Reportable

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 5733 OF 2008 (Arising out of SLP [C] No.12056 of 2007)

National Insurance Co. Ltd. … Appellant

Vs.

M/s. Boghara Polyfab Pvt. Ltd. … Respondents

J U D G M E N T

R.V.RAVEENDRAN, J.

Leave granted. Heard both counsel. The question involved in

this appeal is whether a dispute raised by an insured, after giving a

full  and  final  discharge  voucher  to  the  insurer,  can  be  referred  to

arbitration.  

The brief facts :

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2. The respondent (Insured) obtained a standard Fire and Special

Perils (with a floater) Policy from the appellant (‘Insurer’) to cover its

goods  in  its  godowns  situated  at  Surat  for  the  period  4.8.2003  to

3.8.2004.  The  sum  insured  was  Rs.  Three  crores,  subsequently

increased to Rs. Six crores. On 27.5.2004 the respondent requested

the insurer to increase the sum insured by another Rs. six crores for a

period of two months. Accordingly, the appellant issued an additional

endorsement increasing the sum insured by another Rupees six crores,

in all Rupees twelve crores. The respondent alleges that the additional

endorsement cover issued by the appellant  was for 69 days, that is

from 27.5.2004 to 3.8.2004. The appellant alleges that the additional

endorsement  cover was for  a period of  60 days from 27.5.2004 to

26.7.2004.  (Note:  The  appellant  claims  that  during  subsequent

investigations,  it  came  to  light  that  its  AAO (Dilip  Godbole)  had

delivered  to  the  respondent,  a  computer  generated  Additional

Endorsement (unauthorisedly altered by hand) showing the period of

additional  cover  as  69  days  up  to  3.8.2004,  and  departmental

proceedings have been initiated against the said officer).     

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3. On  5.8.2004,  the  respondent  reported  loss/damage  to  their

stocks on account of heavy rains and flooding which took place on

2/3.8.2004 and made a claim in that behalf. The surveyor submitted a

preliminary report dated 14.8.2004 followed by a final survey report

dated 6.12.2004 according to which the net assessed loss (payable to

respondent) was Rs.3,18,26,025/-. The said sum was arrived at on the

basis that the sum insured was Rs.12 crores, the actual value of stocks

in the godowns at risk was Rs.8,15,99,149/-, value of damaged goods

was  Rs.5,22,81,001/-,  and  the  recoverable  salvage  value  was

Rs.1,87,79,922/-. The appellant informed the surveyor by letter dated

1.3.2005 that there was an error in the net assessed loss arrived at by

the  surveyor  as  it  assumed the  sum insured  as  Rs.12  crores  up  to

3.8.2004  whereas  the  sum  insured  was  only  Rs.6  crores  after

26.7.2004  till  3.8.2004,  and  therefore  instructed  the  surveyor  to

prepare the final report regarding net assessed loss by taking the sum

insured  as only Rupees  six  crores.  The surveyor therefore gave an

addendum to the final survey report on 22.3.2005 reassessing the net

loss by taking the sum insured as only Rupees six crores. The value of

goods  at  risk,  the  value  of  damaged  goods  and  the  value  of

recoverable salvage remained unaltered. By modifying the percentage

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of insurance at 75.53%, the ‘Net Assessed Loss’ was re-worked as

Rs.2,34,01,740/-.  The  respondent  protested  against  the  loss  being

assessed by taking the sum insured as only Rupees six crores.  The

claim and the dispute were pending consideration for a considerable

time.  

4. The respondent alleged that the appellant forced the respondent

to  accept  a  lower  settlement;  that  the  appellant  informed  the

respondent  that  unless  and  until  the  respondent  issued  an  undated

‘Discharge  voucher-in-advance’  (in  the  prescribed  form)

acknowledging  receipt  of  Rs.2,33,94,964/-  in  full  and  final

settlement,  no amount would be released towards the claim; that in

that behalf,  the appellant sent the format of the discharge voucher to

be signed by respondent on 21.3.2006; that on account of the non-

release of the claim, it was in a dire financial condition and it had no

alternative but to yield to the coercion and pressure applied by the

appellant;  that  therefore  the  respondent  signed  and  gave  the  said

discharge voucher, undated, as required by the insurer during the last

week of  March,  2006.  The payment  was  released  by the  appellant

only after receiving the said discharge-voucher. It is extracted below:  

“NATIONAL INSURANCE COMPANY LTD.

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REGD. OFFICE : 3, MIDDLETON STREET, POST BOX NO.9229, KOLKATA 700071

FORM ACL – 10(1) Loss Voucher Non Motor & PA

Received  from  National  Insurance  Company  Limited through its policy issuing office (herein after called the Company) the sum of Rs.2,33,94,964.00 (Rupees two crore thirty three lakh ninety four thousand nine hundred sixty four only) in full and final settlement of all my/our claims in respect of the property lost or damaged  due  to  others  on  or  about  03/08/2004  under  Policy No.250501/11/03/3100000145.

In consideration of such payment I/we hereby absolve the Company from all  liability  present  or  future  arising  directly  or indirectly out  of  the said  loss  or  damage under  the said policy. Further I/We hereby assign to the company my/our rights to the affected property stolen which shall in the event of their recovery be  the  property of  the  company.  I/We even agree that  the  sum insured under the said policy stand reduced by the amount paid under the next renewal.”  

Sd/-

5. Simultaneously,  the  respondent  lodged  a  complaint  dated

24.3.2006 with the Insurance Regulatory and Development Authority

wherein, after setting out the facts, it alleged:

“We lodged a claim with our insurers immediately and pursued the matter  with  them.  Even  after  the  Surveyor  Mr.  Mehernosh Todiwala of M/s. Bhatawadekar & Co. had submitted his report on 22nd March,  2005,  the  insurers  refused  to  settle  our  claim  on various  counts.  We  had  various  meetings  at  the  Divisional, Regional and even the Head Office of the insurers, but to no avail.

In March, 2005, the insurer company forced us to accept a lower settlement and we were told that we would have to agree to a lower settlement  to  ensure  expeditious  settlement  of  the  claim. Accordingly  on  and  around  the  15th of  March,  2005  nearly  8 months  after  the  loss  we gave  our  forced  consent  to  the  lower

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settlement  offered  in  the  hope  that  the  claim amount  would  be received immediately.

Thereafter for the next 1 year, the insurers failed to settle our claim and made us run from pillar to post for the settlement.  

Finally on March 21st 2006 the insurers have sent us a voucher for the  sum  of  Rs.2,33,94,94  which  considering  our  dire  financial condition, and the continuous failed promises from the insurers, we have had no choice but to accept.

Sir, subsequent to the loss, since we could not pay our international suppliers  on  time  they  almost  completely  stopped  all  our shipments. This has resulted in tremendous financial loss to us. We have  lost  our  long  hard  earned  reputation  in  the  market  by becoming  defaulters.  The  insurers  have  deliberately starved  our unit of funds to ruin us financially.

