Does a Full-and-Final Settlement Bar Arbitration?

Boghara Polyfab Pvt. Ltd. kept stocks in godowns at Surat under a Fire and Special Perils policy from 4.8.2003 to 3.8.2004. The sum insured was Rs 3 crore, later raised to Rs 6 crore. On May 27, 2004, the company asked for another Rs 6 crore of cover for two months, and National Insurance issued an additional endorsement taking the total to Rs 12 crore. The two sides later fell out over how long that extra cover ran. Boghara said 69 days, up to August 3, 2004. The insurer said 60 days, up to July 26, 2004.

Heavy rains and flooding on August 2-3, 2004 damaged the stocks. The surveyor's final report of December 6, 2004 put the net loss payable at Rs 3,18,26,025, treating the sum insured as Rs 12 crore. National Insurance objected. Its case was that after July 26, 2004 the cover was only Rs 6 crore. On March 22, 2005 the surveyor reworked the figure and cut the net assessed loss to Rs 2,34,01,740. Boghara protested, and the claim hung unresolved for a long time.

Boghara's version of what came next is the heart of the case. It said the insurer refused to release anything unless it first signed an undated "discharge voucher-in-advance" acknowledging Rs 2,33,94,964 in full and final settlement. The insurer sent the voucher format on March 21, 2006. Boghara said it was in dire financial condition and had no alternative but to yield. It signed the voucher, undated, in the last week of March 2006. The voucher, on the insurer's Form ACL-10(1), said the money was received in full and final settlement and that the company absolved the insurer from all present and future liability. Boghara says the insurer paid only after the signed voucher reached it.

Boghara also lodged a complaint dated March 24, 2006 with the Insurance Regulatory and Development Authority. It then sent a legal notice on May 27, 2006. The notice said the insurer owed Rs 3,18,26,025, that the lower payment had been accepted under duress, and that the difference should be paid with 12% yearly interest from December 6, 2004. If payment did not follow within 15 days, the notice was to be treated as invoking arbitration.

The insurer's reply of August 2, 2006 rejected all of it. It said Boghara had unconditionally accepted the settlement amount fully and finally and had registered no protest while accepting the claim cheque. It said the amount was reached amicably after discussing every aspect of the claim, so arbitration did not arise. When the insurer would not agree to arbitrate, Boghara went to the Bombay High Court under Section 11 of the Arbitration and Conciliation Act, 1996. The Chief Justice allowed the application on April 19, 2007 and appointed Justice S.N. Variava as sole arbitrator. He left open whether the voucher was signed under coercion and let both sides lead evidence on that before the arbitrator. National Insurance appealed to the Supreme Court.

The policy had an arbitration clause for disputes on the amount payable: "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 to all other questions be referred to the decision of a sole Arbitrator."

The insurer argued that once Boghara signed the voucher, the contract ended by accord and satisfaction, meaning both sides had agreed to settle. In its view, neither the contract nor any claim survived. It argued that the voucher should be accepted at face value and any arbitration request thrown out at the threshold. It also argued that Boghara could not keep the money and then attack the voucher. Boghara answered that a contested voucher is not a threshold bar. Whether the voucher was voluntary is itself a question for the Chief Justice or the arbitrator. A voucher extracted by withholding admitted dues is the product of economic duress.

Earlier Supreme Court rulings were cited on both sides. The insurer relied on State of Maharashtra v. Nav Bharat Builders, P.K. Ramaiah & Co. v. National Thermal Power Corpn. and Nathani Steels v. Associated Constructions. Boghara relied on Damodar Valley Corporation, Bharat Heavy Electricals, L.K. Ahuja, Jayesh Engineering Works, Reshmi Constructions and Ambica Construction.

The insurer added a numbers argument. Its lawyer said the cases Boghara cited were all decided by two-Judge Benches, while Nathani Steels was decided by a three-Judge Bench. So, the insurer said, Nathani Steels held the field and had to be followed. That was the insurer's submission, not the Court's finding. The Court did not accept it. It read Nav Bharat Builders, Nathani Steels and P.K. Ramaiah as cases where the facts showed real negotiated or voluntary settlements and no substance in the coercion plea. It said none of the three laid down that merely signing a discharge voucher bars arbitration when the claimant challenges it for fraud, coercion or undue influence. The Nathani Steels remark about not spurning a settlement, it explained, was made about a plea of "mistake", not about fraud, undue influence or coercion.

