The Supreme Court, in the recent case of SBI General Insurance Co Ltd v Krish Spinning again defined the limits of judicial intervention when courts appoint arbitrators under the Arbitration and Conciliation Act, 1996 (act).
Disputes arose between SBI General Insurance (insurer) and Krish Spinning in regard to claims made by Krish Spinning under an insurance policy. Krish Spinning accepted a discharge voucher by which the insurer agreed to pay a fraction of the loss towards a full and final settlement of claims. Later, but well within the period of limitation for invoking arbitration, Krish Spinning claimed that it had accepted the voucher under economic duress and coercion and invoked arbitration for the remainder of its claims. The court had to determine whether the acceptance of the discharge voucher operated as a bar against invoking arbitration and what was the scope of a judicial inquiry in proceedings to appoint arbitrators under the act.
It is settled law that a full and final settlement, or discharge of a contract through accord and satisfaction, do not, of themselves, render an arbitration clause inoperable. The arbitration clause is a separate and distinct contract, which survives the discharged contract. Whether there is a final settlement or the contract stands discharged are mixed questions of fact and law, which must be determined after evidence is adduced as to when the arbitration clause may be invoked.
The court held that the judgment in Vidya Drolia v Durga Trading Corporation had reiterated the principle of minimal judicial intervention in arbitration matters while permitting interference by the referral court to ensure claims that are without merit on their face are not arbitrated. However, the subsequent decisions in Indian Oil Corporation v NCC Limited and NTPC Ltd v SPML Infra Ltd had wrongly interpreted the decision in Vidya Drolia to mean that the referral court can decide on the accord and satisfaction of claims. These decisions had laid down the eye of the needle test enabling the referral court to reject arbitration in exceptional cases where the plea of fraud or coercion in arriving at a full and final settlement appeared to be devoid of merit on its face.
However, the court followed the seven-judge bench decision in In Re: Interplay, which reiterated that the role of the referral court was limited to examining the existence of an arbitration agreement that appeared to be valid and nothing else. It held that a referral court should no longer apply tests such as the eye of the needle nor look at the apparent merits of a claim.
The judgment in Krish Spinning is based on three principles. First is negative competence-competence, which requires that when a matter falls within the exclusive domain of the arbitrator the court in the first instance should not look into the matter even for a determination on the face of the matter. The next is the second look principle, the possibility of a subsequent judicial review in recognition and enforcement proceedings. Last is the lack of a statutory appeal against orders made by the referral court.
The court also held that when deciding the issue of limitation in the exercise of its power to appoint arbitrators, a court must restrict its scope to whether the application was filed within three years, the period of limitation. The question of whether the claims themselves were time-barred must be left to the arbitrator.
The decision is welcome because it again limits court interference and leaves matters for the tribunal to decide. While the act was amended in 2019 to establish the Arbitration Council of India and to conform with international principles of arbitral autonomy, such changes have not yet been brought into force. Krish Spinning is one of several recent judicial pronouncements trying to align jurisprudence with the unrealised legislative intent.
This ruling underscores the importance of precise drafting of arbitration clauses and settlement agreements. The applicability and survival of the arbitration clause in the event of a discharge and settlement must be express and clear. When settlements are concluded, parties must expressly record that such agreements were made as the result of informed choices, without duress, economic or otherwise, to avoid one of them taking a second bite at the cherry.
Sneha Jaisingh is a partner and Jaidhara Shah is a senior associate at Bharucha & Partners.
