Dispute Over Full & Final Settlement Is Arbitrable Despite Parties Discharging Contract : Supreme Court

The Supreme Court today (May 6) observed that if the insured alleges coercion in arriving at a settlement with the insurer, then the dispute over the validity of the settlement remains arbitrable.

“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'.”, the court said.

The bench comprising Justices Abhay S Oka and Ujjal Bhuyan was hearing the case where the Appellant-Insured, who was engaged in the meat processing business, had suffered loss due to flooding. The Appellant alleged that a voucher was signed with the insurer out of coercion to arrive at a settlement, however, immediately after signing of the settlement voucher, the Appellant invoked Arbitration clause.

The Appellant's plea for arbitration was rejected by the High Court, ruling that accepting the payment amounted to "accord and satisfaction", extinguishing further claims.

Aggrieved by the High Court's decision, the Appellant approached the Supreme Court.

Setting aside the High Court's decision, the judgment authored by Justice Bhuyan emphasized that mere signing of a discharge voucher does not bar arbitration if coercion is alleged.

“Mere execution of a full and final settlement receipt or a discharge voucher cannot be a bar to arbitration even when validity thereof is challenged by the claimant on the ground of fraud, coercion or undue influence.”, the court said.

In support, the Court referred to the case of SBI General Insurance Co. Ltd. Vs. Krish Spinning, 2024 LiveLaw (SC) 489, which held that an arbitration agreement doesn't come to an end upon a full and final settlement arrived between the parties. Thus, if the party disputes settlement on the ground of fraud, coercion, etc. then the Arbitral Tribunal by virtue of its power under Section 16 of the Arbitration Ac,t is empowered to decide its jurisdiction over the dispute.

Further, the Court referenced the case of Vidya Drolia Vs. Durga Trading Corporation where the Court held that subject matter qua arbitrability cannot be decided at the stage of Sections 8 or 11 of the 1996 Act unless it is a clear case of dead wood, therefore if there exists a valid arbitration agreement than only arbitral tribunal is empowered to rule upon its competence to decide the dispute under Section 16 of the Arbitration Act.

“Thus, this Court held that at the stage of Section 11(6) of the 1996 Act, court is required to ensure that an arbitrable dispute exist; it has to be prima facie convinced about the genuineness or credibility of the plea of coercion; it cannot be too particular about the nature of the plea which naturally has to be made and established in the arbitral proceeding. If the courts were to take a contrary approach, there would be the danger of denying a forum to the claimant altogether. This Court upheld the concept of economic duress and held that notwithstanding signing of discharge voucher 24 and accepting the amount offered, the dispute is still arbitrable. Pleading in a Section 11(6) application cannot be conclusive whether there is fraud, coercion or undue influence or otherwise”, the court said.

Thus, the Court held that the issue of whether the settlement between the parties was coerced falls within the scope of arbitration and must be determined by the arbitral tribunal.

“The question as to whether the appellant was compelled to sign the standardized voucher/advance receipt forwarded to it by the respondent out of economic duress and whether 28 notwithstanding receipt of Rs.1,88,14,146.00 as against the claim of Rs. 5,71,69,554.00 the claim to arbitration is sustainable or not are clearly within the domain of the arbitral tribunal.”, the court held.

Accordingly, the appeal was allowed.

Case Title: ARABIAN EXPORTS PRIVATE LIMITED VERSUS NATIONAL INSURANCE COMPANY LTD.

Citation : 2025 LiveLaw (SC) 539

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