2024 INSC 532 REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 7821 OF 2024

(ARISING OUT OF SLP (C) NO. 3792 OF 2024)

SBI GENERAL INSURANCE CO. LTD. …APPELLANT

VERSUS

KRISH SPINNING …RESPONDENT

WITH

CIVIL APPEAL NO. 7822 OF 2024

(ARISING OUT OF SLP(C) No. 7220 OF 2024)

J U D G M E N T

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 1 of 85

J. B. PARDIWALA, J.:

For the convenience of exposition, this judgment is divided into the following

parts: -

INDEX

A. FACTUAL MATRIX ............................................................................................. 3

B. SUBMISSIONS ON BEHALF OF THE APPELLANT ................................... 14

C. SUBMISSIONS ON BEHALF OF THE RESPONDENT ............................... 16

D. ISSUES FOR DETERMINATION .................................................................... 18

E. ANALYSIS ............................................................................................................ 19

i. Whether the execution of a discharge voucher towards the full and final settlement

between the parties would operate as a bar to invoke arbitration? ...................... 21

a. Whether the arbitration agreement contained in a substantive contract survives even

after the underlying contract is discharged by “accord and satisfaction”? .............. 25

ii. What is the scope and standard of judicial scrutiny that an application under

Section 11(6) of the Act, 1996 can be subjected to when a plea of “accord and

satisfaction” is taken by the defendant? .................................................................. 31

iii. What is the effect of the decision of this Court in In Re: Interplay Between

Arbitration Agreements under the Arbitration and Conciliation Act 1966 and the

Indian Stamp Act 1899 on the scope of powers of the referral court under Section

11 of the Act, 1996? .................................................................................................... 65

a. Arbitral Autonomy ........................................................................................ 66

b. Negative Competence-Competence .............................................................. 69

c. Judicial Interference under the Act, 1996 ..................................................... 71

F. CONCLUSION .................................................................................................... 84

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 2 of 85

1. Leave granted.

2. Since the issues raised in both the captioned appeals are the same, the

subject-matter also being the same and the parties are also the same, they

were taken up analogously for hearing and are being disposed of by this

common judgment and order.

3. The SLP(C) No. 7220 of 2024 arises from the impugned judgment and

order dated 22.09.2023 passed by the High Court of Gujarat at Ahmedabad

in Arbitration Petition No. 209 of 2021 wherein the High Court after

assigning detailed reasons for allowing the application filed by the

respondent for the appointment of an arbitrator, directed that the said

application be listed before the appropriate bench in accordance with the

roster for the purpose of passing appropriate order for appointment of

arbitrator.

4. The SLP(C) No. 3792 of 2024 arises from the impugned judgment and

order dated 01.12.2023 passed by the High Court of Gujarat at Ahmedabad

in Arbitration Petition No. 209 of 2021 wherein relying upon the judgment

and order dated 22.09.2023 referred to above passed by a co-ordinate

bench in the self-same arbitration application, the High Court allowed the

application of the respondent for the appointment of an arbitrator and

thereby appointed Justice K.A. Puj, former Judge of the High Court of

Gujarat as an arbitrator to resolve the disputes between the parties.

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 3 of 85

A. FACTUAL MATRIX

5. The appellant, SBI General Insurance Co. Ltd., is a Private Sector General

Insurance Company engaged in the business of providing general

insurance to its customers, having one of its offices at 1

st

floor, Shukan

Business Centre, Swastik Cross Road, C.G. Road, Navrangpura,

Ahmedabad.

6. The respondent, M/s Krish Spinning, is a partnership firm registered under

the provisions of the Indian Partnership Act, 1932, and is engaged in the

business of manufacturing and spinning of cotton filaments at its factory

premises situated at Survey No. 845, Ghodasar, Nenpur, Taluka

Memdabad.

7. The respondent obtained a standard fire and special perils (material

damage) insurance policy from the appellant on 31.03.2018 for a total sum

insured of Rs 7,20,00,000/- with the period of insurance being 31.03.2018

to 30.03.2019.

8. During the period of insurance cover, two incidents of fire took place at the

factory premises of the respondent, as a result of which the respondent

suffered loss of assets such as cotton stocks in the form of raw materials,

semi-finished goods, electrical installations, plant and machinery.

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 4 of 85

9. The first incident of fire took place on 28.05.2018 in which the respondent

claims to have suffered a total loss amounting to Rs 1,76,19,967/-. The

second incident of fire took place on 17.11.2018 wherein the respondent

claims to have suffered a total loss amounting to Rs 6,32,25,967/-. It is

pertinent to observe that the present appeals pertain only to the dispute

arising from the settlement of claim relating to the first incident of fire

which took place on 28.05.2018.

10. After the first incident of fire that took place, M/s Paresh Shah & Associates

was appointed as the surveyor by the appellant company on 29.05.2018 under

Section 64UM of the Insurance Act, 1938. The surveyor visited the factory

premises of the respondent on a number of occasions between 29.05.2018 and

29.08.2018 for the purpose of assessing the extent of loss suffered by the

respondent in the fire accident, and accordingly prepared the final survey

report dated 30.12.2018. In the said report, it was inter alia observed that the

fire could not have been caused by any external factor, and that it could have

been caused by spontaneous combustion due to humid temperatures. The

quantum of loss suffered by the respondent, after accounting for deductions

under multiple heads was assessed by the surveyor at Rs 84,19,579/-.

11. Although the respondent 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 respondent to the surveyor

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 5 of 85

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.

12. After addressing the consent letter as aforesaid to the surveyor, the

respondent signed an advance discharge voucher dated 04.01.2019,

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 respondent was discharging the appellant of the liability

arising under its claim.

13. Subsequent to the signing of the advance discharge voucher, the appellant

released the claim settlement amount of Rs 84,08,957/- on 31.01.2019.

14. Thereafter, in relation to the claim arising out of the second fire incident,

the appellant released a total amount of Rs 4,86,67,050/- in three

instalments. The third and final instalment of Rs 2,23,67,050/- was

released on 14.10.2019.

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 6 of 85

15. On 25.10.2019, that is eleven days after the receipt of the third and final

instalment in relation to the claim arising out of the second fire incident,

the respondent dropped one letter by hand delivery at the office of the

appellant. The respondent, inter alia, stated in the said letter that a copy of

the surveyor’s final assessment report was not provided to it despite earlier

requests. The respondent alleged that it had to sign the final discharge

voucher as it was badly in need of money. The respondent further stated in

its letter that it had been unable to take any action due to non-receipt of the

surveyor’s report. The appellant refused to accept the letter and returned it

back to the respondent. The contents of the letter are reproduced

hereinbelow:

“Date:- 25/10/2019

To,

The Manager,

SBI General Insurance Company,

Ahmedabad.

Subject: - Fire claim no.513768 for loss dated 28/05/2018.

Respected Sir,

In connection to the above, we have requested you to

provide the copy of the complete survey report along with

all enclosures thereof to enable us to understand the

calculations made by the surveyor to arrive at the gross

and net loss / damage. Please note that despite our request,

we have not received the copy of survey report, which

shows your arrogant approach.

At this stage, we wish to inform you that you have taken

our consent on the amount assessed by the surveyor. We

have signed the working sent by you. During the said

period, there was another fire in our factory, in which the

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 7 of 85

entire stock, building, plant and machinery have been

damaged and we were badly in need of money, hence

considering you being a reputed insurance company, you

must have examined the assessment made by the surveyor

and on that trust bearing in mind, we have signed the

working sheet of assessments and voucher is also signed

by us in your office as you have informed that we would

get the payment immediately. But the same was also

delayed beyond reasonable time.

Now, since our auditors and bankers would like to know

the grounds considering which, the balance amount of our

claim is not considered by you / surveyor, you are once

again requested to provide the copy of survey report along

with all the documents submitted to you by the surveyor,

based on which, the claim has been settled and paid by you.

Since we have not received the copy of surveyor report, we

are unable to take further action. Once again, you are

requested to provide the copy of survey report along with

all enclosures thereof.

Please consider this letter as a notice.

Yours Faithfully

For KRISH SPINNING”

16. The respondent, on the same day, sent an email to the appellant with a copy

of the aforesaid letter calling upon the respondent to take appropriate and

necessary action. The contents of the said email are reproduced

hereinbelow:

“Sir,

This is in reference to the above subject, today at around

04:00 pm, or personnel visited your office to hand over a

letter requesting you to provide the complete survey report

of our fire claim no.-513768 for loss dated 28/05/2018.

You, in turn returned the letter without accepting it, asking

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 8 of 85

to get the letter signed by our Mr. Ashwinkumar N. Kacha

and resubmit the same.

We wish to inform that Mr. Ashwinkumar Kacha is busy

with medical emergency, and we will submit the letter

signed by him, when he is relieved from the medical

emergency. Attached herewith, is the copy of the said letter

for your kind reference and necessary action.

Thanks & Regards”

17. The appellant replied to the aforesaid letter as well as the email vide the

letter dated 07.11.2019 refuting the allegations of the respondent by stating

that the assessment of loss was personally explained by the surveyor to the

representative of the respondent who in turn had taken an informed

decision of accepting the settlement amount and signing the consent letter

and the advance discharge voucher. A copy of the survey report was also

provided to the respondent along with the reply letter. The contents of the

said reply letter are reproduced hereinbelow:

“SBI GENERAL INSURANCE

Dt: 07/11/2019

To

M/s Krish Spinning

Survey No. 845, Nenpur Haidarvas Road,

Ghodsar Gam,

Tal: Mehmdabad,

Gujarat-387110

(M): 9377071329

Dear Sir,

Re: Claim No. 513768 under Policy No. 9006820 Date of

Loss: 28/05/2018 Sub: Reply of Your letter dated

25/10/2019

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 9 of 85

We refer to your letter dated 25/10/2019, wherein you have

made reference of previous communications asking for

copy of survey report. We have reviewed our records and

we regret to inform that we are not able to locate any

communication in our record through which a request was

made seeking copy of Survey Report of Surveyor M/s

Paresh Shah & Associates. Unless proved otherwise, we

are accordingly considering your letter dated 25/10/2019

as first communication requesting for copy of survey

report.

We reiterate that loss assessment was personally explained

to Mr. Ashwin kacha from your office on 24th December

2018 at our Ahmedabad office and only after

understanding the assessment, Mr. Kacha had taken an

informed decision of signing the consent letter. This

consent letter was also followed with an advance

discharge voucher which was submitted by your office in

response to our settlement offer.

Furthermore, the payment remittance for claim settlement

amount was carried out on 8th January 2019 which is

within 15 days from the date of submission of consent letter

and thus there was no delay beyond reasonable time as

alleged in your letter.

As requested in your referred letter, we are pleased to

attach copy of survey report that forms basis of claim

remittance. You may also note that loss assessment arrived

by surveyor in attached survey report is in line with loss

workings reviewed with Mr. Kacha.

Yours Sincerely

For SBI General Insurance Company Ltd.,

(Sd)

Authorized Signatory”

18. On 02.03.2020, the respondent issued a legal notice calling upon the

appellant to release the balance payment of the claim amount arising out

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 10 of 85

of the first fire incident. The respondent, 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. The respondent further stated that it had

sent the protest letter dated 25.10.2019 immediately after receiving the

final instalment in relation to the claim arising out of the second fire

incident. The respondent further stated that in the event of the appellant’s

denial or failure to pay the balance amount within a period of 15 days, the

legal notice should be treated as notice invoking arbitration.

19. The appellant replied to the aforesaid legal notice on 16.03.2020 refuting

the allegations made by the respondent, alleging them to be mala fide and

an after-thought. The appellant stated that the discharge voucher signed by

the respondent was unqualified and on his own free will and volition. It

was further stated by the appellant that the amount being claimed by the

respondent was not due in the first place, thereby making the dispute not

one of quantum but one of liability, and therefore the arbitration agreement

would not be attracted to the dispute raised.

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 11 of 85

20. As the parties were unable to arrive at any amicable resolution of the

dispute, and as no arbitrator was nominated by the appellant in response to

the notice invoking arbitration, the respondent, on 25.10.2021 filed a

petition for the appointment of arbitrator under Section 11(6) of the

Arbitration and Conciliation Act, 1996 (hereinafter “the Act, 1996”)

before the High Court.

21. The case of the respondent before the High Court was that as against the

loss of Rs 1,76,19,967/- suffered by it, the appellant company paid only Rs

84,19,579/- and thus it was not completely indemnified. It was also argued

that the appellant 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.

22. The appellant, on the other hand, contested the arbitration petition filed by

the respondent on the ground that the claim raised by the respondent herein

was stale and having once signed the consent letter dated 24.12.2018, 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 at the stage of deciding the Section 11 petition.

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 12 of 85

23. The High Court, having regard to the aforesaid submissions of the parties,

held that the dispute in question was falling in the realm of adjudication

and the same is the function to be discharged by an arbitrator. Placing

reliance on the decision of this Court in Oriental Insurance Company Ltd.

v. Dicitex Furnishing Ltd. reported in (2020) 4 SCC 621, the High Court

held that if the dispute existing between the parties could be referred to

arbitration under the arbitration agreement, then appointment of arbitrator

has to follow. Some pertinent observations made by the High Court are

extracted hereinbelow:

“6. Therefore, on one hand, the company has taken a stand

that the petitioner is paid the amounts due and payable under

the policy and that there is no need to refer the disputes to the

arbitration under clause 13 of the policy, on the other hand,

the petitioner disputes such case on various grounds. It was

stated that amount of Rs. 92,00,388/-is wrongfully deducted

while making payment of Rs. 84,19,579/ inasmuch as total

claim lodged was Rs. 1,76,19,967/-.

