CAN ARBITRATION CLAUSE BE EVOKED AFTER SIGNING FULL AND FINAL DISCHARGE
INTRODUCTION
Once a person / organization executes full and final discharge Voucher, can it revert back and aver that his claims are not fully satisfied and can he / it evoke the arbitration clause and move an application before the High Court for the appointment of arbitrator for the adjudication of his claims ?
PRESENT ECONOMIC SCENARIO
With the advancement of trade and commerce, the commercial issues have multiplied not only in quantity but also in the complexity of disputes arising therefrom.
The plight of the common man / organizations can be understood from the fact that they cannot withstand the large Government Corporations, Private Companies / MNC’s and Generally, these organizations obtain undated receipts-in-advance in respect of regular/routine payments on the ground of administrative exigencies and accounting necessities. More or less, this has become an accepted practice. The reason for receipt being undated is that 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 payment is released long thereafter, the receipt acknowledging the amount as having been received on a much earlier date will be absurd and meaningless. Besides, they are also asked to issue / sign full and final discharge voucher before the realize of payment to them.
The situation is worst in the Insurance Sector, where a man who has already lost whole / part of his property is on the begging end for the receipt of the claim for which he is legally entitled. His bargaining position is very week and taking the benefits of the same , generally, insurance companies obtain from him full and final discharge voucher before realize of any payment. The insured, left with no option, has to sign and tender full and final discharge voucher, before any penny is realized to the insured. The aforementioned questions becomes significantly important because, it affects , almost , every insured, besides others.
DOES ARBITRATION CLAUSE STILL SUBSISTS
Once an insured has signed and tendered Full and Final Discharge Voucher, does he has any remedy i.e. can he approach Civil Court and aver that the signed and tendered Full and Final Discharge Voucher ought not be given effect to, as it was not voluntary, but was signed under economic duress, coercion, undue influence, fraud, mistake or misrepresentation. Alternately, where there is an arbitration clause in the insurance policy, can the insured aver that an arbitrator ought to be appointed and adjudicate his balance claim. Generally, it is argument of the Insurance Company that since the claim has been settled in full and final, nothing remains to be adjudicated. As if the arbitration clause still subsists the claim can be arbitrated but not otherwise.
THE POSITION OF ARBITRATION CLAUSE
The existence or otherwise of the arbitration clause after the execution of the full and final settlement voucher is the moot question which needs to be examined, before arriving at any conclusion as to whether the claim can be referred to arbitration.
The existence of arbitration clause or otherwise can be enumerated in these terms :-
(i) An arbitration clause is a collateral term of a contract distinguished from its substantive terms; It shall be treated as an agreement independent of the terms of the contract.
(ii) 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. And if there is an arbitration clause in the new substituted agreement that will come into force.
(iii) 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 for certain purposes, the arbitration clauses in those contracts operate in respect of those purposes.
These principals were propounded by the Hon’ble Supreme Court of India in the matter of Union of India Vs Kishorilal Gupta & Bros. [ 1960 (1) SCR 493] and followed expressively or impliedly in Nathini 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), to name a few.
In the striking word the Hon’ble Supreme Court in the matter of Damodar Valley Corporation vs. K. K. Kar [1974 (1) SCC 141] held that :-
“The questions of unilateral repudiation of rights and obligations under the contract or of a full and final settlement of the contract relate to the performance or discharge of the contract. Far from putting an end to the arbitration clause, they fall within the purview of it. A repudiation by one party alone does not terminate the contract. It takes two to end it, and hence it follows that as the contract subsists for the determination of the rights and obligations of the parties, the arbitration clause also survives. This is not a case where the plea is that the contract is void, illegal or fraudulent etc., in which case, the entire contract along with the arbitration clause is non est, or voidable. 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."
A contract is a creation of agreement of the parties and both the parties can comes out of it by (1) Mutual agreement ( technically known as Recession” ) (2) Substitute the new contract for the old contract ( technically known as novation). In both the aforementioned conditions the contract ceases to exist and so do the arbitration clause.
When a contract has been fully performed, there is a discharge of the contract by performance, and the contract comes to an end. There remains nothing - neither any right to seek performance nor any obligation to perform. In other words, no arbitrable dispute and hence no arbitration.
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, it is an arbitrable issue. 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 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.
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 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.
Where the contract has been discharged by the concept of “novation” or “alteration” i.e. the old contract is discharged and a new contract in entered into between the parties. In such cases, the old contract stands discharged and neither of the parties can claim any right, interest or obligation under the old contract. They nonetheless can claim their rights under the new contract. And on the discharge of the new contract by performance, the doctrine of accord and satisfaction comes into play and the both the contract stands discharged.