You will appreciate that we are now faced with a situation where we have no choice but to accept the payment being released to us unconditionally as  the insurers  have made it  very clear  that  the payment will not be released if there is any conditional discharge of  the  vouchers.  In  order  to  safeguard  our  right  to  claim  the difference amount and any other claims arising out of the financial losses  incurred  by  us  a  direct  result  of  the  deliberate  delay in settlement of our claim by the insurers, we make a humble request to the I.R.D.A. to take up the matter with the insurers to ensure that justice prevails and we are paid the entire compensation due to us.”

6. The  respondent  also  issued  a  legal  notice  dated  27.5.2006

wherein  it  was  alleged  that  the  amount  due  by  the  insurer  was

Rs.3,18,26,025/-, and that under duress and implicit coercion, it  had

accepted  the  payment  of  Rs.2,33,94,964/-,  by signing  and  handing

over  a  ‘full  and  final  discharge  voucher’.  By the  said  notice,  the

respondent demanded the difference amount with interest at the rate

of 12% per annum from 6.12.2004 (date of final survey report) till the

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date of payment. The respondent also informed the appellant that if

payment was not so made within 15 days, the notice should be treated

as  notice  invoking  arbitration.  The  appellant  by  its  reply  dated

2.8.2006, rejected the said demand. The appellant contended that the

respondent had unconditionally accepted the claim settlement amount

fully and finally; that respondent had not registered any protest while

accepting the claim cheque; that the amount payable was arrived at

amicably after discussing all aspects of the claim with the insured and

at  no  juncture  any  protest  was  expressed;  and  that  therefore  the

question of invoking the provision for arbitration did not arise.

7. In  view  of  appellant’s  refusal  to  agree  for  arbitration,  the

respondent filed an application under section 11 of the Arbitration &

Conciliation Act, 1996 (‘Act’ for short) in the Bombay High Court.

The said petition was resisted by the appellant by reiterating that the

respondent had accepted the payment of Rs.233,94,964/- in full and

final  settlement  and therefore,  the  respondent  could not  invoke the

arbitration clause.  

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8. The learned Chief Justice of the Bombay High Court exercising

power under section 11 of the Act, allowed the petition by order dated

19.4.2007. After considering the facts, he was of the view that there

was a serious  dispute between the parties  as to whether  ‘discharge

voucher’  was  given voluntarily  or  under  pressure or  coercion,  and

that  required  to  be  settled  by  the  Arbitral  Tribunal.  He  therefore

appointed Sri Justice S.N.Variava as the sole arbitrator. The learned

Chief  Justice  left  open  the  question  whether  there  was  any

coercion/undue  influence  in  regard  to  issue  of  full  and  final

settlement  discharge  voucher  by the  respondent,  and  permitted  the

parties  to  lead evidence before  the arbitrator  on that  question.  The

said order is challenged by the insurer in this appeal by special leave.

The rival contentions :

9. Learned  counsel  for  the  appellant  contended  that  once  the

insurance  claim was settled  and  the  insured  received  payment  and

issued a full and final discharge voucher, there was discharge of the

contract by accord and satisfaction. As a result, neither the contract

nor any claim survived.  It is submitted that when a discharge voucher

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was issued by the respondent, acknowledging receipt of the amount

paid by the appellant, in full and final settlement and confirming that

there  are  no  pending  claims  against  the  appellant,  such  discharge

voucher  should  be  accepted  on  its  face  value  as  a  discharge  of

contract by full and final settlement. Consequently, it should  entail

ipso jure, rejection  in limine of any subsequent claim or any request

for reference of any dispute regarding any claim to arbitration. It was

also  contended  that  having  received  the  payment  under  the  said

discharge  voucher,  the  respondent  cannot,  while  retaining  and

enjoying  the  benefit  of  the  full  and  final  payment,  challenge  the

validity  or  correctness  of  the  discharge  voucher.  The  appellant

contends that the subsequent  claim  of  the  respondent  ought  not  to

have             been referred to arbitration. In support of its contentions,

reliance  was placed  on three decisions  of  this  Court  in   State   of

Maharashtra  v. Nav  Bharat  Builders  [1994 Supp (3) SCC 83], M/s.

P.  K.  Ramaiah  & Co.   v.   Chairman   &  Managing   Director,

National   Thermal   Power  Corpn.  [1994 Supp  (3)  SCC 126]  and

Nathani Steels Ltd. v. Associated Constructions [1995 Supp (3) SCC

324].

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10. On the other hand the respondent contended that the scope of

proceeding under section 11 of the Act was limited. It is submitted

that  once  the  petitioner  establishes  that  the  contract  between  the

parties contains an arbitration agreement, and that the dispute raised

is in respect of a claim arising out of such contract, the dispute has to

be referred to arbitration;  that  any  contention  by  the  appellant

that there is discharge of the contract by  issue  of  full  and  final

discharge voucher is a matter for the arbitral tribunal to examine and

decide, and cannot be held out as a threshold bar to arbitration; and

that  the  question  whether  there  was  accord  and  satisfaction,  or

whether there was discharge of a contract by performance, is itself a

question that is clearly arbitrable.  It  is alternatively submitted that

when  the  Chief  Justice  or  his  designate  is  required  to  consider

whether the claimant has issued a full and final discharge voucher in

settlement  of  all  claims,  any  objection  to  the  validity  of  such

discharge voucher should also be considered.  It  is  pointed out  that

where  the  discharge  voucher  is  given  under  threat  or  coercion,

resulting in economic duress and compulsion, such discharge voucher

is not valid nor binding on the claimant, and the dispute relating to

the claim survives for consideration and is arbitrable. According to

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respondent, where the person on whom the claim is made, withholds

the admitted amount to coerce and compel the claimant to accept a

smaller  payment  in  full  and  final  settlement  and  give  a  discharge

voucher, there is no accord and satisfaction in the eye of law; and the

discharge voucher will not come in the way of a genuine and bona

fide  dispute  being  raised  regarding  the  balance  of  the  claim  and

seeking reference of such claim to arbitration. In support of the said

contentions,  reliance  was  placed  on  the  decisions  of  this  Court  in

Damodar Valley Corporation v. K. K.Kar [1974 (1) SCC 141],  M/s.

Bharat  Heavy  Electricals  Ltd.,  Ranipur  v.  M/s.  Amar  Nath  Bhan

Prakash [1982 (1) SCC 625],  Union of India vs. L. K. Ahuja & Co.

[1988  (3)  SCC  76],  Jayesh  Engineering  Works  v.  New  India

Assurance  Co.  Ltd.  [2000 (10)  SCC 178],  Chairman & Managing

Director,  NTPC  Ltd.  v.  Reshmi  Constructions,  Builders  &

Contractors [2004 (2) SCC 663], and Ambica Construction v. Union

of India [2006 (13) SCC 475].

11. In reply, the learned counsel for the appellant  submitted that

the decisions relied on by the respondent were all rendered by two-

Judge Benches of this Court, whereas the decision in Nathani Steels

relied on by the appellant, was rendered by a three-Judge Bench; and

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therefore the principle laid down in  Nathani Steels that there can be

no  reference  to  arbitration  wherever  there  is  a  full  and  final

settlement, resulting in the discharge of the contract, holds the field

and will have to be followed in preference to the other decisions.  