The seven-Judge Bench in SBP & Co. v. Patel Engineering had also sorted what a Chief Justice must decide, may decide, or must leave to the tribunal under Section 11. The Supreme Court noted that the voucher question was not covered by that decision. It also observed that the older cases were decided under the Arbitration Act, 1940, and that the new Act has a different perspective.

Justice R.V. Raveendran, writing for the Bench, sorted the earlier cases into two groups. In the insurer's cases, the court had examined the facts and found genuine settlements. In Boghara's cases, there was some substance in the claim that no-dues certificates or full-and-final vouchers were insisted on as a condition for releasing admitted dues. The Court then stated the rule:

Under Section 11, whether the parties closed the transaction by recording satisfaction or taking final payment without objection is an issue the Chief Justice may decide or leave to the tribunal. Either way, the voucher dispute gets decided. Two gaps were closed:

• No automatic dismissal. A respondent cannot defeat an arbitration request simply by producing a signed voucher. If the claimant says it was obtained by fraud, coercion or undue influence, that issue must be decided by the Chief Justice or by the arbitral tribunal under the Section 11 order.
• The voucher's validity gets examined first. Where the Chief Justice is satisfied on a first look that the voucher was not voluntary and the matter needs detailed examination, he may send it to the tribunal with a direction to decide that question first. The tribunal then decides whether the discharge was vitiated by a circumstance that made it voidable at the claimant's instance. If it was, the tribunal ignores the voucher and decides the claim on merits.

On the facts, the Court noted that the Rs 2,33,94,964 had not been paid when Boghara signed and delivered the voucher. It was paid after the voucher was received. The voucher's statements that the money had been received, in full and final settlement, and in consideration of which the insurer was absolved, were therefore "all false and not supported by consideration." The Court also pointed out that the form carried an irrelevant line about assigning rights in stolen property, though no theft was claimed, and said this showed how such vouchers are signed mechanically.

The Court did not decide that Boghara had been coerced. It was prima facie of the view that there was no accord and satisfaction, so the dispute was arbitrable. But the insurer remains free to lead evidence before the arbitrator to prove a valid and binding discharge. The Court made clear that nothing it or the High Court said is a final opinion on accord and satisfaction or on the merits of any claim.

It also spoke bluntly about the practice itself. Undated receipts taken in advance for routine payments by government departments and the corporate sector are, it said, an accepted practice. What troubled the Court was the routine insistence by some government departments, statutory corporations and government companies on an undated no-dues certificate or full-and-final voucher for a sum smaller than the claim, as a condition for releasing even the admitted dues. The Court called that procedure "unfair, irregular and illegal" and said it "requires to be deprecated."

These five situations follow the Court's own illustrations.

• Gather the paper trail first. Collect the policy or contract with its arbitration clause, the discharge voucher, and any assessment or survey reports that show the claim figure. Also collect proof of the actual payment date. The Court focused on the fact that Boghara's voucher was signed before the money was paid.
• Note what the Court looked at on coercion. In Reshmi Constructions, the contractor had written a letter explaining that it signed the certificate under a threat that payment would not otherwise be released. The Court there held that its coercion plea could not be called an afterthought. In Boghara's own case, the Court recorded the complaint to the Insurance Regulatory and Development Authority dated 24.3.2006 and the legal notice of 27.5.2006.
• Follow the route Boghara followed. Boghara first sent a legal notice demanding the difference and invoking arbitration. When the insurer refused, it applied under Section 11 of the Arbitration and Conciliation Act, 1996 to the High Court. The Chief Justice or his designate then decides the voucher issue or directs the tribunal to decide it first. Where forgery or fabrication of the voucher is alleged, the Court said it would be appropriate for the Chief Justice or his designate to decide it.
• Avoid the biggest trap. Financial hardship on its own does not defeat a voucher. The Court's fifth illustration shows that a claimant who settles for less out of commercial pressure, with no threat or coercion from the other side, is bound. The coercion must still be proved before the Chief Justice or the arbitral tribunal.