6.1 Therefore, the above aspects indeed travels to the

adjudicatory realm, which is the function to be discharged by

the arbitrator. When the claim is disputed, it is the arbitrator

who may competently decide the claim. Arbitrability of the

dispute is also to be decided by the arbitrator. While

exercising the powers under section 8 of the Arbitration and

Conciliation Act, 1996, such questions cannot be gone into

by this Court and when there is an arbitration clause, the

aspects are to be decided by the arbitrator for such purpose.

6.2 Following observations of the Supreme Court in Oriental

Insurance Company Ltd. vs. Dicitex Furnishing Ltd.

[(2020) 4 SCC 621], may be pertinently noticed,

"...an application under Section 11(6) is in the

form of a pleading which merely seeks an order

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 13 of 85

of the court, for appointment of an arbitrator. It

cannot be conclusive of the pleas or contentions

that the claimant or the concerned party can

take, in the arbitral proceedings. At this stage,

therefore, the court which is required to ensure

that an arbitrable dispute exists, 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 necessarily has to be made and

established in the substantive (read:

arbitration) proceeding. If the court were to take

a contrary approach and minutely examine the

and plea judge its credibility or reasonableness,

there would be a danger of its denying a forum

to the applicant altogether, because rejection of

the application would render the finding (about

the finality of the discharge and its effect as

satisfaction) final, thus, precluding the

applicant of itsright event to approach a civil

court."

6.3 In the proceedings under section 8 of the Arbitration Act,

it is not the function of the Court to examine in detail, the

extant and nature of dispute, if dispute exist is referable to

the arbitration clause occurring in the agreement between

the parties, the appointment of arbitrator has to follow.

6.4 It is observed that this Court has not expressed any

opinion on merits of the dispute and arbitrability thereof.

6.5 In view of the above discussion, the prayer made in the

present application for appointment of arbitrator shall have

to be adverted to.

7. In the result, the Registry is directed to list the same before

the appropriate Bench in accordance with roster for the

purpose of passing the order regarding appointment of

arbitrator.”

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 14 of 85

24. The aforesaid observations were made by the High Court in its order dated

22.09.2023 which has been impugned by the appellant in SLP(C) No. 7220

of 2024. After making the above quoted observations in favour of the

respondent, the High Court directed that the arbitration application be

listed before an appropriate bench in accordance with the roster. In

pursuance of the said order, the matter came to be listed before the Chief

Justice of the High Court, wherein an order for appointment of arbitrator

was passed. The said order dated 01.12.2023 has been impugned by the

appellant in SLP(C)No. 3792 of 2024.

B. SUBMISSIONS ON BEHALF OF THE APPELLANT

25. Mr Ketan Paul, the learned counsel appearing on behalf of the appellant,

submitted that a full and final settlement was arrived at between the parties

thereby indicating that a distinct understanding was arrived at between

them. No plea or assertion has been made by the respondent, nor any prima

facie evidence has been adduced to establish that the appellant had made

the execution of the discharge voucher a pre-condition to the payment of

the claim, or offered the amount on a “take it or leave it basis”. Seen thus,

the test laid down by this Court in paragraph 52(iv) of the National

Insurance Co. Ltd. v. Boghara Polyfab reported in (2009)1 SCC 267 can

neither be said to have been alleged nor satisfied.

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 15 of 85

26. It was further submitted that there has been an inordinate delay on the part

of the respondent in levelling allegations of coercion. Such allegations

came to be so levelled for the first time in the arbitration notice dated

02.03.2020, that is, almost 14 months after the payment of the subject

claim and five months after the payment of the second claim. The counsel

submitted that the claim amount as per the assessment of the loss by the

surveyor was known to the respondent since 24.12.2018, thereby

indicating that the allegations of coercion were an afterthought.

27. In support of his aforesaid submission, the counsel placed reliance on the

decision of this Court in NTPC Ltd. v. SPML Infra Ltd. reported in (2023)

SCC OnLine SC 389. He submitted that even when examined through the

“eye of the needle” test, the claim could be said to be deadwood and the

arbitration application ought to have been rejected by the High Court on

this count alone. The counsel also placed reliance on the decision of this

Court in New India Assurance Co. Ltd. v. Genus Power Infrastructure

Ltd. reported in (2015) 2 SCC 424 to submit that arbitration ought to be

refused in case of inordinate delay in raising the dispute or levelling

allegations of coercion by the party seeking the referral of disputes to

arbitration.

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 16 of 85

28. One another submission made by the counsel was that the pleadings of the

respondent lack the basic material particulars about any alleged coercion

and the poor financial condition of the respondents. It was further

submitted that even in the arbitration notice all that the respondents have

stated is that had they not signed the discharge voucher in respect of the

first claim, their second claim also would have been affected.

29. The counsel submitted that the letter dated 25.10.2019 addressed by the

respondent cannot be said to be a protest letter as the letter only asked for

a copy of the surveyor’s report to be provided and no allegation of any

coercion or any demand for any amount was even raised in the said letter.

The counsel finally submitted that a discharge voucher for effecting the full

and final settlement in relation to the second claim was also signed by the

respondent on 30.09.2019, which was accepted and no dispute has been

raised in the last five years, which indicates that the appellant acted in a

bona fide manner as per the prescribed norms.

C. SUBMISSIONS ON BEHALF OF THE RESPONDENT

30. Ms Savita Singh, the learned counsel appearing on behalf of the

respondent, at the outset submitted that her client had to succumb before

the surveyor on account of acute economic distress and also on account of

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 17 of 85

pendency of huge amount of claim with the appellant, i.e., around Rs 8

crore cumulatively arising out of the two claims. The respondent was also

under pressure from other financial institutions from whom loan had been

availed.

31. The counsel further submitted that the circumstances were such that her

client had to issue the discharge voucher, otherwise payment towards the

admitted amount would not have been released and her client would have

been put in immense difficulties. She submitted that mere signing of the

discharge voucher by her client would not imply that there was consensus

in arriving at the full and final settlement. 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.

32. The counsel also submitted that it cannot be said that there was an

inordinate delay in raising the plea of coercion as the letter dated

25.09.2019 was sent by her client to the appellant within 11 days of the

receipt of final payment in relation to the second insurance claim.

However, the appellant provided a copy of the surveyor’s report only on

07.11.2019 based on which the notice of arbitration was issued on

02.03.2020.

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 18 of 85

33. The counsel, in the last, submitted that 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.

D. ISSUES FOR DETERMINATION

34. Having heard the learned counsel appearing for the parties and having gone

through the materials on record, the following three questions fall for our

consideration: -

i. Whether the execution of a discharge voucher towards the full and

final settlement between the parties would operate as a bar to invoke

arbitration?

ii. What is the scope and standard of judicial scrutiny that an

application under Section 11(6) of the Act, 1996 can be subjected to

when a plea of “accord and satisfaction” is taken by the defendant?

iii. What is the effect of the decision of this Court in In Re: Interplay

Between Arbitration Agreements under the Arbitration and

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 19 of 85

Conciliation Act 1966 and the Indian Stamp Act 1899 on the scope

of powers of the referral court under Section 11 of the Act, 1996?

E. ANALYSIS

35. Clause 13 of the insurance policy issued in favour of the respondent

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.

It is clearly agreed and understood that no dispute or

difference shall be referrable to arbitration as hereinbefore

proved, if the Company has disputed or not accepted liability

under or in respect of this policy. It is hereby expressed

stipulated and declared that it shall be a condition precedent

to any right of action or suit upon this Policy that the award

by such arbitrator/arbitrators of the amount of the loss or

damaged shall be first obtained”

36. A preliminary objection was raised on behalf of the appellant 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 on the

part of the appellant, whereas the said arbitration clause envisages

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 20 of 85

reference to arbitration only in cases where liability is admitted and there

is a dispute as regards the quantum of liability.

37. However, we find no merit in the aforesaid submission of the appellant. It

is evident from the record that the appellant had admitted its liability with

respect to the first claim and had even disbursed an amount of Rs

84,19,579/- in pursuance of the signing of the advance discharge voucher

by the respondent. Thus, it is clearly a case of admission of liability by the

appellant. However, the quantum of liability is in dispute as the amount

claimed by the respondent is at variance with the amount admitted by the

appellant. Thus, the dispute being one of quantum and not of liability, it

falls within the ambit of the conditional arbitration clause as contained in

the insurance policy.

38. One another preliminary objection raised by the appellant was that the

claim sought to be referred to arbitration is a deadwood claim and thus the

application for appointment of arbitrator ought to have been rejected at the

outset by the High Court. It is clear from the facts as discussed in the

preceding paragraphs that the notice invoking arbitration was sent by the

respondent to the appellant on 02.03.2020 and the petition seeking

appointment of arbitrator under Section 11(6) of the Act, 1996 was filed

before the High Court on 25.10.2021. Thus, the arbitration petition was

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 21 of 85

filed before the High Court much prior to the expiry of the limitation period

of three years. Further, the notice invoking arbitration was also sent by the

respondent well within time from the date of the accrual of the cause of

action. Considered thus, it cannot, by any stretch of imagination, be said

that the claim is a deadwood claim or the arbitration application before the

High Court was time-barred.

39. Having rejected the aforesaid two preliminary objections raised by the

appellant, the question that now remains to be examined is whether, in the

facts of the present case, the respondent could have invoked arbitration

after having signed the consent letter dated 24.12.2018 and the advance

discharge voucher dated 04.01.2019.

i. Whether the execution of a discharge voucher towards the full and final

settlement between the parties would operate as a bar to invoke

arbitration?

40. 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.

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

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 22 of 85

substituted obligations are referred to as ‘accord’ and the discharge of the

substituted obligations is referred to as ‘satisfaction’. It is referred to as

discharge by “accord and satisfaction” or by “full and final settlement” in

common parlance.

41. A written confirmation of discharge by “accord and satisfaction” can also

be in the form of a full and final discharge voucher or a No-Dues or a No-

Claims Certificate issued by one of the parties acknowledging that there

are no outstanding claims and that such a party has received the full and

final payment to its 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.

42. The concept of discharge of a contract by “accord and satisfaction” is

embodied in Section 63 of the Indian Contract Act, 1872, which provides

that the promisee may, inter alia, accept any substituted obligation in place

of the original promise made to him, and such acceptance on the part of the

promisee would amount to the discharge of the contract. Section 63 along

with the illustrations is reproduced hereinbelow:

“63. Promisee may dispense with or remit performance of

promisee.—Every promisee may dispense with or remit,

wholly or in part, the performance of the promisee made to

him, or may extend the time for such performance, or may

accept instead of it any satisfaction which he thinks fit.

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 23 of 85

Illustrations

(a) A promises to paint a picture for B. B afterwards forbids

him to do so. A is no longer bound to perform the promise.

(b) A owes B 5,000 rupees. A pays to B, and B accepts, in

satisfaction of the whole debt, 2,000 rupees paid at the time

and place at which the 5,000 rupees were payable. The whole

debt is discharged.

(c) A owes B 5,000 rupees. C pays to B 1,000 rupees, and B

accepts them, in satisfaction of his claim on A. This payment

is a discharge of the whole claim.

(d) A owes B, under. a contract, a sum of money, the amount

of which has not been ascertained. A, without ascertaining

the amount, gives to B, and B, in satisfaction thereof, accepts,

the sum of 2,000 rupees. This is a discharge of the whole debt,

whatever may be its amount.

(e) A owes B 2,000 rupees, and is also indebted to other

creditors. A makes an arrangement with his creditors,

including B, to pay them a [composition] of eight annas in

the rupee upon their respective demands. Payment to B of

1,000 rupees is a discharge of B’s demand.”

(Emphasis supplied)

43. The Privy Council in Payana Reena Saminathan v. Pana Lana

Palaniappa reported in (1913-14) 41 IA 142 defined the term “accord and

satisfaction” as follows:

“… The ‘receipt’ given by the appellants and accepted by

the respondent, and acted on by both parties proves

conclusively that all the parties agreed to a settlement of all

their existing disputes by the arrangement formulated in the

‘receipt’. It is a clear example of what used to be well known

as common law pleading as ‘accord and satisfaction by a

substituted agreement’. No matter what were the respective

rights of the parties inter se they are abandoned in

consideration of the acceptance by all for a new agreement.

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 24 of 85

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)

44. As discussed in the preceding paragraphs, the appellant has contested that

once a full and final settlement was arrived at between the parties, the

insurance contract between the parties could be said to have been

discharged. Once the contract stood discharged, it was not open to the

respondent to resile from the settlement and invoke the arbitration clause,

as no obligations remained to be fulfilled under the contract pursuant to the

discharge of the contract. In other words, it is the contention of the

appellant that as no arbitrable disputes remained after a full and final

settlement was arrived at, there was nothing left to be referred to the

arbitrator and hence the appointment of arbitrator being an exercise in

futility, should not have been undertaken by the High Court.

45. To answer the aforesaid contention of the appellant, 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?

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 25 of 85

46. It is indeed so that once a contract has been fully performed, it can be said

to have been discharged by performance. Once the contract has been

discharged by performance, neither any right to seek performance, nor any

obligation to perform remains under it.

47. However, 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.

a. Whether the arbitration agreement contained in a substantive

contract survives even after the underlying contract is discharged by

“accord and satisfaction”?

48. 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.