The questions for consideration :  

12. In this case existence of an arbitration clause in the contract of

insurance  is  not  in  dispute.  It  provides  that  “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 to all other questions be referred to the decision of a

sole  Arbitrator.”  The  rival  contentions  give  rise  to  the  following

question for our consideration :

In what circumstances, a court will refuse to refer a dispute relating to quantum to  arbitration,  when the  contract  specifically  provides  for reference  of  disputes  and  differences  relating  to  the  quantum  to arbitration? In particular, what is the position when a respondent in an application under section 11 of the Act, resists reference to arbitration on the ground that  petitioner has issued a full  and final  settlement discharge voucher and the petitioner contends that he was constrained to  issue  it  due  to  coercion,  undue  influence  and  economic compulsion?  

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13. In Union of India v. Kishorilal Gupta & Bros. [1960 (1) SCR

493],  this  Court  considered  the  question  whether  the  arbitration

clause  in  the  contract  will  cease to  have  effect,  when the contract

stood  discharged  as  a  result  of  settlement.  While  answering  the

question in the affirmative, a three Judge Bench of this Court culled

out the following general principles as to when arbitration agreements

operate and when they do not operate:  

(i) An  arbitration  clause  is  a  collateral  term  of  a  contract distinguished from its  substantive  terms; but  none the  less  it  is  an integral part of it.  

(ii) Howsoever  comprehensive  the  terms of  an arbitration  clause may be, the existence of the contract is a necessary condition for its operation; and the arbitration clause perishes with the contract.  

(iii) A  contract  may be  non  est in  the  sense  that  it  never  came legally into existence or it  was void  ab initio. In that event, as the original  contract  has  no  legal  existence,  the  arbitration  clause  also cannot operate, for along with the original contract, it is also void.  

(iv) Though the contract was validly executed, the parties may put an end to it as if it had never existed and substitute a new contract for it, solely governing their rights and liabilities. In such an event, as the original contract is extinguished by the substituted one, the arbitration clause of the original contract perishes with it.  

(v) Between the two extremes referred to in paras (c) and (d), are the  cases  where  the  contract  may come to  an  end,  on  account  of repudiation,  frustration,  breach  etc.  In  these  cases,  it  is  the performance of the contract that has come to an end, but the contract is still in existence for certain limited purposes, in respect of disputes arising under it or in connection with it. When the contracts subsist

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for certain purposes, the arbitration clauses in those contracts operate in respect of those purposes.

The principle stated in para (i) is now given statutory recognition in

section 16(1)(a) of the Act. The principle in para (iii) has to be now

read subject to section 16(1)(b) of the Act. The principles in paras (iv)

and (v) are clear and continue to be applicable. The principle stated in

para  (ii)  requires  further  elucidation  with  reference  to  contracts

discharged by performance or accord and satisfaction.   

14. The decision in  Kishorilal Gupta was followed and reiterated

in several decisions including Naithani Jute Mills Ltd. vs. Khyaliram

Jagannath (AIR 1968 SC 522),  Damodar Valley Corporation vs. K.

K. Kar [1974 (1) SCC 141] and  Indian Drugs  & Pharmaceuticals

Ltd. vs. Indo Swiss Synthetic Gem Manufacturing Co. Ltd. (1996 (1)

SCC 54). In Damodar Valley Corporation, this Court observed :  

“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

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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.  As  the  contract  is  an outcome of the agreement between the parties it is equally open to the parties thereto to agree to bring it to an end or to treat it us if it never existed. It may also be open to the parties to terminate the previous contract and substitute in its place a new contract or alter the original  contract in  such a way that  it  cannot  subsist.  In all these cases, since the entire contract is put an end to the arbitration clause, which is a part of it, also perishes along with it.”

15. Section 16 of the Act bestows upon the arbitral  tribunal,  the

competence  to  rule  on  its  own jurisdiction.  Sub-section  (1)  of  the

section reads thus :  

“16. Competence of arbitral tribunal to rule on its jurisdiction. – (1) The arbitral tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement, and for that purpose, -  

(a) an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract; and  

(b) a decision by the arbitral tribunal that the contract is null and  void  shall  not  entail  ipso  jure the  invalidity  of  the arbitration clause.  

In SBP & Co. vs. Patel Engineering Ltd. – 2005 (8) SCC 618, a seven

Judge Bench of this Court considered the scope of section 11 of the

Act and held that the scheme of section 11 of the Act required the

Chief Justice or his designate to decide whether there is an arbitration

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agreement  in  terms  of  Section  7  of  the  Act  before  exercising  his

power under Section 11(6) of the Act and its implications. It was of

the view that sub-sections (4), (5) and (6)  of section 11 of the new

Act, combined the power vested in the court under sections 8 and 20

of the old Act (Arbitration Act, 1940). This Court held :

“It  is  necessary  to  define  what  exactly  the  Chief  Justice, approached with an application under Section 11 of the Act, is to decide  at  that  stage.  Obviously,  he  has  to  decide  his  own jurisdiction in the sense, whether the party making the motion has approached the right High Court. He has to decide whether there is an arbitration agreement, as defined in the Act and whether the person who has made the request before him, is a party to such an agreement. It is necessary to indicate that he can also decide the question  whether  the  claim was  a dead  one;  or  a  long  barred claim that was sought to be resurrected and whether the parties have concluded the transaction by recording satisfaction of their mutual rights and obligations or by receiving the final payment without objection. It may not be possible at that stage, to decide whether a live claim made, is one which comes within the purview of  the  arbitration  clause.  It  will  be  appropriate  to  leave  that question to be decided by the arbitral tribunal on taking evidence, along with the merits of the claims involved in the arbitration. The Chief Justice has to decide whether the applicant has satisfied the conditions for appointing an arbitrator under Section 11(6) of the Act.  For the purpose of taking a decision on these aspects,  the Chief Justice can either proceed on the basis of affidavits and the documents produced or take such evidence or get such evidence recorded,  as  may  be  necessary. We  think  that  adoption  of  this procedure in the context of the Act would best serve the purpose sought  to  be  achieved  by the  Act  of  expediting  the  process  of arbitration,  without  too many approaches to the court  at  various stages of the proceedings before the Arbitral tribunal.”

“47.(iv) The Chief Justice or the designated judge will  have the right to decide the preliminary aspects as indicated in the earlier part  of  this  judgment.  These  will  be,  his  own  jurisdiction,  to entertain the request, the existence of a valid arbitration agreement, the  existence  or  otherwise  of  a  live  claim,  the  existence of  the condition for the exercise of his power and on the qualifications of the arbitrator or arbitrators.”

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(emphasis supplied)

This Court also examined the ‘competence’ of the arbitral tribunal to

rule  upon  its  own  jurisdiction  and  about  the  existence  of  the

arbitration  clause,  when  the  Chief  Justice  or  his  designate  had

appointed  the  Arbitral  Tribunal  under  section  11  of  the  Act,  after

deciding upon such jurisdictional issue. This Court held:

“We are inclined to the view that the decision of the Chief Justice on the issue of jurisdiction and the existence of a valid arbitration agreement would be binding on the parties when the matter goes to the arbitral tribunal”.

