Brief Overview:
“Full and final” settlement does not, by itself, extinguish an arbitration agreement unless the parties expressly agree to do so ! In a dispute between an insurer and an insured, the Supreme Court allowed arbitration despite the insurer’s claim that the matter stood concluded through settlement.
Technical Details:
A meat export company accepted a reduced insurance settlement under financial duress after suffering flood-related losses. When the company later invoked arbitration to claim the balance amount, the insurer rejected the request, citing full and final settlement. The Bombay High Court dismissed the Section 11 application under the Arbitration and Conciliation Act, 1996 (“A&C Act”). The Supreme Court, however, reversed this decision.
Key Observations of the Supreme Court
1) Arbitrability Despite Full and Final Settlement
The Supreme Court reversed the Bombay High Court’s dismissal of the Section 11 application, holding that a dispute is arbitrable even after a “full and final” settlement, if the plea of coercion appears credible on a prima facie basis.
2) Survival of Arbitration Clause Post-Settlement
The Supreme Court clarified that when parties settle and discharge contractual obligations, it does not automatically terminate the arbitration clause. For the arbitration agreement to cease, there must be an express agreement to that effect.
3) Economic Duress is a Valid Ground for Arbitration
The Supreme Court upheld that execution of a discharge voucher or full and final receipt is not conclusive, where the claimant alleges fraud, coercion, or undue influence. Economic duress, if substantiated, preserves the arbitrability of the dispute.
4) Kompetenz-Kompetenz Principle Reaffirmed
Under Section 11(6) of the A&C Act, the Court’s role is limited to verifying the existence of an arbitration agreement. It must not decide on issues of coercion or fraud, such questions are for the arbitral tribunal. The Court emphasized judicial restraint at the appointment stage.
5) Ipso Facto Discharge of Arbitration Agreement?
The Supreme Court relied upon a previous decision to clarify that a contractual settlement (where parties discharge each other from further obligations) does not automatically terminate the arbitration agreement, unless there is an express and unambiguous intention to that effect. While ordinarily no disputes may remain post full and final settlement, a challenge to the validity of such a settlement (e.g. alleging coercion or duress) is a dispute arising under or in relation to the original contract. As such, it remains arbitrable. The arbitration clause continues to survive, even after the underlying contract has been discharged by accord and satisfaction.
6) Safeguard Against Abuse of Limited Judicial Scrutiny
The Supreme Court addressed concerns regarding the limited scope of judicial intervention under Section 11 and observed that this limitation must not be exploited by parties to force arbitration where it is unwarranted. To maintain balance, the Court empowered arbitral tribunals to impose costs on a party found to have abused the arbitral process, especially where proceedings are initiated in bad faith or solely to harass the other side.
JC takeaway:
The Court reaffirmed that :
1) an arbitration clause survives contractual discharge unless explicitly extinguished;
2) signing a full and final settlement does not automatically negate an arbitration agreement, unless the parties expressly agree to terminate arbitration; and
3) disputes regarding quantum of claims remain arbitrable, particularly when allegations of economic duress exist, thereby reaffirming the principle that an arbitration clause survives contractual discharge unless explicitly extinguished.
For further details, please see:
Arabian Exports Private Ltd. v. National Insurance Company Ltd
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