49. The arbitration agreement, by virtue of the presumption of separability,

survives the principal contract in which it was contained. Section 16(1) of

the Act, 1996 which is based on Article 16 of the UNCITRAL Model Law

on International Commercial Arbitration, 1985 (hereinafter, “Model

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 26 of 85

Law”) embodies the presumption of separability. There are two aspects to

the doctrine of separability as contained in the Act, 1996: -

i. An arbitration clause forming part of a contract is treated as an

agreement independent of the other terms of the contract.

ii. A decision by the arbitral tribunal declaring the contract as null and

void does not, ipso facto, make the arbitration clause invalid.

50. The doctrine of separability was not part of the legislative scheme under

the Arbitration Act, 1940. However, with the enactment of the Act, 1996,

the doctrine was expressly incorporated. This Court in National

Agricultural Coop. Marketing Federation India Ltd. v. Gains Trading

Ltd. reported in (2007) 5 SCC 692, while interpreting Section 16 of the

Act, 1996, held that even if the underlying contract comes to an end, the

arbitration agreement contained in such a contract survives for the purpose

of resolution of disputes between the parties.

51. 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.

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 27 of 85

52. In Heyman v. Darwins Ltd. reported in [1942] AC 356, it was held by the

House of Lords that the repudiation or breach of a contract does not

extinguish the arbitration agreement as it survives for the purpose of

resolution of any outstanding claims arising out of the breach. It was

observed thus:

"I am, accordingly, of the opinion that what is commonly

called repudiation or total breach of a contract, whether

acquiesced in by the other party or not, does not abrogate the

contract, though it may relieve the injured party of the duty

of further fulfilling the obligations which he has by the

contract undertaken to the repudiating party. The contract is

not put out of existence, though all further performance of the

obligations undertaken by each party in favour of the other

may cease. It survives for the purpose of measuring the

claims arising out of the breach, and the arbitration clause

survives for determining the mode of their settlement. The

purposes of the contract have failed, but the arbitration

clause is not one of the purposes of the contract."

(Emphasis supplied)

53. 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. The intention of the

parties in discharging a contract by “accord and satisfaction” is to relieve

each other of the existing or any new obligations under the contract. Such

a discharge of obligations under the substantive contract cannot be

construed to mean that the parties also intended to relieve each other of

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 28 of 85

their obligation to settle any dispute pertaining to the original contract

through arbitration.

54. 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”.

55. The aforesaid position of law has also been consistently followed by this

Court as evident from many decisions. In Boghara Polyfab (supra), while

rejecting the contention that the mere act of signing a “full and final

discharge voucher” would act as a bar to arbitration, this Court held as

follows:

“44. … None of the three cases relied on by the appellant lay

down a proposition that mere execution of a full and final

settlement receipt or a discharge voucher is a bar to

arbitration, even when the validity thereof is challenged by

the claimant on the ground of fraud, coercion or undue

influence. Nor do they lay down a proposition that even if the

discharge of contract is not genuine or legal, the claims

cannot be referred to arbitration. […]”

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 29 of 85

56. Again, in R.L. Kalathia and Company v. State of Gujarat reported in

(2011) 2 SCC 400, it was re-iterated that the mere issuance of the no-dues

certificate would not operate as a bar against the raising of genuine claims

even after the date of issuance of such certificate. The relevant observations

are extracted hereinbelow:

“13. From the above conclusions of this Court, the following

principles emerge:

(1) Merely because the contractor has issued "no-dues

certificate", if there is an acceptable claim, the court cannot

reject the same on the ground of issuance of "no-dues

certificate".

(ii) Inasmuch as it is common that unless a discharge

certificate is given in advance by the contractor, payment of

bills are generally delayed, hence such a clause in the

contract would not be an absolute bar to a contractor raising

claims which are genuine at a later date even after

submission of such "no-claim certificate".

(iii) Even after execution of full and final discharge

voucher/receipt by one of the parties, if the said party is able

to establish that he is entitled to further amount for which he

is having adequate materials, he is not barred from claiming

such amount merely because of acceptance of the final bill by

mentioning "without prejudice" or by issuing "no-dues

certificate".

(Emphasis supplied)

57. The position that emerges from the aforesaid discussion is that there is no

rule of an absolute kind which precludes arbitration in cases where a full

and final settlement has been arrived at. In Boghara Polyfab (supra),

discussing in the context of a case similar to the one at hand, wherein the

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 30 of 85

discharge voucher was alleged to have been obtained on ground of

coercion, it was observed that the discharge of a contract by full and final

settlement by issuance of a discharge voucher or a no-dues certificate

extends only to those vouchers or certificates which are validly and

voluntarily executed. Thus, if the party said to have executed the discharge

voucher or the no dues certificate alleges that the execution was on account

of fraud, coercion or undue influence exercised by the other party and is

able to establish such an allegation, then the discharge of the contract by

virtue of issuance of such a discharge voucher or no dues certificate is

rendered void and cannot be acted upon.

58. It was further held in Boghara Polyfab (supra) that the mere execution of

a full and final settlement receipt or a discharge voucher would not by itself

operate as a bar to arbitration when the validity of such a receipt or voucher

is challenged by the claimant on the ground of fraud, coercion or undue

influence. In other words, where the parties are not ad idem over accepting

the execution of the no-claim certificate or the discharge voucher, such

disputed discharge voucher may itself give rise to an arbitrable dispute.

59. Once the full and final settlement of the original contract itself becomes a

matter of dispute and disagreement between the parties, then such a dispute

can be categorised as one arising “in relation to” or “in connection with”

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 31 of 85

or “upon” the original contract which can be referred to arbitration in

accordance with the arbitration clause contained in the original contract,

notwithstanding the plea that there was a full and final settlement between

the parties.

ii. What is the scope and standard of judicial scrutiny that an application

under Section 11(6) of the Act, 1996 can be subjected to when a plea of

“accord and satisfaction” is taken by the defendant?

60. Whether the issue as regards the validity of the full and final settlement is

to be determined by the referral court acting under Section 11 of the Act,

1996 or by the arbitral tribunal has been considered in a number of

decisions of this Court. Some of these decisions have also delineated the

extent and standard of enquiry which can be undertaken at the stage of

Section 11 petition. We shall discuss these decisions in detail for the benefit

of the exposition of the law on the subject.

61. One of the earliest decisions dealing with the issue of “full and final

settlement” in the specific context of an application for appointment of

arbitrator under the Arbitration Act, 1940 was rendered by a two-Judge

Bench of this Court in Damodar Valley Corporation v. K.K. Kar reported

in (1974) 1 SCC 141. It was observed, inter alia, that any dispute arising in

relation to the validity of the discharge by “accord and satisfaction” would

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 32 of 85

be covered by the arbitration agreement contained in the original contract,

and thus should be referred to the arbitral tribunal for determination. The

relevant observations are extracted hereinbelow:

“4. On these facts the short question for determination is:

where one of the parties refers a dispute or disputes to

arbitration and the other party takes a plea that there was a

final settlement of all claims, is the Court, on an application

under Sections 9(b) and 33 of the Act, entitled to enquire into

the truth and validity of the averment as to whether there was

or was not a final settlement on the ground that if that was

proved, it would bar a reference to the arbitration inasmuch

as the arbitration clause itself would perish.

xxx xxx xxx

6. It appears to us that the question whether there has been

a full and final settlement of a claim under the contract is

itself a dispute arising “upon” or “in relation to” or “in

connection with” the contract. These words are wide enough

to cover the dispute sought to be referred. The respondent's

contention is that the contract has been repudiated by the

appellant unilaterally as a result of which he had no option

but to accept that repudiation because if the appellant was

not ready to receive the goods he could not supply them to

him or force him to receive them. In the circumstances, while

accepting the repudiation, without conceding that the

appellant had a right to repudiate the contract, he could

claim damages for breach of contract. Such a claim for

damages is a dispute or difference which arises between

himself and the appellant and is ‘upon’ or ‘in relation to’ or

‘in connection with’ the contract.

7. The contention that has been canvassed before us is that

as there has been a full and final settlement under the

contract, the rights and obligations under the contract do not

subsist and consequently the arbitration clause also perishes

along with the settlement. If so, the dispute whether there has

or has not been a settlement cannot be the subject of an

arbitration. There is, in our view, a basic fallacy underlying

this submission. A contract is the creature of an agreement

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 33 of 85

between the parties and where the parties under the terms of

the contract agree to incorporate an arbitration clause, that

clause stands apart from the rights and obligations under that

contract, as it has been incorporated with the object of

providing a machinery for the settlement of disputes arising

in relation to or in connection with that contract. The

questions of unilateral repudiation of the 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. […]”

(Emphasis supplied)

62. In Bharat Heavy Electricals Ltd. vs. Amar Nath Bhan Prakash reported

in (1982) 1 SCC 625 it was observed by this Court that the question

whether there was discharge of the contract by “accord and satisfaction” or

not is a dispute liable to be resolved by the arbitral tribunal and the court

ought to appoint an arbitrator in such matters when a party approaches it

seeking relief for the same. It was observed thus:

“1. It appears from the order of the High Court impugned in

the appeal that the High Court has not correctly appreciated

the position that the question whether there was discharge of

the contract by accord and satisfaction or not, is a dispute

arising out of the contract and is liable to be referred to

arbitration and hence the application of the Respondent

under Section 20 of the Indian Arbitration Act should have

been allowed and the matters in dispute between the parties,

including the question whether or not there was discharge of

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 34 of 85

the contract by accord and satisfaction should have been

referred to arbitration.”

(Emphasis supplied)

63. However, the position on the issue witnessed a change with subsequent

decisions of this Court in P.K. Ramaiah and Company v. Chairman and

Managing Director, National Thermal Power Corporation reported in

1994 Supp (3) SCC 126 and Nathani Steels Ltd. v. Associated

Constructions reported in 1995 Supp (3) SCC 324.

64. In P.K. Ramaiah (supra), the decision in Damodar Valley (supra) was

distinguished on facts, and it was held that once “full and final settlement”

is arrived at, no arbitral dispute subsists, and hence there can be no referral

to arbitration. The relevant observations made therein are as follows:

“6. [….] If there is an arbitrable dispute, it shall be referred

to the named arbitrator. But there must exist a subsisting

dispute. Admittedly the appellant acknowledged in writing

accepting the correctness of the measurements as well as the

final settlement and received the amount. Thereafter no

arbitrable dispute arise for reference.

xxx xxx xxx

8. […] Accordingly, we hold that the appellant having

acknowledged the settlement and also accepted

measurements and having received the amount in full and

final settlement of the claim, there is accord and satisfaction.

There is no existing arbitrable dispute for reference to the

arbitration. The High Court is, therefore, right in its finding

in this behalf. The appeals are dismissed but in the

circumstances without costs.”

65. In Nathani Steels (supra), relying upon the decision in P.K. Ramaiah

(supra) it was observed thus:

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 35 of 85

“3. […] It would thus be seen that once there is a full and

final settlement in respect of any particular dispute or

difference in relation to a matter covered under the

Arbitration clause in the contract and that dispute or

difference is finally settled by and between the parties, such

a dispute or difference does not remain to be an arbitrable

dispute and the Arbitration clause cannot be invoked even

though for certain other matters, the contract may be in

subsistence. […]”

66. It is important to note that the aforesaid four decisions were rendered in the

context of appointment of arbitrator under the Arbitration Act, 1940. With

the introduction of the Act, 1996, a different regime came into being insofar

as the question of appointment of arbitrator is concerned. In Jayesh

Engineering Works v New India Assurance Co. Ltd. reported in (2000)

10 SCC 178, dealing with an application for appointment of arbitrator

under the Act, 1996, a position similar to the one taken in Amar Nath

(supra) was taken by this Court. It was held thus:

“1. […] Whether any amount is due to be paid and how far

the claim made by the Appellant is tenable are matters to be

considered by the Arbitrator. In fact, whether the contract

has been fully worked out and whether the payments have

been made in full and final settlement are questions to be

considered by the Arbitrator when there is a dispute

regarding the same. […]”

67. While the aspect of “accord and satisfaction” in the specific context of the

appointment of arbitrator has been discussed by this Court on numerous

occasions, we also deem it necessary to refer to and discuss some important

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 36 of 85

decisions touching upon the contours of the power of the referral court

under Section 11 of the Act, 1996 as they directly affect the issue at hand.

68. The role to be played by the Chief Justice or his designate in the

appointment of an arbitrator has been at the heart of number of decisions

of this Court. In Konkan Railway Corpn. Ltd. v. Rani Construction (P)

Ltd. reported in (2002) 2 SCC 388, a five-Judge Bench of this Court

observed that the power exercised by the referral court under Section 11 of

the Act, 1996 is an administrative power and thus the Chief Justice or his

designate do not have to decide any preliminary issue at that stage.

Accordingly, it held that any issues pertaining to non-arbitrability, validity

and existence of the arbitration agreement are to be decided by the

arbitrator.

69. The aforesaid view occupied the field till a seven-Judge Bench of this

Court in SBP & Co. v. Patel Engg. Ltd. reported in (2005) 8 SCC 618,

characterised the power conferred upon the Chief Justice or his designate

under Section 11 of the Act, 1996 as a judicial power and not merely

administrative power. This Court held that the Chief Justice or his

designate had the right to decide all preliminary issues at the referral stage

under Section 11(6) of the Act, 1996. The Court took such view on the

premise that Section 16 of the Act, 1996, which empowers the Arbitral

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 37 of 85

Tribunal to rule on its own jurisdiction, applies only when the parties go

before the Tribunal without having taken recourse to Sections 8 or 11

respectively of the Act, 1996 first.

70. In Boghara Polyfab (supra), this Court examined the extent of judicial

interference at the stage of referral under Section 11(6) of the Act, 1996 as

laid down in SBP & Co. (supra) and elucidated three categories of issues

which could arise before the referral court as follows:

“22.1. The issues (first category) which the 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.