“Section  16  is  said  to  be  the  recognition  of  the  principle  of Kompetenz - Kompetenz. The fact that the arbitral tribunal has the competence  to  rule  on  its  own  jurisdiction  and  to  define  the contours of its jurisdiction, only means that when such issues arise before it, the Tribunal can and possibly, ought to decide them. This can happen  when  the  parties  have  gone  to  the  arbitral  tribunal without  recourse  to  Section  8  or  11  of  the  Act.  But  where  the jurisdictional  issues  are  decided  under  these  Sections,  before  a reference  is  made,  Section  16  cannot  be  held  to  empower  the arbitral  tribunal  to  ignore  the  decision  given  by  the  judicial authority or the Chief Justice before the reference to it was made. The competence to decide does not enable the arbitral tribunal to get  over  the  finality  conferred  on  an  order  passed  prior  to  its entering upon the reference by the very statute that creates it. That is the position arising out of Section 11(7) of the Act read with Section 16 thereof.  The finality given to  the order of the Chief Justice on the matters within his competence under Section 11 of the  Act,  are  incapable  of  being  reopened  before  the  arbitral tribunal.”

16. It  is  thus  clear  that  when  a  contract  contains  an  arbitration

clause and any dispute in respect of the said contract is referred to

17

arbitration without the intervention of the court, the Arbitral Tribunal

can  decide  the  following  questions  affecting  its  jurisdiction:  (a)

whether there is an arbitration agreement; (b) whether the arbitration

agreement is valid; (c) whether the contract in which the arbitration

clause  is  found  is  null  and  void  and  if  so  whether  the  invalidity

extends to the Arbitration clause also. It follows therefore that if the

respondent before the Arbitral Tribunal contends that the contract has

been discharged by reason of the claimant accepting payment made

by the  respondent  in  full  and  final  settlement,  and  if  the  claimant

counters it by contending that the discharge voucher  was extracted

from  him  by  practicing  fraud,  undue  influence,  or  coercion,  the

arbitral tribunal will have to decide whether the discharge of contract

was  vitiated  by  any  circumstance  which  rendered  the  discharge

voidable at the instance of the claimant. If the arbitral tribunal comes

to  the  conclusion  that  there  was  a  valid  discharge  by  voluntary

execution of a discharge voucher, it will refuse to examine the claim

on merits, and reject the claim as not maintainable. On the other hand,

if the arbitral tribunal comes to the conclusion that such discharge of

contract was vitiated by any circumstance which rendered it void, it

will ignore the same and proceed to decide the claim on merits.  

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17. Where the intervention of the court is sought for appointment

of an Arbitral Tribunal under section 11, the duty of the Chief Justice

or his designate is defined in  SBP & Co. This Court identified and

segregated the preliminary issues that may arise for consideration in

an application under section 11 of the Act into three categories, that is

(i) issues which the Chief Justice or his Designate is bound to decide;

(ii)  issues  which  he  can  also  decide,  that  is  issues  which  he  may

choose to decide; and (iii) issues which should be left to the Arbitral

Tribunal to decide.  

17.1) The  issues  (first  category)  which  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.

17.2) 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:

19

(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.  

17.3) 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.  

It is clear from the scheme of the Act as explained by this Court in

SBP & Co., that in regard to issues falling under the second category,

if  raised  in  any application  under section  11  of  the  Act,  the Chief

Justice/his  designate  may  decide  them,  if  necessary  by  taking

evidence.  Alternatively,  he  may  leave  those  issues  open  with  a

direction  to  the  Arbitral  Tribunal  to  decide  the same. If  the Chief

Justice of his Designate chooses to examine the issue and decides it,

the Arbitral  Tribunal  cannot  re-examine the same issue.  The Chief

Justice/his  designate will,  in  choosing whether he will  decide such

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issue or leave it to the Arbitral Tribunal, be guided by the object of

the  Act  (that  is  expediting  the  arbitration  process  with  minimum

judicial  intervention).  Where  allegations  of  forgery/fabrication  are

made in regard to the document recording discharge of contract by

full  and  final  settlement,  it  would  be  appropriate  if  the  Chief

Justice/his designate decides the issue.  

18. What is however clear is when a respondent contends that the

dispute is not arbitrable on account of discharge of the contract under

a settlement agreement or discharge voucher or no-claim certificate,

and the claimant contends that it was obtained by fraud, coercion or

under influence, the issue will have to be decided either by the Chief

Justice/his designate in the proceedings under section 11 of the Act or

by the arbitral Tribunal as directed by the order under section 11 of

the Act.  A claim for arbitration cannot be rejected merely or solely

on the ground that a settlement agreement or discharge voucher had

been  executed  by  the  claimant,  if  its  validity  is  disputed  by  the

claimant.  

19. We  may  next  examine  some  related  and  incidental  issues.

Firstly, we may refer to the consequences of discharge of a contract.

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When a contract has been fully performed, there is a discharge of the

contract by performance, and the contract comes to an end. In regard

to such a discharged contract, nothing remains - neither any right to

seek  performance  nor  any  obligation  to  perform.  In  short,  there

cannot  be  any  dispute.  Consequently,  there  cannot  obviously  be

reference  to  arbitration  of  any  dispute  arising  from  a  discharged

contract. Whether the contract has been discharged by performance or

not is a mixed question of fact and law, and if there is a dispute in

regard to that question, that is arbitrable. But there is an exception.

Where both parties to a contract confirm in writing that the contract

has  been  fully  and  finally  discharged  by  performance  of  all

obligations  and there  are no outstanding claims or  disputes,  courts

will  not  refer  any  subsequent  claim  or  dispute  to  arbitration.

Similarly, where one of the parties to the contract issues a full and

final  discharge  voucher  (or  no  due  certificate  as  the  case  may be)

confirming  that  he  has  received  the  payment  in  full  and  final

satisfaction  of  all  claims,  and  he  has  no  outstanding  claim,  that

amounts to discharge of the contract by acceptance of performance

and  the  party  issuing  the  discharge  voucher/certificate  cannot

thereafter make any fresh claim or revive any settled claim. Nor can

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he seek  reference  to  arbitration  in  respect  of  any claim. When we

refer  to  a  discharge  of  contract  by  an  agreement  signed  by  both

parties or by execution of a full and final discharge voucher/receipt

by one of the parties, we refer to an agreement or discharge voucher

which  is  validly  and  voluntarily  executed.  If  the  party  who  has

executed the discharge agreement or discharge voucher, alleges that

the execution of such discharge agreement or voucher was on account

of fraud/coercion/undue influence practiced by the other party and is

able  to  establish  the  same,  then  obviously  the  discharge  of  the

contract by such agreement/voucher is rendered void and cannot be

acted upon. Consequently, any dispute raised by such party would be

arbitrable.

