion in
the preceding segments also make it evident that courts
are not required to deal with the issue of stamping at the
stage of granting interim measures under Section 9.”
(Emphasis supplied)
95. We would like to analyse and elaborate some of the observations
from the aforesaid decision which are highly pertinent to the dispute
at hand.
a. Arbitral Autonomy
96. The principle of judicial non-interference permeates the scheme of
the Act, 1996. The principle of competence-competence as contained
in Section 16 of the Act, 1996 indicates that the arbitral tribunal
enjoys sufficient autonomy from the national courts. The underlying
principle behind arbitral autonomy and judicial non-interference is
that when parties mutually decide to settle their disputes through
arbitration, they surrender their right to agitate the same before the
national courts.
97. Section 5 of the Act, 1996 also minimises the supervisory role that
the courts may play in the arbitral process. There are two facets to
Section 5 – positive and negative. The positive facet allows the judicial
authorities to exercise jurisdiction over matters expressly permitted
under the Act, 1996. The negative aspect, on the other hand, prohibits
the judicial authorities from intervening in the arbitral proceedings
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in situations where the arbitral tribunal has been conferred with
exclusive jurisdiction.
98. What follows from the negative facet of arbitral autonomy when
applied in the context of Section 16 is that the national courts are
prohibited from interfering in matters pertaining to the jurisdiction of
the arbitral tribunal, as exclusive jurisdiction on those aspects vests
with the arbitral tribunal. The legislative mandate of prima facie
determination at the stage of Sections 8 and 11 respectively ensures
that the referral courts do not end up venturing into what is intended
by the legislature to be the exclusive domain of the arbitral tribunal.
99. Gary B. Born1 describes arbitral autonomy as intrinsically related to
the ‘right to arbitrate’, which in turn is a concomitant of freedom of
contract, liberty of association and personal autonomy. He describes
“the right of parties to resolve their disputes, with one another, in
a manner of their own choosing” as “a basic aspect of individual
autonomy and liberty, which is properly accorded protection in almost
all developed legal systems.” He also stresses on the importance
of autonomy of parties to arbitrate as giving effect to fundamental
right to autonomy of parties and increasing their access to justice.
Characterising the right to arbitrate as an important political right, he
observes that “voluntary agreements, by free men and women, to
resolve their disputes between themselves, in a manner which they
structure, are the exercise of basic rights of liberty, association and
property and a bulwark against governmental oppression.”2
100. In Hayter v. Nelson reported in [1990] 2 Lloyd’s Rep. 265, 272, it
was observed that the “modern view in line with the basic principles
of the English law of freedom of contract and indeed International
Conventions is that there is no good reason why the Courts should
strive to take matters out of the hands of the tribunal into which the
parties have by agreement undertaken to place them”.
b. Negative Competence-Competence
101. Section 16 of the Act, 1996 recognises the doctrine of competence-
competence and empowers the arbitral tribunal to rule on its own
jurisdiction. The policy consideration for the same is, firstly, to

1 Gary B. Born, Internation Commercial Arbitration, 3rd Ed. (2021), pp. 685
2 Gary B. Born, Internation Commercial Arbitration, 3rd Ed. (2021), pp. 696
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recognise the intention of the parties in choosing arbitration as the
method for resolving the disputes arising out of the contract and
secondly, to prevent the parties from initiating parallel proceedings
before courts and delaying the arbitral process.
102. The negative aspect of competence-competence is aimed at
restricting the interference of the courts at the referral stage by
preventing the courts from examining the issues pertaining to the
jurisdiction of the arbitral tribunal before the arbitral tribunal itself
has had the opportunity to entertain them. The courts are allowed
to review the decision of the arbitral tribunal at a later stage.
103. The principle of negative competence-competence has also been
codified by the national statutory frameworks for international
arbitration. For example, in French New Code of Civil Procedure,
1981 and the French Decree No. 2011- 48 of 13 January 2011
Reforming the Law Governing Arbitration, the concept of negative
competence-competence was codified based on the decision of
Court of Appeal in Colmar Impex v. PAZ, reported in 1968 Rev.
Arb. 149, 155 (Colmar Cour d’Appeal). In the said decision, it
was observed that, “the principle is that the judge hearing a dispute
has jurisdiction to determine his own jurisdiction. This necessarily
implies that when that judge is an arbitrator, whose powers derive
from the agreement of the parties, he has jurisdiction to examine
the existence and validity of such agreement.”