22.2. The issues (second category) 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.

22.3. The issues (third category) 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.”

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 38 of 85

71. The decision in Boghara Polyfab (supra) was followed in a number of

subsequent decisions of this Court. In Union of India v. Master

Construction Co. reported in (2011) 12 SCC 349, this Court held that while

deciding an application under Section 11(6) of the Act, 1996, the referral

court must satisfy itself that the allegations raised against the full and final

discharge voucher were at least prima facie bona fide and genuine.

Applying the said reasoning to the facts before it, this Court held that the

dispute was not a bona fide one and declined to refer the matter to

arbitration. The relevant extracts are reproduced hereinbelow:

“18. In our opinion, there is no rule of the absolute kind. In

a case where the claimant contends that a discharge voucher

or a no-claim certificate as been obtained by fraud and the

other side contests the correctness, the Chief Justice must

look into this aspect to find out at least, prima facie whether

or not the dispute is bona fide and genuine. Where the dispute

raised by the claimant with regard to validity of the discharge

voucher or no-claim certificate or settlement agreement,

prima facie, appears to be lacking in credibility, there may

not be a necessity to refer the dispute for arbitration at all.

xxx xxx xxx

23. The present case in our opinion appears to be a case

falling in the category of exception noted in Boghara

Polyfab[(2009) 1 SCC 267](p.284, para 25). As to the

financial duress or coercion, nothing of this kind is

established prima facie. Mere allegation that no-claim

certificates have been obtained under financial duress and

coercion, without there being anything more to suggest that,

does not lead to an arbitrable dispute. The conduct of the

contractor clearly shows that “no-claim certificates” were

given by it voluntarily, the contractor accepted the amount

voluntarily and the contract was discharged voluntarily.”

(Emphasis supplied)

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 39 of 85

72. In New India Assurance (supra), this Court, relying upon Boghara

Polyfab (supra) and Master Construction Co. (supra), upon examining the

Section 11 petition held that a mere bald assertion of fraud, undue influence

or coercion would not warrant referral of disputes to arbitration, if the

matter had already been fully and finally settled between the parties. The

relevant observations are reproduced hereinbelow:

“10. In our considered view, the plea raised by the

Respondent is bereft of any details and particulars, and

cannot be anything but a bald assertion. Given the fact that

there was no protest or demur raised around the time or soon

after the letter of subrogation was signed, that the notice

dated 31.03.2011 itself was nearly after three weeks and that

the financial condition of the Respondent was not so

precarious that it was left with no alternative but to accept

the terms as suggested, we are of the firm view that the

discharge in the present case and signing of letter of

subrogation were not because of exercise of any undue

influence. Such discharge and signing of letter of subrogation

was voluntary and free from any coercion or undue influence.

In the circumstances, we hold that upon execution of the letter

of subrogation, there was full and final settlement of the

claim. Since our answer to the question, whether there was

really accord and satisfaction, is in the affirmative, in our

view no arbitrable dispute existed so as to exercise power

Under Section 11 of the Act. The High Court was not

therefore justified in exercising power Under Section 11 of

the Act.”

(Emphasis supplied)

73. The net effect of the decisions in SBP & Co. (supra) and Boghara Polyfab

(supra) was that the scope for interference available to the referral courts

when acting under Section 11 of the Act, 1996 was substantially expanded.

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 40 of 85

The referral courts were conferred with the discretion to conduct mini trials

and indulge in the appreciation of evidence on the issues concerned with

the subject matter of arbitration. The Law Commission of India in its 246

th

report took note of the issue of significant delays being caused to the

arbitral process due to enlarged scope of judicial interference at the stage

of appointment of arbitrator and suggested as follows:

i. First, that the power of appointment conferred upon the Chief

Justice be devolved on to the Supreme Court and the High Court, as

the case may be; and

ii. Secondly, the power of appointment under Section 11 be clarified to

be an administrative power and not a judicial one.

iii. Thirdly, the scope of interference under Sections 8 and 11

respectively of the Act, 1996 be restricted only to those cases where

the court finds that no arbitration agreement exists or is null and

void.

74. The Law Commission suggested the insertion of Section 11(6-A) in the

Act, 1996. The aforesaid recommendations of the Commission were taken

note of by the Parliament and accordingly the Act, 1996 was amended in

2015 to incorporate Section 11(6-A), which reads thus:

“(6A) The Supreme Court or, as the case may be, the High

Court, while considering any application under sub-

section (4) or sub-section (5) or sub-section (6), shall,

notwithstanding any judgment, decree or order of any Court,

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 41 of 85

confine to the examination of the existence of an arbitration

agreement.”

75. Interestingly, Section 11(6-A) was omitted by the 2019 amendment to the

Act, 1996 on the basis of a report of the High-Level Committee to Review

the Institutionalisation of Arbitration Mechanism in India. However, in the

absence of the omission being notified, Section 11(6-A) of the Act, 1996

continues to remain on the statute book and thus has to be given effect as

such.

76. The impact of the addition of Section 11(6-A) was elaborately discussed

by this Court in Duro Felguera, S.A. v. Gangavaram Port Ltd reported in

(2017) 9 SCC 729 as follows:

“48. […] From a reading of Section 11(6-A), the intention of

the legislature is crystal clear i.e. the court should and need

only look into one aspect—the existence of an arbitration

agreement. What are the factors for deciding as to whether

there is an arbitration agreement is the next question. The

resolution to that is simple—it needs to be seen if the

agreement contains a clause which provides for arbitration

pertaining to the disputes which have arisen between the

parties to the agreement.

xxx xxx xxx

59. The scope of the power under Section 11(6) of the 1996

Act was considerably wide in view of the decisions in SBP

and Co. [(2005) 8 SCC 618] and Boghara Polyfab [(2009) 1

SCC 267]. This position continued till the amendment

brought about in 2015. After the amendment, all that the

courts need to see is whether an arbitration agreement

exists—nothing more, nothing less. The legislative policy and

purpose is essentially to minimise the Court's intervention at

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 42 of 85

the stage of appointing the arbitrator and this intention as

incorporated in Section 11(6-A) ought to be respected.”

(Emphasis supplied)

77. Despite the decision in Duro Felguera (supra), this Court in United India

Insurance Co. Ltd. v. Antique Art Exports Pvt. Ltd. reported in (2019) 5

SCC 362, while dealing with the issue of “full and final settlement” in the

context of appointment of an arbitrator, held that mere bald allegation by a

party that the discharge voucher was obtained under coercion or undue

influence would not entitle it to seek referral of the dispute to arbitration

unless it is able to produce prima facie evidence of the same during the

course of proceedings under Section 11(6) of the Act, 1996. Important

paragraphs from the said decision are extracted hereinbelow:

“15. From the proposition which has been laid down by this

Court, what reveals is that a mere plea of fraud, coercion or

undue influence in itself is not enough and the party who

alleged is under obligation to prima facie establish the same

by placing satisfactory material on record before the Chief

Justice or his Designate to exercise power under Section

11(6) of the Act, which has been considered by this Court

in New India Assurance Co. Ltd. case [...]

xxx xxx xxx

17. It is true that there cannot be a rule of its kind that mere

allegation of discharge voucher or no claim certificate being

obtained by fraud/coercion/undue influence practised by

other party in itself is sufficient for appointment of the

arbitrator unless the claimant who alleges that execution of

the discharge agreement or no claim certificate was obtained

on account of fraud/coercion/undue influence practised by

the other party is able to produce prima facie evidence to

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 43 of 85

substantiate the same, the correctness thereof may be open

for the Chief Justice/his Designate to look into this aspect to

find out at least prima facie whether the dispute is bona fide

and genuine in taking a decision to invoke Section 11(6) of

the Act.

18. In the instant case, the facts are not in dispute that for the

two incidents of fire on 25-9-2013 and 25-10-2013, the

appellant Company based on the Surveyor's report sent

emails on 5-5-2016 and 24-6-2016 for settlement of the

claims for both the fires dated 25-9-2013 and 25-10-2013

which was responded by the respondent through email on the

same date itself providing all the necessary information to the

regional office of the Company and also issued the discharge

voucher in full and final settlement with accord and

satisfaction. Thereafter, on 12-7-2016, the respondent

desired certain information with details, that too was

furnished and for the first time on 27-7-2016, it took a U-turn

and raised a voice of undue influence/coercion being used by

the appellant stating that it being in financial distress was left

with no option than to proceed to sign on the dotted lines. As

observed, the phrase in itself is not sufficient unless there is

a prima facie evidence to establish the allegation of

coercion/undue influence, which is completely missing in the

instant case.

19. In the given facts and circumstances, we are satisfied that

the discharge and signing the letter of subrogation was not

because of any undue influence or coercion as being claimed

by the respondent and we find no difficulty to hold that upon

execution of the letter of subrogation, the claim was settled

with due accord and satisfaction leaving no arbitral dispute

to be examined by an arbitrator to be appointed under

Section 11(6) of the Act.

20. The submission of the learned counsel for the respondent

that after insertion of sub-section (6-A) to Section 11 of the

Amendment Act, 2015 the jurisdiction of this Court is

denuded and the limited mandate of the Court is to examine

the factum of existence of an arbitration and relied on the

judgment in Duro Felguera, S.A. v. Gangavaram Port

Ltd. [Duro Felguera, S.A. v. Gangavaram Port Ltd., (2017)

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 44 of 85

9 SCC 729 : (2017) 4 SCC (Civ) 764] The exposition in this

decision is a general observation about the effect of the

amended provisions which came to be examined under

reference to six arbitrable agreements (five agreements for

works and one corporate guarantee) and each agreement

contains a provision for arbitration and there was serious

dispute between the parties in reference to constitution of

Arbitral Tribunal whether there has to be Arbitral Tribunal

pertaining to each agreement. In the facts and circumstances,

this Court took note of sub-section (6-A) introduced by the

Amendment Act, 2015 to Section 11 of the Act and in that

context observed that the preliminary disputes are to be

examined by the arbitrator and are not for the Court to be

examined within the limited scope available for appointment

of arbitrator under Section 11(6) of the Act. Suffice it to say

that appointment of an arbitrator is a judicial power and is

not a mere administrative function leaving some degree of

judicial intervention; when it comes to the question to

examine the existence of a prima facie arbitration agreement,

it is always necessary to ensure that the dispute resolution

process does not become unnecessarily protracted.

21. In the instant case, prima facie no dispute subsisted after

the discharge voucher being signed by the respondent

without any demur or protest and claim being finally settled

with accord and satisfaction and after 11 weeks of the

settlement of claim a letter was sent on 27-7-2016 for the first

time raising a voice in the form of protest that the discharge

voucher was signed under undue influence and coercion with

no supportive prima facie evidence being placed on record in

absence thereof, it must follow that the claim had been settled

with accord and satisfaction leaving no arbitral dispute

subsisting under the agreement to be referred to the

arbitrator for adjudication.

22. In our considered view, the High Court has committed a

manifest error in passing the impugned order and adopting a

mechanical process in appointing the arbitrator without any

supportive evidence on record to prima facie substantiate

that an arbitral dispute subsisted under the agreement which

needed to be referred to the arbitrator for adjudication.”

(Emphasis supplied)

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 45 of 85

78. It is pertinent to observe that in Antique Art (supra) the Court placed

reliance on the decisions in Master Construction (supra) and New India

Assurance (supra). Both these decisions were delivered before the

insertion of Section 11(6-A) by the 2015 amendment to the Act, 1996.

Thus, this Court in Antique Art (supra) failed to take into account the

legislative intent behind the introduction of Section 11(6-A), which was

also succinctly explained in Duro Felguera (supra).

79. A three-Judge Bench of this Court in Mayavati Trading Private Limited v.

Pradyut Deb Burman reported in (2019) 8 SCC 714 overruled the decision

in Antique Art (supra) and clarified that the position of law existing prior

to the 2015 amendment to the Act, 1996 under which referral courts had

the power to examine the aspect of “accord and satisfaction” had come to

be legislatively overruled by Section 11(6-A) of the Act, 1996. The Court,

while affirming the reasoning given in Duro Felguera (supra), observed

thus:

“10. This being the position, it is clear that the law prior to

the 2015 Amendment that has been laid down by this Court,

which would have included going into whether accord and

satisfaction has taken place, has now been legislatively

overruled. This being the position, it is difficult to agree with

the reasoning contained in the aforesaid judgment [United

India Insurance Co. Ltd. v. Antique Art Exports (P) Ltd.,

(2019) 5 SCC 362 : (2019) 2 SCC (Civ) 785] , as Section

11(6-A) is confined to the examination of the existence of an

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 46 of 85

arbitration agreement and is to be understood in the narrow

sense as has been laid down in the judgment in Duro

Felguera, SA [Duro Felguera, SA v. Gangavaram Port Ltd.,

(2017) 9 SCC 729 : (2017) 4 SCC (Civ) 764] — see paras 48

& 59

11. We, therefore, overrule the judgment in Antique Art

Exports (P) Ltd. [United India Insurance Co. Ltd. v. Antique

Art Exports (P) Ltd., (2019) 5 SCC 362 : (2019) 2 SCC (Civ)

785] as not having laid down the correct law but dismiss this

appeal for the reason given in para 3 above.”

