Arbitration | Dispute Regarding Full & Final Settlement Of Contract Is Arbitrable : Supreme Court

The Supreme Court held that if any dispute arises as to whether a contract has been discharged or not, such a dispute is arbitrable.

“Once the contract has been discharged by performance, neither any right to seek performance, nor any obligation to perform remains under it.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.”, the Court said.

The Court said that ordinarily, after a full and final settlement of the claim no arbitrable disputes subsist, but when there arises a dispute about the full and settlement of the claim, then the referral courts would not be precluded from referring the dispute to arbitration.

“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.”, the Bench comprising CJI DY Chandrachud and Justices JB Pardiwala and Manoj Misra said.

The Court added that when the full and final settlement of the original contract itself becomes a matter of dispute and disagreement between the parties, then the referral courts would not be precluded from referring the said dispute (arising out of substantive contract) 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.

“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” 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.”, the Judgment authored by Justice Pardiwala observed.

Taking a cue from the Judgment of National Insurance Co. Ltd. v. Boghara Polyfab reported in (2009) 1 SCC 267, the court said that when the parties to the contract were not ad-idem over the full and final settlement of the contract, then mere execution of a full and final settlement of a contract would not by itself operate as a bar to arbitration when the validity of such full and final settlement of a contract was itself in question.

“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.”, the court observed while referring to Boghara Polyfab.

Also From Judgment:  Arbitration | Referral Courts Must Not Conduct Intricate Enquiry On Whether Claims Are Time-Barred : Supreme Court Clarifies 'Arif Azim' Judgment

Case Details: SBI GENERAL INSURANCE CO. LTD. Versus KRISH SPINNING

Citation : 2024 LiveLaw (SC) 489

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