TaxTMI 
TaxTMI 
2008 (9) TMI 864
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....ver 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). 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 i....
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....r 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 ....
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....spondent 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. 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 set....
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....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 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 o....
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....urt 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 ev....
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....ere 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 te....
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....tration, 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." (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 - K....
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.... 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. 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 ....
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.... We may next examine some related and incidental issues. Firstly, we may refer to the consequences of discharge of a contract. 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 ....
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....at 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 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 w....
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....spute 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 : "............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 ....
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....ty 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. 23. We may next refer to the decisions relied on by the respondent: 23.1) In Da....
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....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 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 contra....
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....ncial 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 '....
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....t 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 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 c....
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....ing 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 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 ....
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....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 dischar....
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....yer. 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....