(Emphasis supplied)

80. A two-Judge Bench of this Court in Uttarakhand Purv Sainik Kalyan

Nigam Ltd. v. Northern Coal Field Ltd. reported in (2020) 2 SCC 455 was

called upon to determine the scope of judicial interference at the stage of

Section 11(6) petition wherein the plea of claims being time barred was

taken by the defendant. Referring to the principal of competence-

competence enshrined in Section 16 of the Act, 1996 and the legislative

intent behind the introduction of Section 11(6-A) to Act, 1996 by the 2015

amendment, this Court held that the issue of limitation being a mixed

question of law and fact should be best left to the tribunal to decide. The

referral court should restrict its examination to whether an arbitration

agreement between the parties exists. The relevant observations are

reproduced hereinbelow:

“7.10. In view of the legislative mandate contained in Section

11(6-A), the Court is now required only to examine the

existence of the arbitration agreement. All other preliminary

or threshold issues are left to be decided by the arbitrator

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 47 of 85

under Section 16, which enshrines the kompetenz-kompetenz

principle.

7.11. The doctrine of “kompetenz-kompetenz”, also referred

to as “compétence-compétence”, or “compétence de la

recognized”, implies that the Arbitral Tribunal is empowered

and has the competence to rule on its own jurisdiction,

including determining all jurisdictional issues, and the

existence or validity of the arbitration agreement. This

doctrine is intended to minimise judicial intervention, so that

the arbitral process is not thwarted at the threshold, when a

preliminary objection is raised by one of the parties. The

doctrine of kompetenz-kompetenz is, however, subject to the

exception i.e. when the arbitration agreement itself is

impeached as being procured by fraud or deception. This

exception would also apply to cases where the parties in the

process of negotiation, may have entered into a draft

agreement as an antecedent step prior to executing the final

contract. […]7.12. The legislative intent underlying the 1996

Act is party autonomy and minimal judicial intervention in

the arbitral process. Under this regime, once the arbitrator

is appointed, or the tribunal is constituted, all issues and

objections are to be decided by the Arbitral Tribunal.

7.13. In view of the provisions of Section 16, and the

legislative policy to restrict judicial intervention at the pre-

reference stage, the issue of limitation would require to be

decided by the arbitrator. Sub-section (1) of Section 16

provides that the Arbitral Tribunal may rule on its own

jurisdiction, “including any objections” with respect to the

existence or validity of the arbitration agreement. Section 16

is as an inclusive provision, which would comprehend all

preliminary issues touching upon the jurisdiction of the

Arbitral Tribunal. The issue of limitation is a jurisdictional

issue, which would be required to be decided by the

arbitrator under Section 16, and not the High Court at the

pre-reference stage under Section 11 of the Act. Once the

existence of the arbitration agreement is not disputed, all

issues, including jurisdictional objections are to be decided

by the arbitrator.

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 48 of 85

7.14. In the present case, the issue of limitation was raised

by the respondent Company to oppose the appointment of

the arbitrator under Section 11 before the High Court.

Limitation is a mixed question of fact and law. In ITW

Signode (India) Ltd. v. CCE [ITW Signode (India)

Ltd. v. CCE, (2004) 3 SCC 48] a three-Judge Bench of this

Court held that the question of limitation involves a question

of jurisdiction. The findings on the issue of limitation would

be a jurisdictional issue. Such a jurisdictional issue is to be

determined having regard to the facts and the law. Reliance

is also placed on the judgment of this Court in NTPC

Ltd. v. Siemens Atkeingesellschaft [NTPC Ltd. v. Siemens

Atkeingesellschaft, (2007) 4 SCC 451], wherein it was held

that the Arbitral Tribunal would deal with limitation under

Section 16 of the 1996 Act. If the tribunal finds that the claim

is a dead one, or that the claim was barred by limitation, the

adjudication of these issues would be on the merits of the

claim. Under sub-section (5) of Section 16, the tribunal has

the obligation to decide the plea; and if it rejects the plea,

the arbitral proceedings would continue, and the tribunal

would make the award. Under sub-section (6) a party

aggrieved by such an arbitral award may challenge the

award under Section 34. […]”

(Emphasis supplied)

81. In Union of India v. Pradeep Vinod Construction Company reported in

2019 INSC 1241 this Court left the issue of “accord and satisfaction” to be

decided by the arbitrator and held thus:

“16. […] On behalf of the Respondent, it has been seriously

disputed that issuance of "No Claim" certificate as to the

supplementary agreement recording accord and satisfaction

as on 06.05.2014 (CA No. 6400/2016) and issuance of "No

Claim" certificate on 28.08.2014 (CA No. 6420/2016) that

they were issued under compulsion and due to undue

influence by the railway authorities. We are not inclined to

go into the merits of the contention of the parties. It is for the

arbitrator to consider the claim of the Respondent(s) and the

stand of the Appellant-railways. This contention raised by the

parties are left open to be raised before the arbitrator.”

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 49 of 85

82. Thereafter, a three-Judge Bench of this Court in Vidya Drolia & Ors v.

Durga Trading Corporation reported in (2021) 2 SCC 1 extensively dealt

with the scope of powers of the referral court under Section 8 and 11

respectively of the Act, 1996. It held, inter alia, that Sections 8 and 11 of

the Act, 1996 are complementary to each other and thus the aspect of

‘existence’ of the arbitration agreement, as specified under Section 11

should be seen along with its ‘validity’ as specified under Section 8. This

Court also held that the exercise of power of prima facie judicial review to

examine the existence of arbitration agreement also includes going into the

validity of the arbitration agreement and this does not go against the

principles of competence-competence and the presumption of separability.

It further held that the prima facie review of the aspects related to non-

arbitrability may also be undertaken. The relevant observations are

extracted hereinbelow:

“147.4. Most jurisdictions accept and require prima facie

review by the court on non-arbitrability aspects at the

referral stage.

147.5. Sections 8 and 11 of the Arbitration Act are

complementary provisions as was held in Patel Engg.

Ltd. [SBP & Co. v. Patel Engg. Ltd., (2005) 8 SCC 618] The

object and purpose behind the two provisions is identical to

compel and force parties to abide by their contractual

understanding. This being so, the two provisions should be

read as laying down similar standard and not as laying down

different and separate parameters. Section 11 does not

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 50 of 85

prescribe any standard of judicial review by the court for

determining whether an arbitration agreement is in

existence. Section 8 states that the judicial review at the stage

of reference is prima facie and not final. Prima facie standard

equally applies when the power of judicial review is exercised

by the court under Section 11 of the Arbitration Act.

Therefore, we can read the mandate of valid arbitration

agreement in Section 8 into mandate of Section 11, that is,

“existence of an arbitration agreement”.

147.6. Exercise of power of prima facie judicial review of

existence as including validity is justified as a court is the

first forum that examines and decides the request for the

referral. Absolute “hands off” approach would be

counterproductive and harm arbitration, as an alternative

dispute resolution mechanism. Limited, yet effective

intervention is acceptable as it does not obstruct but

effectuates arbitration.

147.7. Exercise of the limited prima facie review does not in

any way interfere with the principle of competence-

competence and separation as to obstruct arbitration

proceedings but ensures that vexatious and frivolous matters

get over at the initial stage.

147.8. Exercise of prima facie power of judicial review as to

the validity of the arbitration agreement would save costs and

check harassment of objecting parties when there is clearly

no justification and a good reason not to accept plea of non-

arbitrability. […]

xxx xxx xxx

147.11. The interpretation appropriately balances the

allocation of the decision-making authority between the court

at the referral stage and the arbitrators' primary jurisdiction

to decide disputes on merits. The court as the judicial forum

of the first instance can exercise prima facie test jurisdiction

to screen and knock down ex facie meritless, frivolous and

dishonest litigation. Limited jurisdiction of the courts ensures

expeditious, alacritous and efficient disposal when required

at the referral stage.”

(Emphasis supplied)

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 51 of 85

83. This Court further held that the referral court, while exercising its powers

under Sections 8 and 11 respectively of the Act, 1996 could exercise its

powers to screen and knock down ex facie meritless, frivolous and

dishonest litigation so as to ensure expeditious and efficient disposal at the

referral stage.

“148. Section 43(1) of the Arbitration Act states that the

Limitation Act, 1963 shall apply to arbitrations as it applies

to court proceedings. Sub-section (2) states that for the

purposes of the Arbitration Act and Limitation Act,

arbitration shall be deemed to have commenced on the date

referred to in Section 21. Limitation law is procedural and

normally disputes, being factual, would be for the arbitrator

to decide guided by the facts found and the law applicable.

The court at the referral stage can interfere only when it is

manifest that the claims are ex facie time-barred and dead,

or there is no subsisting dispute. All other cases should be

referred to the Arbitral Tribunal for decision on merits.

Similar would be the position in case of disputed “no-claim

certificate” or defence on the plea of novation and “accord

and satisfaction”. As observed in Premium Nafta Products

Ltd. [Fili Shipping Co. Ltd. v. Premium Nafta Products Ltd.,

2007 UKHL 40 : 2007 Bus LR 1719 (HL)] , it is not to be

expected that commercial men while entering transactions

inter se would knowingly create a system which would

require that the court should first decide whether the contract

should be rectified or avoided or rescinded, as the case may

be, and then if the contract is held to be valid, it would require

the arbitrator to resolve the issues that have arisen.”

(Emphasis supplied)

84. Speaking in the specific context of “limitation” and “accord and

satisfaction”, this Court in Vidya Drolia (supra) held that the procedural

and factual disputes, like the one in the present litigation, should be left for

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 52 of 85

the arbitrator to decide, who in turn, would be guided by the facts as

determined by him and the law applicable. However, while re-iterating the

position established in Mayavati Trading (supra), i.e., the principal of

minimal interference at the stage of Section 11(6) petitions by referral

courts in light of the introduction of Section 11(6-A) to the Act, 1996, this

Court in Vidya Drolia (supra) carved out an exceptional category of cases

in which interference by the referral court was permissible thus:

“154.1. Ratio of the decision in Patel Engg. Ltd. [SBP &

Co. v. Patel Engg. Ltd., (2005) 8 SCC 618] on the scope of

judicial review by the court while deciding an application

under Sections 8 or 11 of the Arbitration Act, post the

amendments by Act 3 of 2016 (with retrospective effect from

23-10-2015) and even post the amendments vide Act 33 of

2019 (with effect from 9-8-2019), is no longer applicable.

154.2. Scope of judicial review and jurisdiction of the court

under Sections 8 and 11 of the Arbitration Act is identical but

extremely limited and restricted.

154.3. The general rule and principle, in view of the

legislative mandate clear from Act 3 of 2016 and Act 33 of

2019, and the principle of severability and competence-

competence, is that the Arbitral Tribunal is the preferred first

authority to determine and decide all questions of non-

arbitrability. The court has been conferred power of “second

look” on aspects of non-arbitrability post the award in terms

of sub-clauses (i), (ii) or (iv) of Section 34(2)(a) or sub-clause

(i) of Section 34(2)(b) of the Arbitration Act.

154.4. Rarely as a demurrer the court may interfere at

Section 8 or 11 stage when it is manifestly and ex facie

certain that the arbitration agreement is non-existent, invalid

or the disputes are non-arbitrable, though the nature and

facet of non-arbitrability would, to some extent, determine

the level and nature of judicial scrutiny. The restricted and

limited review is to check and protect parties from being

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 53 of 85

forced to arbitrate when the matter is demonstrably “non-

arbitrable” and to cut off the deadwood. The court by default

would refer the matter when contentions relating to non-

arbitrability are plainly arguable; when consideration in

summary proceedings would be insufficient and

inconclusive; when facts are contested; when the party

opposing arbitration adopts delaying tactics or impairs

conduct of arbitration proceedings. This is not the stage for

the court to enter into a mini trial or elaborate review so as

to usurp the jurisdiction of the Arbitral Tribunal but to affirm

and uphold integrity and efficacy of arbitration as an

alternative dispute resolution mechanism.”

(Emphasis supplied)

85. As is clear from the aforesaid extract, Vidya Drolia (supra) held that

although the arbitral tribunal is the preferred first authority to determine

the questions pertaining to non-arbitrability, yet the referral court may

exercise its limited jurisdiction to refuse reference to arbitration in cases

which are ex-facie frivolous and where it is certain that the disputes are

non-arbitrable.

86. The decision of this Court in Vidya Drolia (supra) was subsequently relied

upon by a two-Judge Bench of this Court in DLF Home Developers Ltd.

v. Rajapura Homes (P) Ltd. reported in (2021) 16 SCC 743 wherein it was

held that the prima facie review as laid down in Vidya Drolia (supra), in

exceptional cases, warrants interference by the court to protect the wastage

of public money.

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 54 of 85

“21. The jurisdiction of this Court under Section 11 is

primarily to find out whether there exists a written agreement

between the parties for resolution of disputes through

arbitration and whether the aggrieved party has made out a

prima facie arbitrable case. The limited jurisdiction,

however, does not denude this Court of its judicial function

to look beyond the bare existence of an arbitration clause to

cut the deadwood. A three-Judge Bench in Vidya

Drolia [Vidya Drolia v. Durga Trading Corpn., (2021) 2

SCC 1, paras 236, 237, 244.3, 244.4, 244.5, 244.5.1-244.5.3

: (2021) 1 SCC (Civ) 549] , has eloquently clarified that this

Court, with a view to prevent wastage of public and private

resources, may conduct “prima facie review” at the stage of

reference to weed out any frivolous or vexatious claims.”

87. In BSNL v. Nortel Networks (India) (P) Ltd., reported in (2021) 5 SCC

738, this Court explained the scope of primary examination regarding the

aspect of non-arbitrability in the context of time-barred claims as laid down

in Vidya Drolia (supra) thus:

“45. In a recent judgment delivered by a three-Judge Bench

in Vidya Drolia v. Durga Trading Corpn. [Vidya

Drolia v. Durga Trading Corpn., (2021) 2 SCC 1 : (2021) 1

SCC (Civ) 549] , on the scope of power under Sections 8 and

11, it has been held that the Court must undertake a primary

first review to weed out “manifestly ex facie non-existent and

invalid arbitration agreements, or non-arbitrable disputes”.

