- 1 year ago
In this video, Adimesh Lochan, Shruti Dhonde and Arjun Gupta, members of the International Dispute Resolution and Investigation Practice Group, discuss a judgment of the Supreme Court in SBI General Insurance Co. Ltd. v. Krish Spinning. The judgment deals with (a) the scope of judicial interference in an application for appointment of arbitrators, (b) arbitrability of disputes where contracts were discharged by ‘accord and satisfaction’; (c) scope of judicial interference where the issue includes discharge of a contract by ‘accord and satisfaction’, (d) scope of inquiry into whether the underlying claims are time barred.
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00:00Hi, so today we will be discussing a Supreme Court judgment, which essentially is an SLP
00:29arising out of an order passed by the Gujarat High Court.
00:33The Gujarat High Court was entertaining a section 11 application seeking appointment
00:39of an arbitrator and had finally appointed the arbitrator.
00:44The SLP that was filed before the Supreme Court actually raises some interesting questions
00:50which are worth discussing.
00:53The contract between the parties wherein disputes arose and therefore an arbitrator was sought
00:59to be appointed was actually performed in part by one of the contracting parties and
01:06that performance was acknowledged by signing of some documents.
01:12This part performance and the acknowledgement of the performance led to some of these interesting
01:17questions being put before the Supreme Court and the discussions which ensued from there.
01:23So just to kick off the discussion, I will request Shruti to give us a little bit of
01:28an idea about what is the factual matrix of the case, who are the parties involved
01:33and what basically led the parties to come to the stage of the dispute.
01:38So thank you Arjun.
01:39I will just shed light on exactly what you said, which is the facts that led to such
01:45a question arising before the Supreme Court.
01:48So in this case there were two parties, the respondent before the Supreme Court, Chris
01:53Pinning had obtained an insurance policy from SPI General Insurance which is the appellant
02:00before the Supreme Court.
02:02So during the coverage period, two fire incidents had occurred.
02:07For the first fire incident, there was some sort of a disagreement in the valuation of
02:11the claims between Chris Pinning and SPI.
02:14But eventually Chris Pinning agreed to the valuation as proposed by SPI which was a reduced
02:20valuation and signed on the consent letter and also signed a discharge voucher.
02:27After this, the claims for the second fire incident were processed.
02:31And a short while after the second fire incident claims were processed, Chris Pinning raised
02:37its original claim which it had asked for the first fire incident which was a higher
02:42amount and stated that it had signed the discharge voucher and the consent letter
02:49under the fear that if it had not done so, then it would not have gotten its claim amount
02:55for the second claim which it appears to have agreed to.
02:59So this is why Chris Pinning filed the section 11 application initiating arbitration that
03:06led to the present dispute.
03:08Thanks Shruti.
03:09So, essentially what we understand is that there was some sort of an agreement between
03:17the parties on performance of the insurance contract.
03:21The insured amount was indeed paid by the insurance company and basis the acknowledgement
03:29of that amount being sufficient compensation to the insured.
03:37There was a contention that was raised by the insurance company that all obligations
03:43arising out of the insurance contract stood satisfied and acknowledged that there exists
03:52no further obligations on the part of the insurance company.
03:56So in this situation, we would want to understand that how do disputes still survive between
04:05the parties to the contract.
04:06So Shruti, if you could help us understand a few concepts.
04:09One would be the arbitrability of disputes when the contract which contains the obligations
04:19actually stands discharged through performance of the parties.
04:24And the second is that if a contract has been extinguished by execution of a subsequent
04:33document like a full and final settlement agreement between the contracting parties,
04:38then how does the arbitration agreement contained therein still survive and still enable the
04:46parties to initiate arbitration proceedings under that contract?
04:50Right.
04:51So these are really pertinent questions which have practical implications in day to day
04:54dealings when parties are trying to enter into some sort of a settlement agreement.
04:59So I will just address the questions one by one.
05:04So I will first explain the process of discharge.
05:07So under the Contract Act, Section 63 provides for discharge of a contract by way of accord
05:15and satisfaction.