20. While  discharge  of  contract  by  performance  refers  to

fulfillment of  the contract  by performance of all  the obligations in

terms of the original contract, discharge by ‘accord and satisfaction’

refers to the contract being discharged by reason of performance of

certain substituted obligations. The agreement by which the original

obligation  is  discharged  is  the  accord,  and  the  discharge  of  the

substituted  obligation  is  the  satisfaction.  A  contract  can  be

23

discharged by the same process which created it,  that is  by mutual

agreement. A contract may be discharged by the parties to the original

contract either by entering into a new contract in substitution of the

original  contract;  or  by  acceptance  of  performance  of  modified

obligations in lieu of the obligations stipulated in the contract. The

classic definition of the term ‘accord and satisfaction’ given by the

Privy  Council   in  Payana  Reena  Saminathan  vs.  Pana  Lana

Palaniappa – 41 IA 142 (reiterated in Kishorilal Gupta) is as under:  

“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 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 of  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]

21. It  is  thus  clear  that  the arbitration  agreement  contained  in  a

contract  cannot  be  invoked  to  seek  reference  of  any  dispute  to

arbitration,  in  the  following  circumstances,  when  the  contract  is

discharged on account of performance, or accord and satisfaction, or

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mutual agreement, and the same is reduced to writing (and signed by

both parties or by the party seeking arbitration) :

(a) Where the  obligations  under a contract  are  fully performed and

discharge of the  contract  by performance is  acknowledged by a

full  and  final  discharge  voucher/receipt.  Nothing  survives  in

regard to such discharged contract.  

(b)Where the  parties  to  the  contract,  by mutual  agreement,  accept

performance of altered, modified and substituted  obligations and

confirm in writing the discharge of contract by performance of the

altered, modified or substituted obligations.  

(c) Where the parties to a contract, by mutual agreement, absolve each

other from performance of their respective obligations (either on

account of frustration or otherwise) and consequently cancel the

agreement  and  confirm  that  there  is  no  outstanding  claims  or

disputes.

22. We may next consider whether the decisions relied on by the

appellant  and  the  decisions  relied  on  by  the  respondent  express

divergent  views,  as  contended  by  the  learned  counsel  for  the

appellant.  We  will  first  consider  the  three  cases  relied  on  by  the

appellant.  

25

22.1) In P.K. Ramaiah, the appellant contractor made certain claims

in regard to a construction contract. The employer rejected the claims,

as also the request for reference to arbitration. On an application by

the contractor, under the Arbitration Act, 1940 for appointment of an

Arbitrator, the Civil Court appointed an Arbitrator. The said order of

appointment was challenged by the employer. The High Court found

that  the  contractor  had  unconditionally  acknowledged  the  final

measurement and accepted the payment in full and final settlement of

the contract on 19.5.1981; that thereafter he had made a fresh claim

on 1.6.1981 which was rejected on 12.8.1981; and that the contractor

did not take action and sought reference to arbitration only several

years  thereafter.  The  High  Court  therefore  held  that  there  was  no

subsisting  contract  to  enable  reference  to  arbitration  and

consequently, set aside the reference to arbitration. On appeal by the

contractor, this Court held that in view of the finding recorded by the

High Court  that  the contractor had accepted the measurements  and

payment  and  had  unconditionally  acknowledged  full  and  final

settlement  and  satisfaction  by  issuing  a  receipt  in  writing,  no

arbitrable dispute arose for being referred to Arbitration. This Court

further held that there was accord and satisfaction by final settlement

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of  the  claims  and  the  subsequent  allegation  of  coercion  was  an

afterthought and only a ploy to get over the settlement of the dispute.  

22.2) In  Nav Bharat  Builders,  a  dispute  arose  in  regard  to  labour

escalation charges. As the employer did not agree for escalation, the

contractor  made an application  under  section 20 of  the  Arbitration

Act, 1940 for filing the agreement and for reference of the dispute to

arbitration.  Pending  the  said  application,  the  contractor  made  a

representation  to  the  employer  for  settlement  of  the  claim.  The

government  constituted  a  Committee  to  examine  the  labour

escalation.  The  said  Committee  suggested  acceptance  of  the  claim

subject to certain terms. The contractor by his letter dated 3.3.1989

agreed  to  receive  the  price  escalation  on  account  of  the  labour

component,  as  worked  out  by  the  Committee.  Thereafter,  the

recommended amount was paid to the contractor, who accepted the

payment and agreed to withdraw the application under section 20 in

regard to the claim for labour escalation. He subsequently contended

that the said letter was obtained by coercion and he was not bound by

it. The trial court and the High Court held that there was an arbitrable

dispute  which  was  challenged  before  this  Court.  It  is  in  this

background this Court following P. K. Ramaiah held :

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“…………the  respondent  contended  that  the  appellant  had accepted the principle on which the escalation charges are to be paid but in its working the amount was not calculated correctly and he expressly referred the same in his letter of acceptance and that, therefore,  it  is  open  to  the  respondent  to  contend  before  the arbitrator  that  in  working  the  principle  on  which  the  amount offered by the Government the arbitrator has to decide as to what amount had been arrived at and if the working in principle is not acceptable  any alternative  principle  would  be  applicable.  If  the arbitrator finds that the respondent is entitled to any claim, it is still an  arbitrable  dispute.  We  find  no  substance  in  the  contention. Whatever be the principle or method or manner of working it out, a  particular  figure  was  arrived  at  by  the  Government.  The respondent was then asked to consider its willingness to accept the offer and having accepted the same and received the amount, it is no longer open to the respondent to dispute the claim on any count or ground. The dispute was concluded and the respondent  fully and finally accepted the (settlement of  the) claim and thereafter received the amount. Thus there is accord and satisfaction of the claim relating to labour escalation charges. Thereby there is no further arbitrable dispute in that behalf.”

[emphasis supplied]

22.3) Nathani  Steels  related  to  a  dispute  on  account  of  non-

completion of the contract. The Court found that the said dispute was

settled  by  and  between  the  parties  as  per  deed  dated  20.12.1980

signed  by both  parties.  The  deed  referred  to  the  prior  discussions

between  the  parties  and  recorded  the  amicable  settlement  of  the

disputes  and differences between the parties  in  the presence of  the

Architect on the terms and conditions set out in clauses 1 to 8 thereof.

In view of it, the Court rejected the contention of the contractor that

the settlement was liable to be set aside on the ground of mistake. A

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three-Judge Bench of this Court, after referring to the decisions in P.

K. Ramaiah and Nav Bharat Builders,  held thus :

“….that once the parties have arrived at a settlement in respect of any dispute or difference arising under a contract and that dispute or the difference is amicable settled by way of a final settlement by and  between  the  parties,  unless  that  settlement  is  set  aside  in proper proceedings, it cannot lie in the mouth of one of the parties to the settlement to spurn it on the ground that it was a mistake and proceed to invoke the Arbitration clause.  If this is permitted the sanctity of contract, the settlement also being a contract, would be wholly lost and it would be open to one party to take the benefit under the settlement and then to question the same on the ground of  mistake  without  having  the  settlement  set  aside.  In  the circumstances, we think that in the instant case since the dispute or difference was finally settled and payments were made as per the settlement, it was not open to the respondent unilaterally to treat the settlement  as non est  and proceed to  invoke the Arbitration clause.”

[emphasis supplied]

22.4) What requires to be noticed is that in Nav Bharat Builders and

Nathani Steels,  this court on examination of facts, was satisfied that

there  were  negotiations  and  voluntary  settlement  of  all  pending

disputes, and the contract was discharged by accord and satisfaction.

In P. K. Ramaiah, the Court was satisfied that there was a voluntary

acceptance  of  the measurements  and full  and  final  payment of  the

amount found due, resulting in discharge of the contract, leaving no

outstanding  claim or  pending  dispute.  In  those  circumstances,  this

Court  held  that  after  such  voluntary  accord  and  satisfaction  or

discharge of the contract, there could be no arbitrable disputes.  