The prima facie review at the reference stage is to cut the

deadwood, where dismissal is barefaced and pellucid, and

when on the facts and law, the litigation must stop at the first

stage. Only when the Court is certain that no valid arbitration

agreement exists, or that the subject-matter is not arbitrable,

that reference may be refused.

45.1. […] While exercising jurisdiction under Section 11 as

the judicial forum, the court may exercise the prima facie test

to screen and knockdown ex facie meritless, frivolous, and

dishonest litigation. Limited jurisdiction of the courts would

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 55 of 85

ensure expeditious and efficient disposal at the referral stage.

At the referral stage, the Court can interfere “only” when it

is “manifest” that the claims are ex facie time-barred and

dead, or there is no subsisting dispute. […]”

(Emphasis supplied)

88. The decision in Vidya Drolia (supra) was applied in the context of “accord

and satisfaction” by a two-Judge Bench of this Court in Indian Oil

Corporation Limited v. NCC Limited reported in (2023) 2 SCC 539. It was

held that although the referral court under Section 11 of the 1996 Act may

look into the aspect of “accord and satisfaction”, yet it is advisable that in

debatable cases and disputable facts, more particularly in reasonably

arguable cases, the determination of whether accord and satisfaction was

actually present or not should be left to the arbitral tribunal. This Court also

expressed disagreement with the High Court which had held that post the

insertion of Section 11(6-A) to the Act, 1996, the scope of interference of

the referral court in a Section 11 petition was limited to the aspect of

examining the existence of a binding arbitration agreement qua the parties

before it. Relevant extracts are reproduced hereinbelow:

“90. […] Therefore, even when it is observed and held that

such an aspect with regard to “accord and satisfaction” of

the claims may/can be considered by the Court at the stage

of deciding Section 11 application, it is always advisable

and appropriate that in cases of debatable and disputable

facts, good reasonably arguable case, the same should be

left to the Arbitral Tribunal. Similar view is expressed by

this Court in Vidya Drolia [Vidya Drolia v. Durga Trading

Corpn., (2021) 2 SCC 1 : (2021) 1 SCC (Civ) 549] .

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 56 of 85

91. Therefore, in the facts and circumstances of the case,

though it is specifically observed and held that aspects with

regard to “accord and satisfaction” of the claims can be

considered by the Court at the stage of deciding Section

11(6) application, in the facts and circumstances of the

case, the High Court has not committed any error in

observing that aspects with regard to “accord and

satisfaction” of the claims or where there is a serious

dispute will have to be left to the Arbitral Tribunal.

92. However, at the same time, we do not agree with the

conclusion arrived at by the High Court that after the

insertion of sub-section (6-A) in Section 11 of the

Arbitration Act, scope of inquiry by the Court in Section 11

petition is confined only to ascertain as to whether or not a

binding arbitration agreement exists qua the parties before

it, which is relatable to the disputes at hand.

93. We are of the opinion that though the Arbitral Tribunal

may have jurisdiction and authority to decide the disputes

including the question of jurisdiction and non-arbitrability,

the same can also be considered by the Court at the stage of

deciding Section 11 application if the facts are very clear

and glaring and in view of the specific clauses in the

agreement binding between the parties, whether the dispute

is non-arbitrable and/or it falls within the excepted clause.

Even at the stage of deciding Section 11 application, the

Court may prima facie consider even the aspect with regard

to “accord and satisfaction” of the claims.

94. Now, so far as the submission on behalf of the respective

parties on the decision of the General Manager on notified

claims in Civil Appeal No. 341 of 2022 arising out of SLP

(C) No. 13161 of 2019 is concerned, the General Manager

has decided/declared that the claims are not arbitrable

since they had been settled and the arbitration agreement

has been discharged under Clause 6.7.2.0 of GCC and no

longer existed/subsisted. As observed hereinabove, the

claims had been settled or not is a debatable and disputable

question, which is to be left to be decided by the Arbitral

Tribunal. Therefore, matters related to the notified claims

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 57 of 85

in the facts and circumstances of the case also shall have to

be left to be decided by the Arbitral Tribunal as in the fact

situation the aspect of “accord and satisfaction” and

“notified claims” both are interconnected and interlinked.”

(Emphasis supplied)

89. We find it difficult to agree with the dictum of law as laid in Indian Oil

(supra). While the dictum in Vidya Drolia (supra) allows for interference

by the referral court, it only allows so as an exception in cases where ex-

facie meritless claims are sought to be referred to arbitration. However, the

view taken in Indian Oil (supra) takes a position which was taken by this

Court in Boghara Polyfab (supra), wherein it was held that the issue of

accord and satisfaction could either be decided by the referring authority

or be left for the arbitrator to decide. This pre-2015 position, as was also

pointed in Mayavati Trading (supra), was legislatively overruled by the

2015 amendment to the Act, 1996 and the introduction of Section 11(6-A).

Thus, in our view, the intention of this Court in Vidya Drolia (supra) was

not to hold that despite the 2015 amendment, the position regarding

“accord and satisfaction” would continue to be one which was taken in

Boghara Polyfab (supra). Vidya Drolia (supra) only went a step ahead

from the position in Mayavati Trading (supra) to create an exception that

although the rule is to refer all questions of “accord and satisfaction” to the

arbitral tribunal, yet in exceptional cases and in the interest of expediency,

ex facie meritless claims could be struck down.

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 58 of 85

90. In NTPC Ltd. v. SPML Infra Ltd. reported in (2023) 9 SCC 385, a two-

Judge Bench of this Court was again faced with the issue of “accord and

satisfaction” in the context of a Section 11 petition for appointment of

arbitrator. Placing reliance on Vidya Drolia (supra), this Court gave the

“Eye of the Needle” test to delineate the contours of the power of

interference which the referral court may exercise under Section 11 of the

Act, 1996. The first prong of the said test requires the court to examine the

validity and existence of the arbitration agreement which includes an

examination of the parties to the agreement and the privity of the applicant

to the contract. The second prong of the test requires the court to, as a

general rule, leave all questions of non-arbitrability to the arbitral tribunal

and only as a demurrer reject the claims which are ex-facie and manifestly

non-arbitrable. However, it was clarified that the standard of the aforesaid

scrutiny is only prima facie, that is, unlike the pre-2015 position, the

scrutiny does not entail elaborate appreciation of evidence and conduct of

mini trials by the referral courts. The relevant observations made therein

are reproduced hereinbelow:

“24. Following the general rule and the principle laid down

in Vidya Drolia [Vidya Drolia v. Durga Trading Corpn.,

(2021) 2 SCC 1 : (2021) 1 SCC (Civ) 549] , this Court has

consistently been holding that the Arbitral Tribunal is the

preferred first authority to determine and decide all questions

of non-arbitrability. In Pravin Electricals (P) Ltd. v. Galaxy

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 59 of 85

Infra & Engg. (P) Ltd. [Pravin Electricals (P) Ltd. v. Galaxy

Infra & Engg. (P) Ltd., (2021) 5 SCC 671, paras 29, 30 :

(2021) 3 SCC (Civ) 307] , Sanjiv Prakash v. Seema

Kukreja [Sanjiv Prakash v. Seema Kukreja, (2021) 9 SCC

732 : (2021) 4 SCC (Civ) 597] , and Indian Oil Corpn.

Ltd. v. NCC Ltd. [Indian Oil Corpn. Ltd. v. NCC Ltd., (2023)

2 SCC 539 : (2023) 1 SCC (Civ) 88] , the parties were

referred to arbitration, as the prima facie review in each of

these cases on the objection of non-arbitrability was found to

be inconclusive. Following the exception to the general

principle that the Court may not refer parties to arbitration

when it is clear that the case is manifestly and ex facie non-

arbitrable, in BSNL v. Nortel Networks (India) (P)

Ltd. [BSNL v. Nortel Networks (India) (P) Ltd., (2021) 5 SCC

738 : (2021) 3 SCC (Civ) 352] (hereinafter “Nortel

Networks”) and Secunderabad Cantonment Board v. B.

Ramachandraiah & Sons [Secunderabad Cantonment

Board v. B. Ramachandraiah & Sons, (2021) 5 SCC 705 :

(2021) 3 SCC (Civ) 335] , arbitration was refused as the

claims of the parties were demonstrably time-barred.

Eye of the needle

25. The abovereferred precedents crystallise the position of

law that the pre-referral jurisdiction of the Courts under

Section 11(6) of the Act is very narrow and inheres two

inquiries. The primary inquiry is about the existence and the

validity of an arbitration agreement, which also includes an

inquiry as to the parties to the agreement and the applicant's

privity to the said agreement. These are matters which

require a thorough examination by the Referral Court. The

secondary inquiry that may arise at the reference stage itself

is with respect to the non-arbitrability of the dispute.

26. As a general rule and a principle, the Arbitral Tribunal

is the preferred first authority to determine and decide all

questions of non-arbitrability. As an exception to the rule,

and rarely as a demurrer, the Referral Court may reject

claims which are manifestly and ex facie non-

arbitrable [Vidya Drolia v. Durga Trading Corpn., (2021) 2

SCC 1, para 154.4 : (2021) 1 SCC (Civ) 549] […]

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 60 of 85

27. The standard of scrutiny to examine the non-arbitrability

of a claim is only prima facie. Referral Courts must not

undertake a full review of the contested facts; they must only

be confined to a primary first review [Vidya Drolia v. Durga

Trading Corpn., (2021) 2 SCC 1, para 134 : (2021) 1 SCC

(Civ) 549] and let facts speak for themselves. This also

requires the Courts to examine whether the assertion on

arbitrability is bona fide or not. [Vidya Drolia v. Durga

Trading Corpn., (2021) 2 SCC 1 : (2021) 1 SCC (Civ) 549]

The prima facie scrutiny of the facts must lead to a clear

conclusion that there is not even a vestige of doubt that the

claim is non-arbitrable. [BSNL v. Nortel Networks (India)

(P) Ltd., (2021) 5 SCC 738, para 47 : (2021) 3 SCC (Civ)

352] On the other hand, even if there is the slightest doubt,

the rule is to refer the dispute to arbitration [Vidya

Drolia v. Durga Trading Corpn., (2021) 2 SCC 1, para 154.4

: (2021) 1 SCC (Civ) 549].”

(Emphasis supplied)

91. The justification given in NTPC v. SPML (supra) for allowing the scrutiny

of arbitrability at the stage of Section 11 petition was that the referral court

is under a duty to protect the parties from being forced to arbitrate when

the matter is demonstrably non-arbitrable, and any interference by the

referral court preventing such ex-facie meritless arbitration could be

termed as legitimate. It was observed thus:

“28. The limited scrutiny, through the eye of the needle, is

necessary and compelling. It is intertwined with the duty of

the Referral Court to protect the parties from being forced to

arbitrate when the matter is demonstrably non-arbitrable . It

has been termed as a legitimate interference by Courts to

refuse reference in order to prevent wastage of public and

private resources [Vidya Drolia v. Durga Trading Corpn.,

(2021) 2 SCC 1, para 139 : (2021) 1 SCC (Civ) 549] .

Further, as noted in Vidya Drolia [Vidya Drolia v. Durga

Trading Corpn., (2021) 2 SCC 1 : (2021) 1 SCC (Civ) 549] ,

if this duty within the limited compass is not exercised, and

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 61 of 85

the Court becomes too reluctant to intervene, it may

undermine the effectiveness of both, arbitration and the

Court [Vidya Drolia v. Durga Trading Corpn., (2021) 2 SCC

1, para 139 : (2021) 1 SCC (Civ) 549] . Therefore, this Court

or a High Court, as the case may be, while exercising

jurisdiction under Section 11(6) of the Act, is not expected

to act mechanically merely to deliver a purported dispute

raised by an applicant at the doors of the chosen arbitrator,

as explained in DLF Home Developers Ltd. v. Rajapura

Homes (P) Ltd. [DLF Home Developers Ltd. v. Rajapura

Homes (P) Ltd., (2021) 16 SCC 743, paras 22, 26 : 2021 SCC

OnLine SC 781, paras 18, 20]”

92. The position that emerges from the aforesaid discussion of law on the

subject as undertaken by us can be summarised as follows: -

i. There were two conflicting views which occupied the field under the

Arbitration Act, 1940. While the decisions in Damodar Valley

(supra) and Amar Nath (supra) took the view that the disputes

pertaining to “accord and satisfaction” should be left to the arbitrator

to decide, the view taken in P.K. Ramaiah (supra) and Nathani

Steels (supra) was that once a “full and final settlement” is entered

into between the parties, no arbitrable disputes subsist and therefore

reference to arbitration must not be allowed.

ii. Under the Act, 1996, the power under Section 11 was characterised

as an administrative one as acknowledged in the decision in Konkan

Railway (supra) and this continued till the decision of a seven-Judge

Bench in SBP & Co. (supra) overruled it and significantly expanded

the scope of judicial interference under Sections 8 and 11

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 62 of 85

respectively of the Act, 1996. The decision in Jayesh Engineering

(supra) adopted this approach in the context of “accord and

satisfaction” cases and held that the issue whether the contract had

been fully worked out and whether payments had been made in full

and final settlement of the claims are issues which should be left for

the arbitrator to adjudicate upon.

iii. The decision in SBP & Co. (supra) was applied in Boghara Polyfab

(supra) and it was held by this Court that the Chief Justice or his

designate, in exercise of the powers available to them under Section

11 of the Act, 1996, can either look into the question of “accord and

satisfaction” or leave it for the decision of the arbitrator. However,

it also specified that in cases where the Chief Justice was satisfied

that there was indeed “accord and satisfaction”, he could reject the

application for appointment of arbitrator. The prima facie standard

of scrutiny was also expounded, stating that the party seeking

arbitration would have to prima facie establish that there was fraud

or coercion involved in the signing of the discharge certificate. The

position elaborated in Boghara Polyfab (supra) was adopted in a

number of subsequent decisions, wherein it was held that a mere bald

plea of fraud or coercion was not sufficient for a party to seek

reference to arbitration and prima facie evidence for the same was

required to be provided, even at the stage of the Section 11 petition.