104. Supreme Court of the United States too has, on a number of
occasions, consistently affirmed that by virtue of the separability
presumption, where there is only a challenge to the validity or legality
of the underlying contract, and no challenge to the existence, validity,
or legality of the associated arbitration clause itself, the claims
should be referred to arbitration. [See: Prima Paint Corp. v. Flood
& Conklin Manufacturing Co. reported in 388 U.S. 395 (U.S. S.Ct.
1967); Buckeye Check Cashing, Inc. v. Cardegna reported in 546
U.S. 440 (U.S. S.Ct. 2006)]
105. In the specific context of settlement of original contract, Gary Born3
writes that “US lower courts have repeatedly applied the separability
presumption in holding that claims regarding the validity or

3 Gary B. Born, Internation Commercial Arbitration, 3rd Ed. (2021), pp. 1251
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enforceability of the underlying contract do not impeach the separable
arbitration clause and for decisions by the arbitrators.” Referring to
the cases in which the aforesaid principles have been applied, he
writes “that approach has been opted in diverse settings including
in the case of Ambulance Biling Sys., Inc. v. Gemini Ambulance
Servs., Inc., 103 S.W.3d 507, 514-515 (Tex. App. 2003) wherein
arbitrators were given the power to decide regarding whether a
settlement agreement was reached replacing or cancelling original
agreement.”
106. In Howsam v. Dean Witter Reynolds, Inc. reported in 537 U.S. 79,
84 (U.S. S.Ct. 2002), it was observed by the US Supreme Court that
“the presumption is that the arbitrator should decide allegation[s] of
waiver, delay, or alike defense to arbitrability.”
c. Judicial Interference under the Act, 1996
107. The parties have been conferred with the power to decide and agree
on the procedure to be adopted for appointing arbitrators. In cases
where the agreed upon procedure fails, the courts have been vested
with the power to appoint arbitrators upon the request of a party, to
resolve the deadlock between the parties in appointing the arbitrators.
108. Section 11 of the Act, 1996 is provided to give effect to the mutual
intention of the parties to settle their disputes by arbitration in situations
where the parties fail to appoint an arbitrator(s). The parameters of
judicial review laid down for Section 8 differ from those prescribed
for Section 11. The view taken in SBP & Co. (supra) and affirmed
in Vidya Drolia (supra) that Sections 8 and 11 respectively of the
Act, 1996 are complementary in nature was legislatively overruled
by the introduction of Section 11(6-A) in 2015. Thus, although both
these provisions intend to compel parties to abide by their mutual
intention to arbitrate, yet the scope of powers conferred upon the
courts under both the sections are different.
109. The difference between Sections 8 and 11 respectively of the Act,
1996 is also evident from the scope of these provisions. Some of
these differences are:
i. While Section 8 empowers any ‘judicial authority’ to refer the
parties to arbitration, under Section 11, the power to refer
has been exclusively conferred upon the High Court and the
Supreme Court.
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ii. Under Section 37, an appeal lies against the refusal of the
judicial authority to refer the parties to arbitration, whereas no
such provision for appeal exists for a refusal under Section 11.
iii. The standard of scrutiny provided under Section 8 is that of
prima facie examination of the validity and existence of an
arbitration agreement. Whereas, the standard of scrutiny under
Section 11 is confined to the examination of the existence of
the arbitration agreement.
iv. During the pendency of an application under Section 8,
arbitration may commence or continue and an award can be
passed. On the other hand, under Section 11, once there is
failure on the part of the parties in appointing the arbitrator as
per the agreed procedure and an application is preferred, no
arbitration proceedings can commence or continue.
110. The scope of examination under Section 11(6-A) is confined to the
existence of an arbitration agreement on the basis of Section 7. The
examination of validity of the arbitration agreement is also limited to
the requirement of formal validity such as the requirement that the
agreement should be in writing.
111. The use of the term ‘examination’ under Section 11(6-A) as
distinguished from the use of the term ‘rule’ under Section 16 implies
that the scope of enquiry under section 11(6-A) is limited to a prima
facie scrutiny of the existence of the arbitration agreement, and
does not include a contested or laborious enquiry, which is left for
the arbitral tribunal to ‘rule’ under Section 16. The prima facie view
on existence of the arbitration agreement taken by the referral court
does not bind either the arbitral tribunal or the court enforcing the
arbitral award.
112. The aforesaid approach serves a two-fold purpose – firstly, it allows
the referral court to weed out non-existent arbitration agreements,
and secondly, it protects the jurisdictional competence of the
arbitral tribunal to rule on the issue of existence of the arbitration
agreement in depth.
