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Arbitrability of disputes post execution of ‘unconditional discharge vouchers’ – An analysis

13 七月 2020

One of the common defenses taken by a party, facing a claim, in an arbitration is that the contract has already been discharged by performance. Sometimes, the party claiming discharge relies upon a document which may be in the form of a no due certificate, no claim certificate, final bill, full and final settlement etc. In insurance contracts, the insurer may rely upon a discharge voucher to contend that it has already discharged its obligations under the contract. On the other hand, it is not uncommon for the claimant to dispute the discharge voucher signed by it and claim that it was executed under fraud, coercion or undue influence. Based on the facts in some cases, it has been held that fraud, coercion or undue influence renders the discharge void at the instance of the party issuing the discharge voucher. When dealing with appointments of arbitrators, wherever such issues arise, the Court forms a prima facie view as to whether the dispute is bona fide and genuine before referring the same to arbitration. Hence, a bald plea of fraud, coercion or undue influence is not sufficient to seek reference of the dispute to arbitration. [See endnote [i]]

Issue:

The question before the Supreme Court in the case of Oriental Insurance Co. Ltd. v. Dicitex Furnishing Ltd. [See endnote [ii]] was whether Dicitex had prima facie made out that they had executed the unconditional discharge voucher under coercion, duress or undue influence, thereby, making the dispute arbitrable.

Brief facts:

Certain stock of goods of Dicitex had been insured by Oriental Insurance for Rs. 13 Cr. Due to a fire, the entire stock was destroyed. Dicitex claimed about Rs. 14.88 Cr. while the first surveyor appointed by the Insurer valued the claim at Rs. 12.93 Cr. Dicitex requested that its claim be settled on priority stating that it was under financial distress.

Another surveyor was appointed by the Insurer. Despite requests of Dicitex to settle the claims, both the Insurer and surveyor kept delaying valuation. After 26 months of the fire, the Insurer sent Dicitex a discharge voucher, which valued the claim at Rs. 7.16 Cr. and stated that if the discharge voucher was not accepted by Dicitex, the Insurer would not make any payments.

Being under financial distress, Dicitex accepted the discharge voucher, but, raised a dispute within 12 days. The Insurer denied any further claim as Dicitex had signed an unconditional discharge voucher and refused to appoint an arbitrator. Hence, Dicitex filed a petition under Section 11(6) before the Bombay High Court seeking the appointment of an arbitrator. The High Court allowed the petition and held that the dispute was arbitrable as prima facie Dicitex had signed the discharge voucher reluctantly due to financial distress. The Insurer challenged the decision of the High Court before the Supreme Court. After a detailed analysis, the Supreme Court upheld the order of the High Court.

Analysis:

While arriving at its decision, the Supreme Court analysed the judgment in Boghara Polyfab [See endnote [iii]] to examine whether a dispute is arbitrable or not in context of no objection certificates or unconditional discharge vouchers being executed and laid down the following illustrations:

  • A claim referred to a conciliation or a prelitigation Lok Adalat after being settled through negotiation and being attested by the Conciliator/ members of the Lok Adalat cannot be referred to arbitration.
  • When numerous claims are made which include some undisputed ones (which are paid) and the disputed ones which are settled after negotiations with the issuance of discharge vouchers/ no claim certificates, then neither the contract nor any dispute survives. Hence, the dispute may not be referred to arbitration.
  • A contractor may execute work for a particular amount and the employer may admit the claim for a much-reduced sum. If the employer makes the reduced sum a “take it or leave it offer”, stating no funds would be released unless the reduced payment is accepted, and the contractor is hard pressed for funds, the discharge would be under economic duress. Hence, it would not be considered voluntary discharge of the contract and there would be no bar to arbitration.
  • If an insured party (who is under financial difficulties) is offered a “take it or leave it” offer for an amount much lesser than the amount claimed, then the discharge voucher issued in pursuance thereof, would not be voluntary as it is issued under economic duress. The arbitration agreement can thus be invoked to refer the disputes to arbitration.
  • A claim for a huge sum, by way of damages is voluntarily reduced by the Claimant and a full and final discharge voucher is issued in order to avoid litigation and get an early settlement. Even if the claimant might have agreed for settlement due to financial compulsions, the decision was their free choice. Therefore, the accord is valid and there cannot be any reference to arbitration.

The Court also quoted Master Construction [See endnote [iv]] and Genus Power [See endnote [v]] to state that only a prima facie case of coercion, undue influence or financial duress in the issuing of the discharge voucher had to be established to qualify as an arbitrable dispute.

Findings and way forward:

On facts, the Court held that Dicitex was undergoing a financial crisis. The second surveyor estimated the claim at a much lesser valuation than the first surveyor. The reduced claim was paid 27 months after the fire. The Insurer had given a final “take it or leave it offer” for a much-reduced valuation. This case, therefore, fell directly within the fact scenario envisaged under illustrations (iii) and (iv).

Hence, the Court was prima facie convinced that the plea of coercion and economic duress was bona fide. Therefore, the Supreme Court upheld the decision of the High Court allowing the appointment of an arbitrator.

This case has re-emphasized the principles and provides some relief to a party that may be compelled to accept a “take it or leave it offer”, particularly, in the current economic situation. If the party is able to demonstrate a prima facie case that the discharge voucher was signed under economic and financial distress, the dispute becomes arbitrable and the party gets an opportunity to raise its claims before the arbitrator.

[The authors are Joint Partner and Associate, respectively, in Commercial Litigation team, Lakshmikumaran & Sridhara

 

[i] Union of India (UOI) and Ors. v Master Construction Co., (2011) 12 SCC 349.

[ii] 2019 (16) SCALE 242.

[iii] National Insurance Co. Ltd v. Boghara Polyfab Pvt Ltd., (2009) 1 SCC 267.

[iv] Union of India (UOI) and Ors. v Master Construction Co., (2011) 12 SCC 349.

[v] New Indian Assurance Co. Ltd v Genus Power Infrastructure Ltd., (2015) 2 SCC 424.

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