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 63 of 85

iv. The view taken by SBP & Co. (supra) and Boghara Polyfab (supra)

was seen by the legislature as causing delays in the disposal of

Section 11 petitions, and with a view to overcome the same, Section

11(6-A) was introduced in the Act, 1996 to limit the scope of enquiry

under Section 11 only to the extent of determining the “existence”

of an arbitration agreement. This intention was acknowledged and

given effect to by this Court in the decision in Duro Felguera

(supra) wherein it was held that the enquiry under Section 11 only

entailed an examination whether an arbitration agreement existed

between the parties or not and “nothing more or nothing less”.

v. Despite the introduction of Section 11(6-A) and the decision in Duro

Felguera (supra), there have been diverging views of this Court on

whether the scope of referral court under Section 11 of the Act, 1996

includes the power to go into the question of “accord and

satisfaction”. In Antique Art (supra) it was held that unless some

prima facie proof of duress or coercion is adduced by the claimant,

there could not be a referral of the disputes to arbitration. This view,

however, was overruled in Mayavati Trading (supra) which

reiterated the view taken in Duro Felguera (supra) and held that

post the 2015 amendment to the Act, 1996, it was no more open to

the Court while exercising its power under Section 11 of the Act,

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 64 of 85

1996 to go into the question of whether “accord and satisfaction”

had taken place.

vi. The decision in Vidya Drolia (supra) although adopted the view

taken in Mayawati Trading (supra) yet it provided that in

exceptional cases, where it was manifest that the claims were ex-

facie time barred and deadwood, the Court could interfere and refuse

reference to arbitration. Recently, this view in the context of “accord

and satisfaction” was adopted in NTPC v. SPML (supra) wherein

the “eye of the needle” test was elaborated. It permits the referral

court to reject arbitration in such exceptional cases where the plea of

fraud or coercion appears to be ex-facie frivolous and devoid of

merit.

93. Thus, the position after the decisions in Mayavati Trading (supra) and

Vidya Drolia (supra) is that ordinarily, the Court while acting in exercise

of its powers under Section 11 of the Act, 1996, will only look into the

existence of the arbitration agreement and would refuse arbitration only as

a demurrer when the claims are ex-facie frivolous and non-arbitrable.

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 65 of 85

iii. What is the effect of the decision of this Court in In Re: Interplay Between

Arbitration Agreements under the Arbitration and Conciliation Act 1966

and the Indian Stamp Act 1899 on the scope of powers of the referral court

under Section 11 of the Act, 1996?

94. A seven-Judge Bench of this Court, in In Re: Interplay Between

Arbitration Agreements under the Arbitration and Conciliation Act 1966

and the Indian Stamp Act 1899 reported in 2023 INSC 1066, speaking

eruditely through one of us, Dr Dhananjaya Y. Chandrachud, Chief Justice

of India, undertook a comprehensive analysis of Sections 8 and 11

respectively of the Act, 1996 and, inter alia, made poignant observations

about the nature of the power vested in the Courts insofar as the aspect of

appointment of arbitrator is concerned. Some of the relevant observations

made by this Court in In Re: Interplay (supra) are extracted hereinbelow:

“179. […] However, the effect of the principle of

competence-competence is that the arbitral tribunal is vested

with the power and authority to determine its enforceability.

The question of enforceability survives, pending the curing of

the defect which renders the instrument inadmissible. By

appointing a tribunal or its members, this Court (or the High

Courts, as the case may be) is merely giving effect to the

principle enshrined in Section 16. The appointment of an

arbitral tribunal does not necessarily mean that the

agreement in which the arbitration clause is contained as

well as the arbitration agreement itself are enforceable. The

arbitral tribunal will answer precisely these questions.

xxx xxx xxx

185. The corollary of the doctrine of competence-competence

is that courts may only examine whether an arbitration

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 66 of 85

agreement exists on the basis of the prima facie standard of

review. The nature of objections to the jurisdiction of an

arbitral tribunal on the basis that stamp-duty has not been

paid or is inadequate is such as cannot be decided on a prima

facie basis. Objections of this kind will require a detailed

consideration of evidence and submissions and a finding as

to the law as well as the facts. Obligating the court to decide

issues of stamping at the Section 8 or Section 11 stage will

defeat the legislative intent underlying the Arbitration Act.

186. The purpose of vesting courts with certain powers under

Sections 8 and 11 of the Arbitration Act is to facilitate and

enable arbitration as well as to ensure that parties comply

with arbitration agreements. The disputes which have arisen

between them remain the domain of the arbitral tribunal

(subject to the scope of its jurisdiction as defined by the

arbitration clause). The exercise of the jurisdiction of the

courts of the country over the substantive dispute between the

parties is only possible at two stages:

a. If an application for interim measures is filed under

Section 9 of the Arbitration Act; or

b. If the award is challenged under Section 34.

Issues which concern the payment of stamp-duty fall within

the remit of the arbitral tribunal. The discussion in the

preceding segments also make it evident that courts are not

required to deal with the issue of stamping at the stage of

granting interim measures under Section 9.”

(Emphasis supplied)

95. We would like to analyse and elaborate some of the observations from the

aforesaid decision which are highly pertinent to the dispute at hand.

a. Arbitral Autonomy

96. The principle of judicial non-interference permeates the scheme of the Act,

1996. The principle of competence-competence as contained in Section 16

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 67 of 85

of the Act, 1996 indicates that the arbitral tribunal enjoys sufficient

autonomy from the national courts. The underlying principle behind

arbitral autonomy and judicial non-interference is that when parties

mutually decide to settle their disputes through arbitration, they surrender

their right to agitate the same before the national courts.

97. Section 5 of the Act, 1996 also minimises the supervisory role that the

courts may play in the arbitral process. There are two facets to Section 5 –

positive and negative. The positive facet allows the judicial authorities to

exercise jurisdiction over matters expressly permitted under the Act, 1996.

The negative aspect, on the other hand, prohibits the judicial authorities

from intervening in the arbitral proceedings in situations where the arbitral

tribunal has been conferred with exclusive jurisdiction.

98. What follows from the negative facet of arbitral autonomy when applied

in the context of Section 16 is that the national courts are prohibited from

interfering in matters pertaining to the jurisdiction of the arbitral tribunal,

as exclusive jurisdiction on those aspects vests with the arbitral tribunal.

The legislative mandate of prima facie determination at the stage of

Sections 8 and 11 respectively ensures that the referral courts do not end

up venturing into what is intended by the legislature to be the exclusive

domain of the arbitral tribunal.

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 68 of 85

99. Gary B. Born

1

describes arbitral autonomy as intrinsically related to the

‘right to arbitrate’, which in turn is a concomitant of freedom of contract,

liberty of association and personal autonomy. He describes “the right of

parties to resolve their disputes, with one another, in a manner of their

own choosing” as “a basic aspect of individual autonomy and liberty,

which is properly accorded protection in almost all developed legal

systems.” He also stresses on the importance of autonomy of parties to

arbitrate as giving effect to fundamental right to autonomy of parties and

increasing their access to justice. Characterising the right to arbitrate as an

important political right, he observes that “voluntary agreements, by free

men and women, to resolve their disputes between themselves, in a manner

which they structure, are the exercise of basic rights of liberty, association

and property and a bulwark against governmental oppression.

2

”

100. In Hayter v. Nelson reported in [1990] 2 Lloyd's Rep. 265, 272, it was

observed that the “modern view in line with the basic principles of the

English law of freedom of contract and indeed International Conventions

is that there is no good reason why the Courts should strive to take matters

1

Gary B. Born, Internation Commercial Arbitration, 3

rd

Ed. (2021), pp. 685

2

Gary B. Born, Internation Commercial Arbitration, 3

rd

Ed. (2021), pp. 696

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 69 of 85

out of the hands of the tribunal into which the parties have by agreement

undertaken to place them”.

b. Negative Competence-Competence

101. Section 16 of the Act, 1996 recognises the doctrine of competence-

competence and empowers the arbitral tribunal to rule on its own

jurisdiction. The policy consideration for the same is, firstly, to recognise

the intention of the parties in choosing arbitration as the method for

resolving the disputes arising out of the contract and secondly, to prevent

the parties from initiating parallel proceedings before courts and delaying

the arbitral process.

102. The negative aspect of competence-competence is aimed at restricting the

interference of the courts at the referral stage by preventing the courts from

examining the issues pertaining to the jurisdiction of the arbitral tribunal

before the arbitral tribunal itself has had the opportunity to entertain them.

The courts are allowed to review the decision of the arbitral tribunal at a

later stage.

103. The principle of negative competence-competence has also been codified

by the national statutory frameworks for international arbitration. For

example, in French New Code of Civil Procedure, 1981 and the French

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 70 of 85

Decree No. 2011- 48 of 13 January 2011 Reforming the Law Governing

Arbitration, the concept of negative competence-competence was codified

based on the decision of Court of Appeal in Colmar Impex v. PAZ,

reported in 1968 Rev. Arb. 149, 155 (Colmar Cour d’Appeal). In the said

decision, it was observed that, “the principle is that the judge hearing a

dispute has jurisdiction to determine his own jurisdiction. This necessarily

implies that when that judge is an arbitrator, whose powers derive from

the agreement of the parties, he has jurisdiction to examine the existence

and validity of such agreement”.

104. Supreme Court of the United States too has, on a number of occasions,

consistently affirmed that by virtue of the separability presumption, where

there is only a challenge to the validity or legality of the underlying

contract, and no challenge to the existence, validity, or legality of the

associated arbitration clause itself, the claims should be referred to

arbitration. [See: Prima Paint Corp. v. Flood & Conklin Manufacturing

Co. reported in 388 U.S. 395 (U.S. S.Ct. 1967); Buckeye Check Cashing,

Inc. v. Cardegna reported in 546 U.S. 440 (U.S. S.Ct. 2006)]

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 71 of 85

105. In the specific context of settlement of original contract, Gary Born

3

writes

that “US lower courts have repeatedly applied the separability

presumption in holding that claims regarding the validity or enforceability

of the underlying contract do not impeach the separable arbitration clause

and for decisions by the arbitrators.” Referring to the cases in which the

aforesaid principles have been applied, he writes “that approach has been

opted in diverse settings including in the case of Ambulance Biling Sys.,

Inc. v. Gemini Ambulance Servs., Inc., 103 S.W.3d 507, 514-515 (Tex. App.

2003) wherein arbitrators were given the power to decide regarding

whether a settlement agreement was reached replacing or cancelling

original agreement.”

106. In Howsam v. Dean Witter Reynolds, Inc. reported in 537 U.S. 79, 84

(U.S. S.Ct. 2002), it was observed by the US Supreme Court that "the

presumption is that the arbitrator should decide allegation[s] of waiver,

delay, or alike defense to arbitrability.”

c. Judicial Interference under the Act, 1996

107. The parties have been conferred with the power to decide and agree on the

procedure to be adopted for appointing arbitrators. In cases where the

3

Gary B. Born, Internation Commercial Arbitration, 3

rd

Ed. (2021), pp. 1251

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 72 of 85

agreed upon procedure fails, the courts have been vested with the power to

appoint arbitrators upon the request of a party, to resolve the deadlock

between the parties in appointing the arbitrators.

108. Section 11 of the Act, 1996 is provided to give effect to the mutual

intention of the parties to settle their disputes by arbitration in situations

where the parties fail to appoint an arbitrator(s). The parameters of judicial

review laid down for Section 8 differ from those prescribed for Section 11.

The view taken in SBP & Co. (supra) and affirmed in Vidya Drolia (supra)

that Sections 8 and 11 respectively of the Act, 1996 are complementary in

nature was legislatively overruled by the introduction of Section 11(6-A)

in 2015. Thus, although both these provisions intend to compel parties to

abide by their mutual intention to arbitrate, yet the scope of powers

conferred upon the courts under both the sections are different.

109. The difference between Sections 8 and 11 respectively of the Act, 1996 is

also evident from the scope of these provisions. Some of these differences

are:

i. While Section 8 empowers any ‘judicial authority’ to refer the

parties to arbitration, under Section 11, the power to refer has been

exclusively conferred upon the High Court and the Supreme Court.

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 73 of 85

ii. Under Section 37, an appeal lies against the refusal of the judicial

authority to refer the parties to arbitration, whereas no such

provision for appeal exists for a refusal under Section 11.

iii. The standard of scrutiny provided under Section 8 is that of prima

facie examination of the validity and existence of an arbitration

agreement. Whereas, the standard of scrutiny under Section 11 is

confined to the examination of the existence of the arbitration

agreement.

iv. During the pendency of an application under Section 8, arbitration

may commence or continue and an award can be passed. On the

other hand, under Section 11, once there is failure on the part of the

parties in appointing the arbitrator as per the agreed procedure and

an application is preferred, no arbitration proceedings can

commence or continue.