113. Referring to the Statement of Objects and Reasons of the Arbitration
and Conciliation (Amendment) Act, 2015, it was observed in In Re:
Interplay (supra) that the High Court and the Supreme Court at the
stage of appointment of arbitrator shall examine the existence of
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a prima facie arbitration agreement and not any other issues. The
relevant observations are extracted hereinbelow:
“209. The above extract indicates that the Supreme Court
or High Court at the stage of the appointment of an
arbitrator shall “examine the existence of a prima
facie arbitration agreement and not other issues”.
These other issues not only pertain to the validity of
the arbitration agreement, but also include any other
issues which are a consequence of unnecessary
judicial interference in the arbitration proceedings.
Accordingly, the “other issues” also include examination
and impounding of an unstamped instrument by the
referral court at the Section 8 or Section 11 stage. The
process of examination, impounding, and dealing with
an unstamped instrument under the Stamp Act is not a
timebound process, and therefore does not align with the
stated goal of the Arbitration Act to ensure expeditious and
time-bound appointment of arbitrators. […]”
(Emphasis supplied)
114. In view of the observations made by this Court in In Re: Interplay
(supra), it is clear that the scope of enquiry at the stage of appointment
of arbitrator is limited to the scrutiny of prima facie existence of the
arbitration agreement, and nothing else. For this reason, we find it
difficult to hold that the observations made in Vidya Drolia (supra)
and adopted in NTPC v. SPML (supra) that the jurisdiction of the
referral court when dealing with the issue of “accord and satisfaction”
under Section 11 extends to weeding out ex-facie non-arbitrable and
frivolous disputes would continue to apply despite the subsequent
decision in In Re: Interplay (supra).
115. The dispute pertaining to the “accord and satisfaction” of claims is
not one which attacks or questions the existence of the arbitration
agreement in any way. As held by us in the preceding parts of this
judgment, the arbitration agreement, being separate and independent
from the underlying substantive contract in which it is contained,
continues to remain in existence even after the original contract
stands discharged by “accord and satisfaction”.
116. The question of “accord and satisfaction”, being a mixed question of
law and fact, comes within the exclusive jurisdiction of the arbitral
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tribunal, if not otherwise agreed upon between the parties. Thus,
the negative effect of competence-competence would require that
the matter falling within the exclusive domain of the arbitral tribunal,
should not be looked into by the referral court, even for a prima
facie determination, before the arbitral tribunal first has had the
opportunity of looking into it.
117. By referring disputes to arbitration and appointing an arbitrator by
exercise of the powers under Section 11, the referral court upholds
and gives effect to the original understanding of the contracting parties
that the specified disputes shall be resolved by arbitration. Mere
appointment of the arbitral tribunal doesn’t in any way mean that the
referral court is diluting the sanctity of “accord and satisfaction” or
is allowing the claimant to walk back on its contractual undertaking.
On the contrary, it ensures that the principal of arbitral autonomy is
upheld and the legislative intent of minimum judicial interference in
arbitral proceedings is given full effect. Once the arbitral tribunal is
constituted, it is always open for the defendant to raise the issue of
“accord and satisfaction” before it, and only after such an objection
is rejected by the arbitral tribunal, that the claims raised by the
claimant can be adjudicated.
118. Tests like the “eye of the needle” and “ex-facie meritless”, although
try to minimise the extent of judicial interference, yet they require
the referral court to examine contested facts and appreciate prima
facie evidence (however limited the scope of enquiry may be) and
thus are not in conformity with the principles of modern arbitration
which place arbitral autonomy and judicial non-interference on the
highest pedestal.
119. Appointment of an arbitral tribunal at the stage of Section 11
petition also does not mean that the referral courts forego any
scope of judicial review of the adjudication done by the arbitral
tribunal. The Act, 1996 clearly vests the national courts with the
power of subsequent review by which the award passed by an
arbitrator may be subjected to challenge by any of the parties to
the arbitration.
120. The principle of subsequent judicial review has been enshrined in
the US doctrine of “Second Look”. In a leading U.S. Supreme Court
judgement of PacifiCare Health Systems, Inc. v. Book reported
in 538, U.S. 401 (U.S. S. Ct. 2003), it was held that the question
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of non-arbitrability should be considered in the first instance by
the arbitral tribunal. The Court observed that, “since we do not
know how the arbitrator will construe the remedial limitations,
the question ... whether they render the parties’ agreements
unenforceable is better left for initial arbitral consideration”. This
doctrine has also been affirmed by judgements of the U.S. lower
courts in cases of Dillon v. BMO Harris Bank, NA reported in
856 F.3d 330, 333 (4th Cir. 2017) and Escobar v. Celebration
Cruise Operator, Inc. reported in 805 F.3d 1279, 1288-89 (11th
Cir. 2015) wherein it was reasoned that the issues of U.S. statutory
law and arbitrability should be submitted first to arbitration, with
the possibility of subsequent judicial review in recognition and
enforcement proceedings.
