Supreme Court clarifies the position on accord and satisfaction at the stage of appointment of an arbitral tribunal

MEMBER FIRM OF

INTRODUCTION:

A three-judge bench of the Supreme Court of India in SBI General Insurance Co Ltd v. Krish Spinning, 2024 SCC Online SC 1754 examined the effects of accord and satisfaction of a contract in an application for appointment of an arbitrator under the Arbitration and Conciliation Act 1996 (“Act”). The appeals arose from the Gujarat High Court as the High Court fist held that there were arbitrable disputes between an insurer and an insurance company, and then proceeded to appoint an arbitrator to resolve the disputes, despite the insurer having issued a discharge voucher in 2019 in favour of the insurance company in respect of its claim under a fire insurance policy of 2018. The Court passed a common judgment and order in the appeals.

ISSUES:

The Supreme Court (“Court”) considered the following questions of law:

1. What would be the scope of judicial scrutiny under Section 11(6) of the Act when a plea of “accord and satisfaction” is taken?
2. Impact of the 7-judge bench judgment in In Re: Interplay Between Arbitration Agreements under the Arbitration and Conciliation Act 1966 and the Indian Stamp Act 1899 on the scope of powers of the referral court under Section 11 of the Act, 1996 (“In Re Interplay”)?

ANALYSIS:

• The Court traced the devolution of law from Konkan Railway Corpn. Ltd. v. Rani Construction (P) Ltd.,(2002) 2 SCC 388 where a five-judge bench of the Supreme Court held that in an application for appointment of arbitrator a court exercised purely administrative powers under Section 11(6) and ought to determine whether there existed an arbitration agreement. The Court also referred to National Insurance Company v. Boghara Polyfab, (2009) 1 SCC 207 prior to the 2015 amendment of the Act, where it was held that certain “preliminary” issues must be gone into by the referral courts before appointing an arbitrator under Section 11(6). It was held that the referral court must be satisfied that there existed a prima facie case substantiating the allegation against the discharge voucher prior to appointing an arbitrator.
• The Court then dealt with the scope of judicial scrutiny as addressed in the 246th Law Commission Report which suggested the insertion of Section 11 (6-A) into the Act to limit the purview of the referral courts under Section 11. The Court noted the reasoning in its judgment in Duero Felguera S. A. v. Gangavaram Port Ltd., (2017) 9 SCC 729 where the intent behind Section 11(6A) was explained.
• Citing Vidya Drolia & Ors v Durga Trading Corporation,(2021) 21 SCC 1, where a three-judge Bench of the Court held that ‘existence’ as mentioned in Section 11 must be read along with Section 8’s ‘validity’ and that the Court had the power of prima facie judicial review to examine the existence of the arbitration agreement and that this would also include going into the validity of the agreement and that such review would not be in contravention of Section 16 of the Act. However, such power was to be used in only in extreme cases in order to protect parties from being forced to arbitrate when the matter is demonstrably “non-arbitrable”.
• Citing NTPC Ltd v SPML Infra Ltd, (2023) SCC OnLine SC 389, where the Court while faced with the issue of “accord and satisfaction” in the context of a Section 11 petition laid down the eye of the needle test which held that (i) courts must first examine the validity and existence of an arbitral agreement, and (ii) court must leave all questions of non-arbitrability to the arbitral tribunal except to reject the claims which are ex-facie and manifestly non-arbitrable. But the standard for the scrutiny would only be prima facie, unlike the pre-2015 position. This expansion of scope of court’s powers under Section 11 was reasoned as necessary to avoid ex-facie meritless arbitration.
• The Court then examined In Re Interplay, where a seven-judge bench held that the corollary of the principle of competence-competence is that a referral court should only examine whether an arbitration agreement exists. The Court noted that the parameters of Section 8 of the Act differ from that of Section 11 of the Act and while both provisions intend to compel parties to abide by their mutual intention to arbitrate, the scope of powers conferred upon the courts are different.
• The Court noted that the standard of scrutiny under Section 11 is confined to the examination of the existence of the arbitration agreement. The spirit of Section 11 (6A) evidences that scrutiny is limited to a prima facie scrutiny of the existence of an arbitration agreement and does not include any finding on the merits of the claims advanced by the Parties.
• The Court held that in light of In Re Interplay, the submission that the jurisdiction of the referral court when dealing with issue of “accord and satisfaction” under Section 11 extends to weeding out ex-facie non-arbitrable and frivolous disputes is untenable.
• The Court held that:
  • The question of accord and satisfaction is “a mixed question of law and fact” and would have to be determined by the Arbitral tribunal in keeping with the doctrine of competence.
  • Tests such as “eye of the needle” and “ex facie meritless” require the referral court to examine contested facts and appreciate prima facie evidence and such examination is no longer in alignment with the principles governing arbitration presently. The courts must limit their interference in order to maintain the autonomy of the arbitration process.
  • The Courts may review the merits of the claims advanced by the Party when or if the arbitral award is challenged under Section 34 of the Act. The Courts have the power of subsequent review and must not exercise the power of review at the Section 11 stage.
  • Any scrutiny of “accord and satisfaction” would be tantamount to the Courts infringing upon and assuming the authority sought to be solely vested in the arbitrators by the parties to a contract. The Courts ought not to encroach upon the power of the arbitral tribunal.
  • A time bound and expeditious disposal of an application for appointment of arbitrator is required. If a referral court went into issues of “accord and satisfaction” it would result in delays.
  • An arbitral tribunal can decide on issue of ex-facie frivolity and dishonesty basis appreciation of evidence submitted by parties.

  Conclusion

  The three-judge bench followed well-established principles to hold that a court should not examine issues of accord and satisfaction at the stage of appointment of an arbitral tribunal.

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