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23. We may next refer to the decisions relied on by the respondent:

23.1) In  Damodar  Valley  Corporation, the  question  that  arose  for

consideration of this Court was as follows:

“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.”

In  that  case  the  question  arose  with  reference  to  a  claim  by  the

supplier.  The  purchaser  required  the  supplier  to  furnish  a  full  and

final receipt. But the supplier did not give such a receipt. Even though

there  was  no  discharge  voucher,  the  purchaser  contended  that  the

payments made by it were in full and final settlement of the bills. This

Court  rejected  that  contention  and  held  that  the  question  whether

there  has  been a  settlement  of  all  the  claims arising  in  connection

with the contract also postulates the existence of the contract which

would mean that the arbitration clause operates. This Court held 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

30

relation to’ or ‘in connection with’ the contract; and where there is an

arbitration  clause in  a contract,  notwithstanding the  plea  that  there

was a full and final settlement between the parties, that dispute can be

referred to arbitration. It was also observed that mere claim of accord

and satisfaction  may not  put  an end to  the arbitration  clause.  It  is

significant  that  neither  P.K. Ramaiah nor  Nathani  Steels  disagreed

with  the  decision  in  Damodar  Valley  Corporation  but  only

distinguished  it  on  the  ground  that  there  was  no  full  and  final

discharge voucher showing accord and satisfaction in that case.   

23.2) In Bharat Heavy Electricals Ltd., this Court observed that the

question whether there was discharge of the contract by accord and

satisfaction  or  not,  is  a  dispute  arising  out  of  the  contract,  which

requires to be referred to arbitration. It was held that the Arbitrator

shall  first  determine  whether  there  was  accord  and  satisfaction

between parties and/or whether the contract was discharged;  that if

the decision was in favour of the employer, the Arbitrator will  not

proceed further in the matter but dismiss the claim of the contractor;

and that if he finds that the contract was not discharged by accord and

satisfaction or otherwise, he should proceed to determine the claim of

31

the  contractor  on  merits.  In  this  case  also,  there  was  no

acknowledgment  of  full  and  final  settlement  not  any  discharge

voucher.  

23.3) In  Union of India vs. L.K. Ahuja & Co.  – 1988 (3) SCC 76,

this Court observed :  

“In order to be entitled to ask for a reference under section 20 of the Act, there must be an entitlement to money and a difference or dispute in respect of the same. It is true that on completion of the work, right to get payment would normally arise and it is also true that on settlement of the final bill, the right to get further payment gets weakened but the claim subsists and whether it does subsist, is a matter which is arbitrable.”  

There was no full  and final discharge or accord and satisfaction in

that  case.  In  Jayesh  Engineering  Works, There  was  an

acknowledgment by the contractor that he had received the amount in

full  and  final  settlement  and  he  has  no  further  claim.  This  Court

following  L. K. Ahuja held that 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 validity of such acknowledgement and

that the arbitrator will consider whether any amount is due to be paid

and  how far  the  claim made  by  the  contractor  is  tenable.  Jayesh

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Engineering  Works did  not  refer  to  Kishorilal  Gupta,  Nav Bharat

Builders, P.K. Ramaiah or Nathani Steels..  

23.4) In  Reshmi Constructions,   the employer prepared a final  bill

and  forwarded  the  same along  with  a  ‘No-Demand  Certificate’  in

printed format confirming that it had no claims. The contractor signed

the no-demand certificate and submitted it. But on the same day, the

contractor also wrote a letter to the employer stating that it had issued

the said certificate in view of a threat that until the said document was

executed,  payment  of  the  bill  will  not  be  released.  In  those

circumstances, after considering  P. K. Ramaiah and  Nathani Steels,

this Court held :

“26. … The conduct of the parties as evidenced in their letters, as noticed hereinbefore, clearly goes to show that not only the final bill submitted by the respondent was rejected but another final bill was prepared with a printed format that a “No-Demand Certificate” has been executed as otherwise the final bill  would not be paid. The respondent herein, as noticed hereinbefore, categorically stated in its letter dated 20.12.1990 as to under what circumstances they were compelled to sign the said printed letter. It appears from the appendix appended to the judgment of the learned trial Judge that the said letter was filed even before the trial court. It is, therefore, not a case whether the respondent’s assertion of “under influence or  coercion”  can  be  said  to  have  been  taken  by  way  of  an afterthought.

27. Even when rights and obligations of the parties are worked out, the contract does not come to an end inter alia for the purpose of determination  of  the  disputes  arising  thereunder,  and,  thus,  the arbitration  agreement  can  be  invoked.  Although  it  may  not  be strictly in place but we cannot shut our eyes to the ground reality that in a case where a contractor has made huge investments, he

33

cannot afford not to take from the employer the amount under the bills,  for  various  reasons  which  may  include  discharge  of  his liability towards the banks, financial institutions and other persons. In such a situation, the public sector undertakings would have an upper hand. They would not ordinarily release the money unless a “No-Demand  Certificate”  is  signed.  Each  case,  therefore,  is required to be considered on its own facts.

28. Further, necessitas non habet legem is an age-old maxim which means necessity knows no law. A person may sometimes have to succumb to the pressure of the other party to the bargain who is in a stronger position.

29.  We may, however, hasten to add that such a case has to be made out and proved before the arbitrator for obtaining an award.”

This decision dealt with a case where there was some justification for

the contention of the contractor that the ‘No-demand Certificate’ was

not given voluntarily but under coercion, and on facts, this Court felt

that the question required to be examined.  

23.5) In Ambica Constructions (supra) this Court considered a clause

in  the  contract  which  required  the  contractor  to  give  a  no  claim

certificate  in  the  form  required  by  Railways  after  the  final

measurement  is  taken  and  provided  that  the  contractor  shall  be

debarred from disputing the correctness of the items covered by ‘No

claim certificate’ or demanding a reference to arbitration in respect

thereof.  There  was  some material  to  show that  the  certificate  was

given  under  coercion  and  duress.  This  Court  following  Reshmi

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Constructions, observed that such a clause in contract would not be

an absolute bar  to a contractor raising claims which were genuine,

even after submission of a no-claim certificate.    

24. We thus find that the cases referred fall under two categories.

The cases relied on by the appellant are of one category where the

court after considering the facts, found that there was a full and final

settlement  resulting  in  accord  and  satisfaction,  and  there  was  no

substance  in  the  allegations  of  coercion/  undue  influence.

Consequently, this Court held that there could be no reference of any

dispute  to  arbitration.  The  decisions  in  Nav  Bharat  and  Nathani

Steels are cases falling under this category where there were bilateral

negotiated settlements of pending disputes, such settlements having

been  reduced  to  writing  either  in  the  presence  of  witnesses  or

otherwise. P.K. Ramaiah is a case where the contract was performed

and there was a full and final settlement and satisfaction resulting in

discharge of the contract. It also falls under this category. The cases

relied on by the respondent fall under a different category where the

court found some substance in the contention of the claimants that ‘no

due/claim  certificates’,  or  ‘full  and  final  settlement  Discharge

Vouchers’  were  insisted  and  taken  (either  in  a  printed  format  or

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otherwise) as a condition precedent for release of the admitted dues.

