YOU ARE YET TO BE DISCHARGED!

The insured had signed a discharge voucher releasing the insurance company from any and all liability in respect to the insurance claim and received payment. Then the insured decided to ask for more money and sent a legal notice to the insurance company alleging, inter alia, the voucher was signed under coercion and a copy of the survey report was never shared (and no explanation of loss assessment was ever provided).

In SBI General Insurance Co. Ltd v. Krish Spinning, 2024, the Supreme Court of India discussed the availability of arbitration in a scenario where the claim is settled by the insurance company following the release of funds, and receipt of the discharge voucher.

PARTIES INVOLVED

1.      SBI General Insurance Co. Ltd., the insurer (appellant).

2.      M/s Krish Spinning, the insured (respondent).

The insured obtained a standard fire and special perils (material damage) insurance policy from the insurer.

BACKGROUND

During the period of insurance cover, two incidents of fire took place at the factory premises of the insured, as a result of which the insured suffered loss of assets such as cotton stocks in the form of raw materials, semi-finished goods, electrical installations, plant and machinery.

It is pertinent to observe that the present case pertain only to the dispute arising from the settlement of claim relating to the first incident.

THE CONSENT

Although the insured 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 insured 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.

Furthermore, the insured signed an advance discharge voucher, 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 insured was discharging the appellant of the liability arising under its claim.

RELEASE OF CLAIM PAYMENT

Subsequent to the signing of the advance discharge voucher, the insurer released the claim settlement amount of Rs 84,08,957/-.

INSURED CONTESTS THE AMOUNT

The insured issued a legal notice calling upon the insurer to release the balance payment (Rs 1,76,19,967 - Rs 84,19,579) of the claim amount arising out  of the first fire incident. The insured, 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 volition of the respondent. It was also argued that the insurer 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.

INSURER CONTESTS ELIGIBILITY FOR ARBITRATION

The insurer contested the arbitration petition filed by the insured on the ground that the claim raised by the insured herein was stale and having once signed the consent letter, 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.

SUBMISSIONS  

The counsel appearing on behalf of the insurer, submitted that

a.      A full and final settlement was arrived at between the parties.

b.      No plea or assertion has ever been made by the insured, nor any prima facie evidence has been adduced to establish that the insured had made the execution of the discharge voucher, a pre-condition to the payment of the claim, under any coercion.

c.      It was further submitted that there has been an inordinate delay on the part of the respondent in levelling allegations of coercion.

The counsel appearing on behalf of the insured, at the outset submitted that

i)                    The insured 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.

ii)                   The counsel further submitted that the circumstances were such that the insured had to issue the discharge voucher, otherwise payment towards the admitted amount would not have been released and the insured would have been put in immense difficulties. 

iii)                 It was further submitted that mere signing of the discharge voucher by the insured would not imply that there was consensus in arriving at the full and final settlement.

iv)                 Finally, 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. 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.

THE MAIN ISSUE

Whether the execution of a discharge voucher towards the full and final settlement between the parties would operate as a bar to invoke arbitration?

ANALYSIS

Clause 13 of the insurance 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.

The court, understandably, rejected insurer’s objection 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 (clearly, there is an admission of liability) on the part of the insurer, 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 (clearly, only the amount is disputed).

Discharge By Performance

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.

Discharge By “Accord & Satisfaction”

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’.

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.

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?

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.

Furthermore, 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.

The arbitration agreement, by virtue of the presumption of separability, survives the principal contract in which it was contained.  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.

The court confirmed, under various paragraphs, as under:

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. 

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”.

……………there is no rule of an absolute kind which precludes arbitration in cases where a full and final settlement has been arrived at.   

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”.

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. 

CONCLUSION

The court concluded as under:

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.

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