The Supreme Court rules that the issue of accord and satisfaction cannot be examined at the stage of appointment of an arbitrator.

In SBI General Insurance Co. Ltd. v. Krish Spinning[1], the Supreme Court re-emphasized the need for judicial non-interference and held that Courts cannot examine whether a contract, and by implication the arbitration agreement, is discharged by ‘accord and satisfaction’ at the stage of appointment of an arbitrator. Cue The Rolling Stones album “Out of Our Heads”.

As is usual in many insurance matters, the insured raised a dispute that owing to the financial distress it was facing, it had under duress and coercion, accepted a lower payout and signed a letter discharging the insurer of all further liability. The insurer refused to appoint an arbitrator stating that the letter was sent voluntarily and the contract, and by implication the arbitration agreement, stood discharged under Section 63 of the Indian Contract Act, 1872. Under these circumstances, the matter wound up in the Supreme Court on whether an arbitrator could be appointed.

Discharge by ‘accord and satisfaction’

The Supreme Court, while acknowledging that a discharge may relieve the parties of their obligations under the contract, held that this would not automatically mean that the arbitration agreement too stands discharged. Relying on the doctrine of separability, it held that the dispute pertaining to the legitimacy of the discharge itself continues to be arbitrable.

Scope of judicial examination

Considering that several such matters had come up in the past, the Supreme Court sought to examine its prior decisions and put to an end any uncertainty that may exist. It divided the precedents into three buckets:

• Prior to the 2015 Amendments and introduction of Section 11(6A)
• It observed that prior to the 2015 Amendments, examination of issues by the courts at the stage of appointment of an arbitrator was deep and pervasive.
• Although there were decisions which referred the issue of discharge to arbitration, nevertheless, this was after unwarranted inquiries into the factual matrix aimed at examining whether the disputes pertaining to discharge were prima facie
• After the 2015 Amendments, but prior to the decision in In Re: Interplay Between Arbitration Agreements under the Arbitration and Conciliation Act, 1996[2]
• The Supreme Court looked into the legislative intent of the 2015 Amendments and specifically the introduction of Section 11(6A) which clarified that at the stage of appointment, the courts shall “confine to the examination of the existence of an arbitration agreement”.
• Despite the same, in Vidya Drolia & Ors. v. Durga Trading Corporation[3] (“Vidya Drolia”), the Supreme Court had held that prima facie review of certain aspects may be taken up by the courts at the stage of appointment to screen and knock down ex facie meritless, dishonest and frivolous disputes. The Supreme Court had thus laid the foundation of the ‘deadwood’
• In NTPC Ltd. v. SPML Infra Ltd.[4] (“NTPC”), the Supreme Court had applied a two-level inquiry called the ‘Eye of the Needle’ The primary inquiry in this test was the existence and validity of the arbitration agreement. The secondary inquiry laid out under this test is that of the prima facie examination of non-arbitrability of the dispute, at the reference stage itself. The reasoning for the secondary test was to protect the parties from being forced into arbitration when the matter may not be arbitrable.
• Post the decision in In Re: Interplay
• The Supreme Court then examined its seven-judge decision in In Re: Interplay where the Supreme Court emphasized the importance of arbitral autonomy, minimal judicial interference and the kompetenz-kompetenz principle that empowered the arbitral tribunal. In this decision, the Supreme Court had held that under Section 11(6A), at the stage of appointment, only the existence of an arbitration agreement is to be looked into by the appointing court and nothing else.

Considering the above, the Supreme Court held as follows:

• The ‘deadwood’ and ‘Eye of Needle’ tests should not be applied by an appointing court in order to examine whether the dispute over the discharge of a contract should be referred to arbitration.
• The dispute pertaining to ‘accord and satisfaction’ is not one which attacks or questions the existence of the arbitration agreement in any way which continues to have a separate existence despite the alleged discharge of the contract.
• Being a mixed question of law and fact, this issue should be best left to the arbitral tribunal.
• Ex-facie frivolity and dishonesty in opening a genuinely discharged contract is an aspect that the arbitral tribunal is more capable of deciding.
• Importantly, the Supreme Court took the opportunity of clarifying its decision in M/s Arif Azim Co. Ltd. v. M/s Aptech Ltd.[5] and extended the hands-off approach. It held that the appointing court ought not to examine whether the claims are time-barred and simply appoint the arbitrator.

We hope you have found this information useful. For any queries/clarifications please write to us at insights@elp-in.com  or write to our authors:

Alok Jain, Partner – Email – alokjain@elp-in.com

Vinuta Rayadurg, Principal Associate – Email – vinutarayadurg@elp-in.com

Atharva Diwe, Associate – Email – atharvadiwe@elp-in.com

[1] Civil Appeal Nos. 7821-22 of 2024.

[2] 2023 INSC 1066

[3] (2021) 2 SCC 1

[4] (2023) 9 SCC 385

[5] 2024 INSC 155

[6] From the album “Out of Our Heads”, The Rolling Stones, 1965