Alternatively,  they  were  cases  where  full  and  final  discharge  was

alleged,  but  there  were  no  documents  confirming  such  discharge.

Consequently, this Court held that the disputes were arbitrable. 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. In all the three cases, the court examined the

facts  and  satisfied  itself  that  there  was  accord  and  satisfaction  or

complete discharge of the contract and that there was no evidence to

support the allegation of coercion/undue influence. It is true that in

Nathani Steels, there is an observation that “unless that settlement is

set aside in proper proceedings, it cannot lie in the mouth of one of

the parties to the settlement to spurn it on the ground that it  was a

mistake and proceed to invoke the arbitration clause”. But that was an

observation made with reference to a plea of ‘mistake’ and not with

reference to allegation of fraud, undue influence or coercion. It is also

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true that the observations in Damodar Valley Corporation and Jayesh

Engineering Works, that whether contract has been fully worked out

and whether payment has been made in full and final settlement are

questions to be considered by the Arbitrator when there is a dispute

regarding  the  same,  even  if  there  is  a  full  and  final  settlement

discharge  voucher,  seem to  reflect  a  view at  the  other  end  of  the

spectrum. Though it is possible to read them harmoniously, such an

exercise may not be necessary. All those decisions were rendered in

the  context  of  the  provisions  of  the  Arbitration  Act,  1940.  The

perspective of the new Act is different from the old Act. The issue is

not covered by the decision in SBP & Co.

25. In  several  insurance  claim  cases  arising  under  Consumer

Protection Act, 1986, this Court has held that if a complainant/ claimant

satisfies the consumer forum that discharge vouchers were obtained

by fraud, coercion, undue influence etc., they should be ignored, but if they

were found to be voluntary, the claimant will be bound by it resulting

in rejection of  complaint.   In  United India Insurance Co. Ltd.,  vs.

Ajmer Singh Cotton & General Mills – 1999 (6) SCC 400, this Court

held :

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“The mere execution of the discharge voucher would not always deprive  the  consumer  from preferring claim with  respect  to  the deficiency in service or consequential  benefits arising out of the amount paid in default of the service rendered. Despite execution of the discharge voucher, the consumer may be in a position to satisfy the Tribunal  or the Commission  under the Act that  such discharge voucher or receipt had been obtained from him under the circumstances which can be termed as fraudulent  or exercise of undue influence or by misrepresentation or the like. If in a given case the consumer satisfies  the  authority under  the Act  that  the discharge voucher was obtained by fraud, misrepresentation, undue influence  or  the  like,  coercive  bargaining  compelled  by circumstances, the authority before whom the complaint is made would be justified in granting appropriate relief.

In  the  instant  cases  the  discharge  vouchers  were  admittedly executed voluntarily and the  complainants  had  not  alleged their execution under fraud, undue influence, misrepresentation or the like.  In  the  absence  of  pleadings  and  evidence  the  State Commission was justified in dismissing their complaints.”

The  above  principle  was  followed  and  reiterated  in  National

Insurance Co. Ltd. vs. Nipha Exports (P) Ltd. – 2006 (8) SCC 156

and  National Insurance Co. Ltd., vs. Sehtia Shoes – 2008 (5) SCC

400. It will also not be out of place to refer to what this Court had

said in  Central Inland Water Transport Corporation Ltd. vs. Brojo

Nath  Ganguly –  1986  (3)  SCC  156  in  a  different  context  (not

intended to apply to commercial transactions) :

“(This) principle is that the courts will not enforce and will, when called  upon  to  do  so,  strike  down  an  unfair  and  unreasonable contract, or an unfair and unreasonable clause in a contract, entered into between parties who are not equal in bargaining power. It is difficult to give an exhaustive list of all bargains of this type. No court can visualize the different situations which can arise in the affairs of men. One can only attempt to give some illustrations. For

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instance,  the  above principle  will  apply where the  inequality of bargaining power is the result of the great disparity in the economic strength  of  the  contracting  parties.  It  will  apply  where  the inequality is the result of circumstances, whether of the creation of the parties or not. It will apply to situations in which the weaker party is in a position in which he can obtain goods or services or means of livelihood only upon the terms imposed by the stronger party or go without them.  It will also apply where a man has no choice, or rather no meaningful choice, but to give his assent to a contract or to sign on the dotted line in a prescribed or standard form or to accept a set of rules as part of the contract, however unfair, unreasonable and unconscionable a clause in that contract or form or rules may be. This principle, however, will not apply where the bargaining power of the contracting parties is equal or almost equal. This principle may not apply where both parties are businessmen  and  the  contract  is  a  commercial  transaction.  In today's complex world of giant corporations with their vast infra- structural  organizations  and  with  the  State  through  its instrumentalities and agencies entering into almost every branch of industry and commerce, there can be myriad situations which result in  unfair  and  unreasonable  bargains  between  parties  possessing wholly  disproportionate  and  unequal  bargaining  power.  These cases  can  neither  be enumerated  nor  fully illustrated.  The  court must judge each case on its own facts and circumstances.”

[emphasis supplied]

26. Obtaining  of  undated  receipts-in-advance  in  regard  to

regular/routine payments by government departments  and corporate

sector  is  an  accepted  practice  which  has  come  to  stay  due  to

administrative exigencies and accounting necessities. The reason for

insisting  upon  undated  voucher/receipt  is  that  as  on  the  date  of

execution of such voucher/receipt, payment is not made. The payment

is made only on a future date long after obtaining the receipt. If the

date of execution of the receipt is mentioned in the receipt and the

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payment  is  released  long  thereafter,  the  receipt  acknowledging  the

amount as having been received on a much earlier date will be absurd

and meaningless. Therefore, undated receipts are taken so that it can

be  used  in  respect  of  subsequent  payments  by  incorporating  the

appropriate date. But many a time, matters are dealt with so casually,

that the date is not filled even when payment is made. Be that as it

may. But what is of some concern is the routine insistence by some

government  Departments,  statutory  Corporations  and  government

Companies  for issue of undated ‘no due certificates’ or a ‘full  and

final settlements vouchers’ acknowledging receipt of a sum which is

smaller than the claim in full and final settlement of all claims, as a

condition  precedent  for  releasing  even  the  admitted  dues.  Such  a

procedure  requiring  the  claimant  to  issue  an  undated  receipt

(acknowledging receipt of a sum smaller than his claim) in full and

final  settlement,  as  a  condition  for  releasing  an  admitted  lesser

amount, is unfair, irregular and illegal and requires to be deprecated.   