110. The scope of examination under Section 11(6-A) is confined to the

existence of an arbitration agreement on the basis of Section 7. The

examination of validity of the arbitration agreement is also limited to the

requirement of formal validity such as the requirement that the agreement

should be in writing.

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 74 of 85

111. The use of the term ‘examination’ under Section 11(6-A) as distinguished

from the use of the term ‘rule’ under Section 16 implies that the scope of

enquiry under section 11(6-A) is limited to a prima facie scrutiny of the

existence of the arbitration agreement, and does not include a contested or

laborious enquiry, which is left for the arbitral tribunal to ‘rule’ under

Section 16. The prima facie view on existence of the arbitration agreement

taken by the referral court does not bind either the arbitral tribunal or the

court enforcing the arbitral award.

112. The aforesaid approach serves a two-fold purpose – firstly, it allows the

referral court to weed out non-existent arbitration agreements, and

secondly, it protects the jurisdictional competence of the arbitral tribunal

to rule on the issue of existence of the arbitration agreement in depth.

113. Referring to the Statement of Objects and Reasons of the Arbitration and

Conciliation (Amendment) Act, 2015, it was observed in In Re: Interplay

(supra) that the High Court and the Supreme Court at the stage of

appointment of arbitrator shall examine the existence of a prima facie

arbitration agreement and not any other issues. The relevant observations

are extracted hereinbelow:

“209. The above extract indicates that the Supreme Court or

High Court at the stage of the appointment of an arbitrator

shall “examine the existence of a prima facie arbitration

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 75 of 85

agreement and not other issues”. These other issues not

only pertain to the validity of the arbitration agreement, but

also include any other issues which are a consequence of

unnecessary judicial interference in the arbitration

proceedings. Accordingly, the “other issues” also include

examination and impounding of an unstamped instrument by

the referral court at the Section 8 or Section 11 stage. The

process of examination, impounding, and dealing with an

unstamped instrument under the Stamp Act is not a

timebound process, and therefore does not align with the

stated goal of the Arbitration Act to ensure expeditious and

time-bound appointment of arbitrators. […]”

(Emphasis supplied)

114. In view of the observations made by this Court in In Re: Interplay (supra),

it is clear that the scope of enquiry at the stage of appointment of arbitrator

is limited to the scrutiny of prima facie existence of the arbitration

agreement, and nothing else. For this reason, we find it difficult to hold

that the observations made in Vidya Drolia (supra) and adopted in NTPC

v. SPML (supra) that the jurisdiction of the referral court when dealing

with the issue of “accord and satisfaction” under Section 11 extends to

weeding out ex-facie non-arbitrable and frivolous disputes would continue

to apply despite the subsequent decision in In Re: Interplay (supra).

115. 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

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 76 of 85

substantive contract in which it is contained, continues to remain in

existence even after the original contract stands discharged by “accord and

satisfaction”.

116. The question of “accord and satisfaction”, being a mixed question of law

and fact, comes within the exclusive jurisdiction of the arbitral tribunal, if

not otherwise agreed upon between the parties. Thus, the negative effect

of competence-competence would require that the matter falling within the

exclusive domain of the arbitral tribunal, should not be looked into by the

referral court, even for a prima facie determination, before the arbitral

tribunal first has had the opportunity of looking into it.

117. By referring disputes to arbitration and appointing an arbitrator by exercise

of the powers under Section 11, the referral court upholds and gives effect

to the original understanding of the contracting parties that the specified

disputes shall be resolved by arbitration. Mere appointment of the arbitral

tribunal doesn’t in any way mean that the referral court is diluting the

sanctity of “accord and satisfaction” or is allowing the claimant to walk

back on its contractual undertaking. On the contrary, it ensures that the

principal of arbitral autonomy is upheld and the legislative intent of

minimum judicial interference in arbitral proceedings is given full effect.

Once the arbitral tribunal is constituted, it is always open for the defendant

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 77 of 85

to raise the issue of “accord and satisfaction” before it, and only after such

an objection is rejected by the arbitral tribunal, that the claims raised by

the claimant can be adjudicated.

118. Tests like the “eye of the needle” and “ex-facie meritless”, although try to

minimise the extent of judicial interference, yet they require the referral

court to examine contested facts and appreciate prima facie evidence

(however limited the scope of enquiry may be) and thus are not in

conformity with the principles of modern arbitration which place arbitral

autonomy and judicial non-interference on the highest pedestal.

119. Appointment of an arbitral tribunal at the stage of Section 11 petition also

does not mean that the referral courts forego any scope of judicial review

of the adjudication done by the arbitral tribunal. The Act, 1996 clearly

vests the national courts with the power of subsequent review by which the

award passed by an arbitrator may be subjected to challenge by any of the

parties to the arbitration.

120. The principle of subsequent judicial review has been enshrined in the US

doctrine of “Second Look”. In a leading U.S. Supreme Court judgement of

PacifiCare Health Systems, Inc. v. Book reported in 538, U.S. 401 (U.S.

S. Ct. 2003), it was held that the question of non-arbitrability should be

considered in the first instance by the arbitral tribunal. The Court observed

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 78 of 85

that, “since we do not know how the arbitrator will construe the remedial

limitations, the question ... whether they render the parties' agreements

unenforceable is better left for initial arbitral consideration”. This

doctrine has also been affirmed by judgements of the U.S. lower courts in

cases of Dillon v. BMO Harris Bank, NA reported in 856 F.3d 330, 333

(4th Cir. 2017) and Escobar v. Celebration Cruise Operator, Inc. reported

in 805 F.3d 1279, 1288-89 (11th Cir. 2015) wherein it was reasoned that

the issues of U.S. statutory law and arbitrability should be submitted first

to arbitration, with the possibility of subsequent judicial review in

recognition and enforcement proceedings.

121. 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. Similarly, it would be

open to the claimant to allege that the voucher had been obtained under

fraud, coercion or undue influence. In such a scenario, the civil court would

consider the evidence as to whether there was any fraud, undue influence

or coercion. If the civil court finds that there was none, then it would reject

the claims at the outset. However, if it finds that the allegations of fraud

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 79 of 85

are true, then it would reject the discharge voucher and proceed to

adjudicate the claims on merit.

122. Once an arbitration agreement exists between parties, then the option of

approaching the civil court becomes unavailable to them. In such a

scenario, if the parties seek to raise a dispute, they necessarily have to do

so before the arbitral tribunal. The arbitral tribunal, in turn, can only be

constituted as per the procedure agreed upon between the parties.

However, if there is a failure of the agreed upon procedure, then the duty

of appointing the arbitral tribunal falls upon the referral court under Section

11 of the Act, 1996. If the referral court, at this stage, goes beyond the

scope of enquiry as provided under the section and examines the issue of

“accord and satisfaction”, then it would amount to usurpation of the power

which the parties had intended to be exercisable by the arbitral tribunal

alone and not by the national courts. Such a scenario would impeach

arbitral autonomy and would not fit well with the scheme of the Act, 1996.

123. The power available to the referral courts has to be construed in the light

of the fact that no right to appeal is available against any order passed by

the referral court under Section 11 for either appointing or refusing to

appoint an arbitrator. Thus, by delving into the domain of the arbitral

tribunal at the nascent stage of Section 11, the referral courts also run the

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 80 of 85

risk of leaving the claimant in a situation wherein it does not have any

forum to approach for the adjudication of its claims, if it Section 11

application is rejected.

124. Section 11 also envisages a time-bound and expeditious disposal of the

application for appointment of arbitrator. One of the reasons for this is also

the fact that unlike Section 8, once an application under Section 11 is filed,

arbitration cannot commence until the arbitral tribunal is constituted by the

referral court. This Court, on various occasions, has given directions to the

High Courts for expeditious disposal of pending Section 11 applications.

It has also directed the litigating parties to refrain from filing bulky

pleadings in matters pertaining to Section 11. Seen thus, if the referral

courts go into the details of issues pertaining to “accord and satisfaction”

and the like, then it would become rather difficult to achieve the objective

of expediency and simplification of pleadings.

125. We are also of the view that ex-facie frivolity and dishonesty in litigation

is an aspect which the arbitral tribunal is equally, if not more, capable to

decide upon the appreciation of the evidence adduced by the parties. We

say so because the arbitral tribunal has the benefit of going through all the

relevant evidence and pleadings in much more detail than the referral court.

If the referral court is able to see the frivolity in the litigation on the basis

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 81 of 85

of bare minimum pleadings, then it would be incorrect to doubt that the

arbitral tribunal would not be able to arrive at the same inference, most

likely in the first few hearings itself, with the benefit of extensive pleadings

and evidentiary material.

126. Before, we close the matter, it is necessary for us to clarify the dictum as

laid in M/s Arif Azim Co. Ltd. v. M/s Aptech Ltd. reported in 2024 INSC

155, so as to streamline the position of law and prevent the possibility of

any conflict between the two decisions that may arise in future.

127. In Arif Azim (supra), while deciding an application for appointment of

arbitrator under Section 11(6) of the Act, 1996, two issues had arisen for

our consideration:

i. Whether the Limitation Act, 1963 is applicable to an application for

appointment of arbitrator under Section 11(6) of the Arbitration and

Conciliation Act, 1996? If yes, whether the petition filed by M/s Arif

Azim was barred by limitation?

ii. Whether the court may decline to make a reference under Section 11

of Act, 1996 where the claims are ex-facie and hopelessly time-

barred?

128. On the first issue, it was observed by us that the Limitation Act, 1963 is

applicable to the applications filed under Section 11(6) of the Act, 1996.

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 82 of 85

Further, we also held that it is the duty of the referral court to examine that

the application under Section 11(6) of the Act, 1996 is not barred by period

of limitation as prescribed under Article 137 of the Limitation Act, 1963,

i.e., 3 years from the date when the right to apply accrues in favour of the

applicant. To determine as to when the right to apply would accrue, we had

observed in paragraph 56 of the said decision that “the limitation period

for filing a petition under Section 11(6) of the Act, 1996 can only commence

once a valid notice invoking arbitration has been sent by the applicant to

the other party, and there has been a failure or refusal on part of that other

party in complying with the requirements mentioned in such notice.”

129. Insofar as the first issue is concerned, we are of the opinion that the

observations made by us in Arif Azim (supra) do not require any

clarification and should be construed as explained therein.

130. On the second issue it was observed by us in paragraph 67 that the referral

courts, while exercising their powers under Section 11 of the Act, 1996,

are under a duty to “prima-facie examine and reject non-arbitrable or dead

claims, so as to protect the other party from being drawn into a time-

consuming and costly arbitration process.”

131. Our findings on both the aforesaid issues have been summarised in

paragraph 89 of the said decision thus: -

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 83 of 85

“89. Thus, from an exhaustive analysis of the position of law

on the issues, we are of the view that while considering the

issue of limitation in relation to a petition under Section 11(6)

of the Act, 1996, the courts should satisfy themselves on two

aspects by employing a two-pronged test – first, whether the

petition under Section 11(6) of the Act, 1996 is barred by

limitation; and secondly, whether the claims sought to be

arbitrated are ex-facie dead claims and are thus barred by

limitation on the date of commencement of arbitration

proceedings. If either of these issues are answered against the

party seeking referral of disputes to arbitration, the court may

refuse to appoint an arbitral tribunal.”

132. Insofar as our observations on the second issue are concerned, we clarify

that the same were made in light of the observations made by this Court in

many of its previous decisions, more particularly in Vidya Drolia (supra)

and NTPC v. SPML (supra). However, in the case at hand, as is evident

from the discussion in the preceding parts of this judgment, we have had

the benefit of reconsidering certain aspects of the two decisions referred to

above in the light of the pertinent observations made by a seven-Judge

Bench of this Court in In Re: Interplay (supra).

133. Thus, we clarify that while determining the issue of limitation in exercise

of the powers under Section 11(6) of the Act, 1996, the referral court should

limit its enquiry to examining whether Section 11(6) application has been

filed within the period of limitation of three years or not. The date of

commencement of limitation period for this purpose shall have to be

construed as per the decision in Arif Azim (supra). As a natural corollary,

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 84 of 85

it is further clarified that the referral courts, at the stage of deciding an

application for appointment of arbitrator, must not conduct an intricate

evidentiary enquiry into the question whether the claims raised by the

applicant are time barred and should leave that question for determination

by the arbitrator. Such an approach gives true meaning to the legislative

intention underlying Section 11(6-A) of the Act, and also to the view taken

in In Re: Interplay (supra).

134. The observations made by us in Arif Azim (supra) are accordingly

clarified. We need not mention that the effect of the aforesaid clarification

is only to streamline the position of law, so as to bring it in conformity with

the evolving principles of modern-day arbitration, and further to avoid the

possibility of any conflict between the two decisions that may arise in

future. These clarifications shall not be construed as affecting the verdict

given by us in the facts of Arif Azim (supra), which shall be given full

effect to notwithstanding the observations made herein.

F. CONCLUSION

135. 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

Special Leave Petition (C) Nos. 3792/2024 & 7220/2024 Page 85 of 85

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.

136. For all the aforesaid reasons, we uphold and affirm the appointment of

Justice K.A. Puj, former Judge of the High Court of Gujarat as an arbitrator

to resolve the disputes between the parties.

137. The order staying the arbitration proceedings stands vacated.

138. All legal contentions including objections available to the appellant are

kept open to be taken up before the learned Arbitrator.

139. Pending application(s), if any, shall stand disposed of.

…………………………………….CJI

(Dr. Dhananjaya Y. Chandrachud)

………………………………………J.

(J.B. Pardiwala)

………………………………………J.

(Manoj Misra)

New Delhi;

18

th

July, 2024