'Accord and satisfaction' & Arbitration
Published: Oct 08, 2024
By Shoba Ramamoorthy
'ACCORD and satisfaction' is a legal device enabling one party to the contract to avoid an obligation, with the agreement of the other (accord). The performance of an alternate, agreed obligation (satisfaction) is the consideration a party pays to release itself from an obligation under the original contract. This general principle of contract is recognized in Indian Law, in Section 63 of the Indian Contract Act, 1872.
When a contract is fully performed, it is discharged by performance. The contract comes to an end. Nothing survives - neither any right to seek performance nor any obligation to perform. There is no scope for dispute and therefore there is nothing that could be referred for resolution by arbitration. When a contract is breached or repudiated, disputes certainly arise and could be referred for arbitration, in terms of the contract.
What happens when a contracting party executes a 'discharge voucher' or a 'no due certificate', admitting a full and final settlement of all its claims?
This question has been coming up for consideration of the Courts, the reason being that in almost all Government contracts and in contracts between parties of unequal bargaining power, execution of 'discharge vouchers'/'no dues certificates' is a precondition for release of even admitted dues under the contract.
NIC Ltd vs Boghara Polyfab Pvt Ltd 2009 1 SCC 267= 2008-TIOLCORP-01-SC-MISC was a case of claim under a Standard Fire and Special Perils Policy. The net assessed claim of the insured Boghara was reduced from Rs 3.18 Cr to Rs 2.34 Cr, by NIC. Despite protest, Boghara was forced to accept the lesser amount and sign an undated 'discharge voucher in advance', by NIC, which withheld the release of the claim amount. In this factual matrix, a 2 Judge Bench of the Supreme Court observed that:
"26. When we refer to a discharge of contract by an agreement signed by both the parties or by execution of a full and final discharge voucher/receipt by one of the parties, we refer to an agreement or discharge voucher which is validly or voluntarily executed. If the party which has executed the discharge agreement or discharge voucher, alleges that the execution was on account of fraud/coercion/undue influence practiced by the other party and is able to establish the same, then obviously the discharge of the contract by such agreement/voucher is rendered void and cannot be acted upon…"
In R.L. Kalathia & Co vs State of Gujarat, 2011 2 SCC 400 = 2011-TIOLCORP-01-SC-MISC the Supreme Court was seized of a matter arising out of a civil suit by the contractor for recovery of dues payable, on account of additional work done in execution of a contract with State of Gujarat, for construction of a dam in Jamnagar. The State contended that the acceptance of payment under the 'final bill' by the contractor, 'under protest', without any valid objection, absolved the State of all liabilities under the contract.
The Court elucidated the following principles:
"i) 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 a 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'."
It is now well settled that an admitted discharge/full satisfaction does not estop a contracting party from raising a claim for unpaid dues under the contract, having regard to the nature and circumstances of such admission.
This leads us to the sequel…. whether an arbitration clause in a contract could be invoked, when the contract itself is claimed to have been discharged by accord and satisfaction? This assumes significance because, in commercial contracts, by default, the agreement providing for resolution of disputes by arbitration is contained in the contract and when this contract itself is no longer in existence (having been discharged) the arbitration clause is also taken to be wiped out. Such an issue does not arise in case of breach or repudiation of a contract, since the contract remains in force for the purpose of adjudication of breach or on repudiation, which are matters arising out of or in relation to the contract. Also, when the contracting parties are relegated to Civil Courts for redressal of their rights, such a situation does not arise. The party asserting its claim and the party relying upon discharge plead the necessary facts and disputed facts give rise to issues, which in turn raise mixed questions of fact and law that have to be necessarily adjudicated by the Courts. Therefore, there could be no bar at the threshold, forbidding an initial examination/consideration of the rival claims to discharge by accord and satisfaction.
In a 7 Judge Bench judgment in In Re: Interplay Between Agreements under Arbitration and Conciliation Act, 1996 and the Indian Stamp Act, 1889, 2024 6 SCC 1 the Supreme Court invoked the Doctrine of separability or severability, a well-recognized legal fiction, in answering the above mentioned question. The Court observed that:
"The concept of separability reflects the presumptive intention of the parties to distinguish the underlying contract, which captures the substantive rights and obligations of the parties, from an arbitration agreement which provides a procedural framework to resolve the disputes arising out of the underlying contract. This concept is recognized in Sec 16 of the Arbitration Act, encapsulating the general rule on the substantive independence of an arbitration agreement."