27. Let us consider what a civil court would have done in a case

where the defendant puts forth the defence of accord and satisfaction

on the basis of a full and final discharge voucher issued by plaintiff,

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and the plaintiff alleges that it was obtained by fraud/coercion/undue

influence and therefore not valid. It would consider the evidence as to

whether there was any fraud, coercion or undue influence. If it found

that there was none, it will accept the voucher as being in discharge

of the contract and reject the claim without examining the claim on

merits. On the other hand, if it found that the discharge voucher had

been obtained by fraud/undue influence/coercion,  it  will  ignore the

same, examine whether plaintiff had made out the claim on merits and

decide the matter  accordingly. The position  will  be the  same even

when  there  is  a  provision  for  arbitration.  The  Chief  Justice/his

designate  exercising  jurisdiction  under  section  11  of  the  Act  will

consider whether there was really accord and satisfaction or discharge

of contract by performance. If the answer is in the affirmative, he will

refuse to  refer  the dispute to  arbitration.  On the other  hand,  if  the

Chief Justice/his designate comes to the conclusion that the full and

final  settlement  receipt  or  discharge voucher  was the  result  of  any

fraud/coercion/undue influence, he will have to hold that there was no

discharge  of  the  contract  and  consequently  refer  the  dispute  to

arbitration.  Alternatively,  where  the  Chief  Justice/his  designate  is

satisfied  prima  facie  that  the  discharge  voucher  was  not  issued

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voluntarily and the claimant was under some compulsion or coercion,

and that the matter deserved detailed consideration, he may instead of

deciding  the  issue  himself,  refer  the  matter  to  the  arbitral  tribunal

with a specific direction that the said question should be decided in

the first instance.  

28. Some  illustrations  (not  exhaustive)  as  to  when  claims  are

arbitrable  and  when  they  are  not,  when  discharge  of  contract  by

accord and satisfaction are disputed, to round up the discussion on

this subject :   

(i) A  claim is  referred  to  a  conciliation  or  a  pre-litigation  Lok

Adalat. The parties negotiate and arrive at a settlement. The terms of

settlement are drawn up and signed by both the parties and attested by

the Conciliator or the members of the Lok Adalat. After settlement by

way  of  accord  and  satisfaction,  there  can  be  no  reference  to

arbitration.  

(ii) A claimant makes several claims. The admitted or undisputed

claims are paid. Thereafter negotiations are held for settlement of the

disputed claims resulting in an agreement in writing settling all the

pending claims and disputes. On such settlement, the amount agreed

is paid and the contractor also issues a discharge voucher/no claim

certificate/full  and final receipt.  After the contract is  discharged by

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such  accord  and  satisfaction,  neither  the  contract  nor  any  dispute

survives  for  consideration.  There  cannot  be  any  reference  of  any

dispute to arbitration thereafter.  

(iii) A  contractor  executes  the  work  and  claims  payment  of  say

Rupees  Ten  Lakhs  as  due  in  terms of  the  contract.  The  employer

admits the claim only for Rupees six lakhs and informs the contractor

either in writing or orally that unless the contractor gives a discharge

voucher in  the  prescribed  format acknowledging receipt  of  Rupees

Six Lakhs in full and final satisfaction of the contract, payment of the

admitted  amount  will  not  be  released.  The contractor  who is  hard

pressed for funds and keen to get the admitted amount released, signs

on the dotted line either in a printed form or otherwise, stating that

the amount is received in full and final settlement. In such a case, the

discharge is under economic duress on account of coercion employed

by  the  employer.  Obviously,  the  discharge  voucher  cannot  be

considered to be voluntary or as having resulted in discharge of the

contract by accord and satisfaction. It will not be a bar to arbitration.  

(iv) An  insured  makes  a  claim  for  loss  suffered.  The  claim  is

neither  admitted  nor  rejected.  But  the  insured  is  informed  during

discussions that unless the claimant gives a full and final voucher for

a  specified  amount  (far  lesser  than  the  amount  claimed  by  the

insured),  the  entire  claim  will  be  rejected.  Being  in  financial

difficulties, the claimant agrees to the demand and issues an undated

discharge  voucher  in  full  and  final  settlement.  Only  a  few  days

thereafter, the admitted amount mentioned in the voucher is paid. The

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accord  and  satisfaction  in  such  a  case  is  not  voluntary  but  under

duress,  compulsion  and  coercion.  The  coercion  is  subtle,  but  very

much  real.  The  ‘accord’  is  not  by  free  consent.  The  arbitration

agreement can thus be invoked to refer the disputes to arbitration.  

(v) A claimant makes a claim for a huge sum, by way of damages.

The respondent disputes the claim. The claimant who is keen to have

a settlement and avoid litigation,  voluntarily reduces the claim and

requests for settlement. The respondent agrees and settles the claim

and  obtains  a  full  and  final  discharge  voucher.  Here  even  if  the

claimant  might  have  agreed  for  settlement  due  to  financial

compulsions  and  commercial  pressure  or  economic  duress,  the

decision  was  his  free  choice.  There  was  no  threat,  coercion  or

compulsion by the respondent. Therefore, the accord and satisfaction

is  binding  and valid  and there  cannot  be  any subsequent  claim or

reference to arbitration.  

29. Let us now examine the receipt that has been taken in this case.

It  is  undated  and  is  in  a  pro  forma furnished  by  the  appellant

containing  irrelevant  and inappropriate statements.  It  states  :  “I/we

hereby assign to the company, my/our right to the affected property

stolen which shall, in the event of their recovery, be the property of

the company”. The claim was not in regard to theft of any property

nor was the claim being settled in respect  of a theft  claim. We are

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referring to this aspect only to show how claimants are required to

sign on the dotted line, and how such vouchers are insisted and taken

mechanically without application of mind.

30. The discharge voucher form was handed over to the respondent

on  21.3.2006.  It  was  signed  and  delivered  to  the  appellant

immediately thereafter acknowledging that a sum of Rs.2,33,94,964/-

had  been  received  from  the  insurer  (appellant)  in  full  and  final

settlement, and that in consideration of such payment, the respondent

absolved the appellant from all liabilities, present and future, arising

directly or indirectly,  out  of said loss  or damage under the policy.

Admittedly, on the date when such discharge voucher was signed and

given by the respondent, the payment of Rs.233,94,964/- had not been

made. It was made after receiving the voucher. Therefore, at the time

of signing the voucher by the respondent and at the time of delivery

of  voucher  by the respondent  to  the appellant,  the  contents  of  the

voucher that the said amount had been received, that such amount had

been received in full  and final settlement of all  claims, and that in

consideration of such payment, the company was absolved from any

further liability, are all false and not supported by consideration.  

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31. In this case the High Court examined the issue and found that

prima facie there was no accord and satisfaction or discharge of the

contract. It held that the appellant is still  entitled to raise this issue

before an arbitrator and the arbitrator has to decide it.  On the facts

and  circumstances  and  the  settled  position  of  law  referred  by  us

above, we are also prima facie of the view that there is no accord and

satisfaction in this case and the dispute  is  arbitrable.  But it  is  still

open  to  the  appellant  to  lead  evidence  before  the  arbitrator,  to

establish that there is a valid and binding discharge of the contract by

way of accord and satisfaction.

32. We therefore find no reason to interfere with the order of the

High court.  The appeal  is  accordingly dismissed. We make it  clear

nothing  stated  by  the  High  Court  or  by  us  shall  be  construed  as

expression of any final opinion on the issue whether there was accord

and satisfaction nor as expression of any views on merits of any claim

or contentions of the parties.  

………………………….J. (R V Raveendran)

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New Delhi; ………………………..J. September  18, 2008. (Lokeshwar Singh Panta)        

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