121. In a case with similar facts but where an arbitration agreement is not
in existence, the claimant would have the recourse to approach a
civil court with its claims. Even in such proceedings before the civil
court, it would be open to the defendant to put forward the defence
of “accord and satisfaction” on the basis of the discharge voucher.
Similarly, it would be open to the claimant to allege that the voucher
had been obtained under fraud, coercion or undue influence. In
such a scenario, the civil court would consider the evidence as to
whether there was any fraud, undue influence or coercion. If the
civil court finds that there was none, then it would reject the claims
at the outset. However, if it finds that the allegations of fraud are
true, then it would reject the discharge voucher and proceed to
adjudicate the claims on merit.
122. Once an arbitration agreement exists between parties, then the option
of approaching the civil court becomes unavailable to them. In such
a scenario, if the parties seek to raise a dispute, they necessarily
have to do so before the arbitral tribunal. The arbitral tribunal, in
turn, can only be constituted as per the procedure agreed upon
between the parties. However, if there is a failure of the agreed
upon procedure, then the duty of appointing the arbitral tribunal
falls upon the referral court under Section 11 of the Act, 1996. If
the referral court, at this stage, goes beyond the scope of enquiry
as provided under the section and examines the issue of “accord
and satisfaction”, then it would amount to usurpation of the power
which the parties had intended to be exercisable by the arbitral
tribunal alone and not by the national courts. Such a scenario would
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impeach arbitral autonomy and would not fit well with the scheme
of the Act, 1996.
123. The power available to the referral courts has to be construed
in the light of the fact that no right to appeal is available against
any order passed by the referral court under Section 11 for either
appointing or refusing to appoint an arbitrator. Thus, by delving into
the domain of the arbitral tribunal at the nascent stage of Section
11, the referral courts also run the risk of leaving the claimant in a
situation wherein it does not have any forum to approach for the
adjudication of its claims, if it Section 11 application is rejected.
124. Section 11 also envisages a time-bound and expeditious disposal of
the application for appointment of arbitrator. One of the reasons for
this is also the fact that unlike Section 8, once an application under
Section 11 is filed, arbitration cannot commence until the arbitral
tribunal is constituted by the referral court. This Court, on various
occasions, has given directions to the High Courts for expeditious
disposal of pending Section 11 applications. It has also directed
the litigating parties to refrain from filing bulky pleadings in matters
pertaining to Section 11. Seen thus, if the referral courts go into
the details of issues pertaining to “accord and satisfaction” and the
like, then it would become rather difficult to achieve the objective
of expediency and simplification of pleadings.
125. We are also of the view that ex-facie frivolity and dishonesty in
litigation is an aspect which the arbitral tribunal is equally, if not
more, capable to decide upon the appreciation of the evidence
adduced by the parties. We say so because the arbitral tribunal has
the benefit of going through all the relevant evidence and pleadings
in much more detail than the referral court. If the referral court is
able to see the frivolity in the litigation on the basis of bare minimum
pleadings, then it would be incorrect to doubt that the arbitral tribunal
would not be able to arrive at the same inference, most likely in
the first few hearings itself, with the benefit of extensive pleadings
and evidentiary material.
126. Before, we close the matter, it is necessary for us to clarify the dictum
as laid in M/s Arif Azim Co. Ltd. v. M/s Aptech Ltd. reported in
2024 INSC 155, so as to streamline the position of law and prevent
the possibility of any conflict between the two decisions that may
arise in future.
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127. In Arif Azim (supra), while deciding an application for appointment
of arbitrator under Section 11(6) of the Act, 1996, two issues had
arisen for our consideration:
i. Whether the Limitation Act, 1963 is applicable to an application
for appointment of arbitrator under Section 11(6) of the Arbitration
and Conciliation Act, 1996? If yes, whether the petition filed by
M/s Arif Azim was barred by limitation?
ii. Whether the court may decline to make a reference under
Section 11 of Act, 1996 where the claims are ex-facie and
hopelessly time-barred?