05:16So if there is a full and final settlement between the parties, then it can be said that
05:21the contract between them, the obligations that arise out of that contract have been
05:26discharged by way of accord and satisfaction.
05:29Now, when I say that the obligations have been discharged, then how does a dispute still
05:36arise and how does the contract still survive?
05:38So while this is the construct under contract law, when such a case comes to arbitration
05:45or when the contract has an arbitration agreement, certain principles of arbitration also come
05:51into play.
05:52So one of the important principles of arbitration is the separability of arbitration agreements.
05:57So an arbitration agreement is considered to be separate from the substantive contract,
06:03which is why what happens is even when parties enter into this sort of an arrangement, sign
06:08a discharge voucher or enter into a full and final settlement of their obligations arising
06:14out of the original contract, the arbitration agreement continues to survive because that
06:19has not been discharged.
06:22So which is why the disputes that arise from such a discharge, whether or not the contract
06:30has actually been discharged, whether there was any duress at play or any coercion at
06:36play, all of these can therefore be arbitrated under the arbitration agreement, which is
06:42still surviving.
06:44So this is why the disputes continue to remain arbitrable and they can be arbitrated under
06:50the arbitration agreement itself because generally arbitration agreements have wordings like
06:56any disputes that arise out of the arbitration agreement, in relation to the arbitration
07:01agreement, under the arbitration agreement, this is a very broad scope.
07:04So all of the disputes that arise in relation to whether or not a contract has been discharged
07:10can be arbitrated under the arbitration agreement.
07:13And so a determination as to whether there has been a discharge or not can go into certain
07:21questions of facts as well and it cannot be a prima facie determination, which is why
07:29it's not for courts at a section 11 stage also to decide the facts of this case and
07:34which is why it has to go to an arbitral tribunal as well.
07:38So that is sort of what the judgment says on the questions that you asked.
07:43Thanks Shruti.
07:44So in light of these observations by the Supreme Court, do you have any suggestions for drafting
07:53of a settlement agreement, which records the performance and extinguishment of obligations
08:01under the substantive contract?
08:04Definitely.
08:05So I will have two points in response to that.
08:08So firstly, there's a difference between a simple discharge and a settlement agreement.
08:15So a simple discharge or a discharge voucher or any agreement which says that, you know,
08:22this agreement is simply to discharge the previous agreement that has existed between
08:25the parties.
08:27And there are no new obligations created by this discharge agreement or a consent letter.
08:36Then that document definitely leaves open some room for parties to then say that, no,
08:44this dispute can be arbitrated under the arbitration agreement of the original contract because
08:50that new contract does not really create any obligations.
08:54But if you were to ensure that no such disputes arise, there are two ways to go about it.
08:59So one can be you enter into a separate settlement agreement, which has separate obligations
09:06of its own, which has a dispute resolution clause of its own.
09:10So which is why you cannot then go back to the previous contract and say that, OK, there
09:15are some outstanding obligations under that contract that remain unfulfilled.
09:20And the second thing, the court also says that the parties will have the opportunity
09:25to arbitrate such a dispute relating to discharge unless agreed otherwise, which means that
09:31if in your discharge voucher or in your consent letter, if you had specifically said that
09:37even the arbitration agreement is non-est or there are no obligations even under the
09:43arbitration agreement upon the signing of this discharge voucher or the consent letter,
09:48then that is a safeguard.
09:49So that saves you from the other party then, you know, coming and stating that there were
09:55some additional claims that maybe were unfulfilled.
09:58So I think these would be the two practical takeaways.
10:03Thank you, Shruti.
10:04I think those were very important points to keep in mind when we are drafting settlement
10:08agreements, which is something which is, you know, a very common document for parties to
10:15sign and amicably settle disputes arising out of any commercial document.
10:19Thank you, Shruti.
10:20Thank you so much.
10:22So just to continue the conversation about the judgment with Adimesh.
10:26So Adimesh, I understand that this judgment delves deep into the powers of the referral
10:32court in a section 11 petition to see what is the scope of such powers and to understand
10:39that what are the questions that a referral court can actually go into at the time of
10:43appointment of an arbitrator.