Therefore, an arbitration agreement survives the challenge to the existence of the substantive/original contract on the ground that the same has been discharged by accord and satisfaction. And for this reason, there could be no bar in invoking arbitration.
It is therefore clear that de-hors the claim of discharge of contract by accord and satisfaction, by one contracting party, the other party is well within its rights to claim further dues under the contract and invoke arbitration, for the said purpose, in terms of the original contract. When such party applies to the appropriate Court, for appointment of an arbitrator, under section 11 of the Act, the next issue arises, viz., the scope of judicial scrutiny and interference into the matter of discharge by accord and satisfaction.
In Konkan Railway Corporation Ltd., vs. Rani Construction (P) Ltd., 2002 2 SCC 388 = 2003-TIOLCORP-01-SC-MISC-CB a 5 Judge Bench of the Supreme Court declared that the power exercised by the Chief Justice or his designate under section 11 is an administrative power and therefore, the Judge is not required to decide any preliminary issue (such as discharge of contract by accord and satisfaction) pertaining to non-arbitrability, validity or existence of an arbitration agreement.
Later, a 7 Judge Bench of the Supreme Court, in SBP & Co. vs. Patel Engg. Ltd., 2005 8 SCC 618 = 2005-TIOLCORP-01-SC-MISC-CB qualified the power to appoint an arbitrator as a judicial and not merely an administrative power. The referral Court therefore is required to rule not only on the existence of an arbitration agreement but also on its validity and to weed out ex-facie meritless claims.
In Boghara Polyfab (Supra), a 2 Judge Bench of the Supreme Court categorized the preliminary issues that may arise in a petition for application of an arbitrator, as under:
i) Issues which have to be decided by referral Court
a) Whether the party has approached the appropriate High Court
b) Whether there is an arbitration agreement and the party who applied to Court is party to the agreement
ii) Issues which may be decided by the Court.
a) Whether the Claim is a dead claim or live claim
b) Whether parties have concluded the contract (either by performance or by accord and satisfaction)
iii) Issues which should be left exclusively to the arbitral tribunal
a) Whether the claim is arbitrable
b) Whether the claim is sustainable
As there was scope for mini trials and appreciation of evidence as regards issues arising under category (ii) which delayed the process of appointment of an arbitrator, the Law Commission, in its 246th Report recommended that the scope of judicial interference at the referral stage be curtailed. Consequently, section 11 (6-A) was inserted by the Amending Act of 2015.
It reads as under:
"11. Appointment of Arbitrators – (1)..…………..
(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, confine to the examination of the existence of an arbitration agreement".
Post amendment, a 3 Judge Bench of the Supreme Court, in Mayawati Trading Ltd. vs. Pradyut Deb Burman 2019 8 SCC 7 14 = 2019-TIOLCORP-44-SC-MISC-LB clarified that the position of law existing prior to the 2015 amendment, under which referral Court had the power to examine the aspect of accord and satisfaction had come to be legislatively over-ruled by section 11 (6A) of the Act.
In its judgment in In Re: Inter play (supra), the Supreme Court categorically ruled that the judicially recognized principle of arbitral autonomy permits judicial scrutiny at the referral stage, only to determine the prima facie 'existence' of arbitration agreement, the privity of the parties to the agreement and to examine whether, the application for appointment of arbitrator is not barred by time.
Thus, any inquiry whether preliminary or otherwise, into the issue of discharge of contract by accord and satisfaction, is not permitted in law. It is only the arbitral tribunal that has to first look into it.
Finally, all the issues discussed above, regarding 'accord and satisfaction' and arbitration, arose for determination in SBI General Insurance Co. Ltd., vs Krish Spinning - 2024-TIOLCORP-10-SC-MISC-LB Justice. J.B.Pardiwala, who authored the judgment for the Bench of 3 Judges, analyzed the evolution of legal principles in the matter of accord and satisfaction, noted the change in approach to the issue of arbitrability and scope of judicial interference, after the amendment to the Act in 2015, in the context of the 7 Judge Bench decision (In Re: Interplay) and affirmed that:
"114. In view of the observations made by this Court 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 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… The matter falling within the exclusive domain of the arbitral tribunal, should not be looked into by 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 arbitrations and appointing an arbitrator by exercise of the power under Section 11, the referral Court upholds and gives effects to the original understating 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…….."
Summing up, the principles of arbitral autonomy and judicial non-interference have been accorded primacy over 'existence/validity of agreement' and 'ex-facie meritless' contentions. The Supreme Court has been steering the path of law to align it with the evolving principles in modern day arbitrations and to propel commercial disputes towards resolution by arbitrations.