128. On the first issue, it was observed by us that the Limitation Act,
1963 is applicable to the applications filed under Section 11(6)
of the Act, 1996. Further, we also held that it is the duty of the
referral court to examine that the application under Section 11(6)
of the Act, 1996 is not barred by period of limitation as prescribed
under Article 137 of the Limitation Act, 1963, i.e., 3 years from the
date when the right to apply accrues in favour of the applicant.
To determine as to when the right to apply would accrue, we had
observed in paragraph 56 of the said decision that “the limitation
period for filing a petition under Section 11(6) of the Act, 1996
can only commence once a valid notice invoking arbitration has
been sent by the applicant to the other party, and there has been
a failure or refusal on part of that other party in complying with the
requirements mentioned in such notice.”
129. Insofar as the first issue is concerned, we are of the opinion that the
observations made by us in Arif Azim (supra) do not require any
clarification and should be construed as explained therein.
130. On the second issue it was observed by us in paragraph 67 that
the referral courts, while exercising their powers under Section 11 of
the Act, 1996, are under a duty to “prima-facie examine and reject
non-arbitrable or dead claims, so as to protect the other party from
being drawn into a time-consuming and costly arbitration process.”
131. Our findings on both the aforesaid issues have been summarised
in paragraph 89 of the said decision thus: -
“89. Thus, from an exhaustive analysis of the position of
law on the issues, we are of the view that while considering
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the issue of limitation in relation to a petition under Section
11(6) of the Act, 1996, the courts should satisfy themselves
on two aspects by employing a two-pronged test – first,
whether the petition under Section 11(6) of the Act, 1996
is barred by limitation; and secondly, whether the claims
sought to be arbitrated are ex-facie dead claims and are
thus barred by limitation on the date of commencement
of arbitration proceedings. If either of these issues are
answered against the party seeking referral of disputes
to arbitration, the court may refuse to appoint an arbitral
tribunal.”
132. Insofar as our observations on the second issue are concerned, we
clarify that the same were made in light of the observations made
by this Court in many of its previous decisions, more particularly in
Vidya Drolia (supra) and NTPC v. SPML (supra). However, in the
case at hand, as is evident from the discussion in the preceding
parts of this judgment, we have had the benefit of reconsidering
certain aspects of the two decisions referred to above in the light
of the pertinent observations made by a seven-Judge Bench of this
Court in In Re: Interplay (supra).
133. Thus, we clarify that while determining the issue of limitation in
exercise of the powers under Section 11(6) of the Act, 1996, the
referral court should limit its enquiry to examining whether Section
11(6) application has been filed within the period of limitation of three
years or not. The date of commencement of limitation period for this
purpose shall have to be construed as per the decision in Arif Azim
(supra). As a natural corollary, it is further clarified that the referral
courts, at the stage of deciding an application for appointment of
arbitrator, must not conduct an intricate evidentiary enquiry into the
question whether the claims raised by the applicant are time barred
and should leave that question for determination by the arbitrator.
Such an approach gives true meaning to the legislative intention
underlying Section 11(6-A) of the Act, and also to the view taken in
In Re: Interplay (supra).
134. The observations made by us in Arif Azim (supra) are accordingly
clarified. We need not mention that the effect of the aforesaid
clarification is only to streamline the position of law, so as to bring it
in conformity with the evolving principles of modern-day arbitration,
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and further to avoid the possibility of any conflict between the two
decisions that may arise in future. These clarifications shall not be
construed as affecting the verdict given by us in the facts of Arif
Azim (supra), which shall be given full effect to notwithstanding the
observations made herein.
F. CONCLUSION
135. The existence of the arbitration agreement as contained in Clause 13
of the insurance policy is not disputed by the appellant. The dispute
raised by the claimant being one of quantum and not of liability, prima
facie, falls within the scope of the arbitration agreement. The dispute
regarding “accord and satisfaction” as raised by the appellant does
not pertain to the existence of the arbitration agreement, and can
be adjudicated upon by the arbitral tribunal as a preliminary issue.
136. For all the aforesaid reasons, we uphold and affirm the appointment
of Justice K.A. Puj, former Judge of the High Court of Gujarat as an
arbitrator to resolve the disputes between the parties.
137. The order staying the arbitration proceedings stands vacated.
138. All legal contentions including objections available to the appellant
are kept open to be taken up before the learned Arbitrator.
139. Pending application(s), if any, shall stand disposed of.

Result of the case: Matters disposed of.

†
Headnotes prepared by: Nidhi Jain