SCOPE OF JUDICIAL INTERFERENCE UNDER SECTION 11 ARBITRATION ACT PETITION
The scope of Judicial intervention in cases for the appointment of arbitrator in cases where there is a full and final settlement discharge and “ NO dues Certificate” executed by one of the parties is an important question. As if the courts are powerless once the full and final settlement is executed there is no question for the appointment of arbitrator. This issue has been settled by the constitutional Bench of Supreme Court of India in the matter of SBP & Co. vs. Patel Engineering Ltd. - 2005 (8) SCC 618. Hon’ble Supreme Court has laid down the following proposition :-
The issues 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.
The issues which the Chief Justice/his designate may choose to decide (or leave them to the decision of the arbitral tribunal) are:
(a) Whether the claim is a dead (long barred) claim or a live claim.
(b) Whether the parties have concluded the contract/ transaction by recording satisfaction of their mutual rights and obligation or by receiving the final payment without objection.
The issues 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.
THE VARIOUS JUDGMENTS
There are two lines of Judgments rendered by the Hon’ble Supreme Court on the issue.
First, Line of judgment states that once the person has issued full and final discharge, nothing remains to be adjudicated and therefore there is no question of appointment of arbitrator for the adjudication of disputes.
Then there is Second line of Judgment states that even if there is full and final discharge, arbitration clause can be evoked and arbitrator can be appointed to adjudicate the dispute.
FIRST LINE OF JUDGMENTS
The First Line of Judgment rendered by the Hon’ble Supreme Court in the matters of State of Maharastra Vs. Nav Bharat Builders [1994 Supp (3) SCC 83], P K Ramaiah & Co Vs Chairman & Managing Director, National Thermal Power Corporation [ 1994 Supp (3) SCC 126] and Nathani Steels Ltd Vs. Associated Construction [1995 Supp (3) SCC 324] wherein the Hon’ble Supreme Court has held that once a full and final discharge voucher has been given there remains nothing to be arbitrable and hence the matter cannot be referred to arbitrator. Of all these three judgments the most important is the judgment rendered by the 3 Hon’ble Judges bench of Supreme Court in the matter of Nathani Steels Ltd Vs. Associated Construction [1995 Supp (3) SCC 324] wherein the Hon’ble Court has held 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.”
Thus in the judgment of Nathani Steels (supra) the Hon’ble Supreme Court has held in clear terms that if there is a full and final discharge, the arbitration proceedings will not lie until and unless the full and final discharge voucher itself is set aside in proper proceedings. It has to be borne in mind that the judgment was rendered by 3 Hon’ble Judges Judgment.
SECOND LINE OF JUDGMENTS
Second Line of Judgments rendered by the Hon’ble Supreme Court in the matters of Damodar Valley Corporation v. K. K.Kar [1974 (1) SCC 141],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
In the matter of United India Insurance Co. Ltd., vs.
"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.”
IS ADJUDICATION OF CLAIM BY ARBITRATOR POSSIBLE IF FULL AND FINAL DISCHARGE VOUCHER HAS BEEN SIGNED UNDER COERCION, UNDUE INFLUENCE, FRAUD OR MISREPRESENTATION
Between these two line of judgment the question which remains to be answered is in case of execution of full and final discharge voucher, Can the claimant get his claims adjudicated through an arbitrator, if such discharge voucher has been executed under coercion, undue influence, misrepresentation , mistake or fraud.
The issue has been raised and settled by the Hon’ble Supreme Court in the matter of National Insurance Co Ltd Vs Boghara Polyfab Pvt Ltd in 2008 wherein the Hon’ble after taking accounts of both the lines of judgment has held that :-
“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, 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 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. “
While referring to Judgment rendered by the 3 Judges, Hon’ble Court distinguished it by stating that the observation made in the said judgment to the extent that “unless that settlement is set aside in proper proceedings arbitration cannot be proceed’ with by stating that the said observation has been made in the context of mistake and not with reference to the plea of coercion, undue influence, fraud and misrepresentation. Meaning thereby that in case of plea of coercion, undue influence, fraud and misrepresentation, there is no requirement of getting the discharge voucher set aside by way of appropriate proceedings and the claimant can seek arbitration. It has further held that where the respondent is able to demonstrate that the settlement has been arrived at after proper negotiation between the parties, then the claimant cannot plead that execution of the discharge voucher is not voluntary and hence raise the plea of coercion, undue influence, fraud or misrepresentation.
The
(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 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 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.
CONCLUSION
With the clarity in the legal position, in fact, it is a time to rejoice for the common man and Lakhs of small and medium businessman who are compelled to execute a full and final discharge voucher or “ No dues Certificate” to corporate, government organization, insurance companies before the realize of any of their claims. Now the common man can even after execution of the full and final discharge voucher or “ No dues Certificate” can get proper redressal of his claims.
Written By :-
Praveen Agrawal,
B Com, LLB, ACS
Advocate on Record,
Supreme Court of
B 73, Shekhar Apartment,
Mayur Vihar – I Extension,
Phone 9811702850
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