10:45So they have gone into the entire history of how the law has evolved on this aspect,
10:52but they have also gone through the entire plethora of judgments on this aspect.
10:56And they have thereafter also dealt with the specific concept of accord and satisfaction
11:02and how the referral court should behave in these kind of situations as well.
11:06So could you shed a little light about both the generic scope of powers for a referral
11:12court under section 11 to appoint an arbitrator as well as in accord and satisfaction situations,
11:18how does this court deal with appointment of an arbitrator situation?
11:22Yeah, sure, absolutely.
11:23As you say, the Supreme Court did discuss a series of judgments in this regard, case
11:28laws judgments.
11:29But most importantly, the reference was made to an important amendment of the year 2015
11:34in which an amendment to section 11 specifically stated that a referral court under section
11:3911 must only look at the existence of an arbitration agreement or rather the words were to examine
11:45the existence of an arbitration agreement.
11:47So taking cue from this amendment as well as other judgments, the Supreme Court has
11:51finally concluded that a referral court under section 11 must confine itself to a limited
11:58scrutiny of the prima facie existence of an arbitration agreement.
12:03So long as this referral court is able to conclude that yes, there exists or there prima
12:08facie exists an arbitration agreement, the referral court should refer the matter to
12:12arbitration or rather to appoint the arbitrators for the matter.
12:18Now specifically for matters which involve disputes on accord and satisfaction as was
12:22the present case, the Supreme Court said that matters involving accord and satisfaction
12:27or rather discharge of contracts by way of accord and satisfaction, the issue is a mixed
12:33question of law and fact in the Supreme Court words, the issue is a mixed question of law
12:38and fact.
12:39Therefore, this is by default a question which is to be administered and adjudicated by the
12:44arbitrator.
12:45Therefore, in all matters which involve accord and satisfaction, the referral court must
12:51refer the matter to arbitration or appoint the arbitrators in that section 11.
12:56Thanks Adimesh.
12:58So we all know that there have been certain judgments of the Supreme Court even post the
13:042015 amendment where they have given a slightly expansive view of what are the discretionary
13:13powers available to a referral court at the time of appointment of the arbitrator.
13:18Considering that those are also Supreme Court judgments, is it now the situation that this
13:23particular judgment stands supreme and those earlier judgments have been overruled or will
13:30those judgments still be available to parties to cite and may be take advantage of?
13:36So here is where it gets interesting because the Supreme Court has not specifically overruled
13:43the judgments which have may be given an expansive scope to section 11.
13:46The Supreme Court has only indicated its antithesis to the observations made in those judgments.
13:54Therefore, it might be open for a review by a larger bench and it might be open for parties
13:59to take a contrary view to this judgment as well.
14:04So I also understand that in this judgment the Supreme Court has discussed the concept
14:10of time barred claims and what should be the scope of the referral court if one of
14:17the parties has claimed that the disputes are time barred.
14:23Can you shed some light on this aspect as well?
14:25Yeah, absolutely.
14:26So in addition to discussing generally the scope of section 11 and also the scope of
14:29section 11 with respect to accord and satisfaction, the Supreme Court also briefly discussed the
14:35scope of interference by a referral court when there is an issue of allegation made
14:41by the other party to the section 11 that the underlying claims in the arbitration are
14:47time barred.
14:48So in this regard the Supreme Court referred to an earlier judgment in Arif Azim v. Aspect
14:53and indicated that the second issue which was before the Supreme Court in Arif Azim
14:59that may be required clarification and therefore the Supreme Court in this judgment clarified
15:04that a referral court under section 11 must not at all go into a prima facie examination
15:11of the arbitration agreement.
15:12It must simply examine the existence of an arbitration agreement and wherever there is
15:17an issue of the claims being time barred or ex versae time barred, the Supreme Court or
15:24the referral court rather should leave all of these matters to adjudication by the arbitral
15:29tribunal.
15:30The Supreme Court has also said that these issues should be adjudicated and determined
15:35as a preliminary issue so that speaks a lot for the Supreme Court about how the arbitration
15:42matter should go forward.
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