Supreme Court Asserts Referral Courts Must Adhere to Arbitration Norms
In a significant pro-arbitration ruling on Thursday, the Supreme Court held that referral courts cannot exceed the scope of inquiry under the Arbitration and Conciliation Act, 1996 [SBI General Life Insurance Co Ltd v Krish Spinning].
A bench comprising Chief Justice of India (CJI) DY Chandrachud, Justices JB Pardiwala, and Manoj Misra emphasized the importance of adhering to arbitration norms and agreements.
A referral court should only intervene when the procedure for appointing arbitrators is not followed, the Court stated. “If the referral court goes beyond the scope of inquiry as provided under the section and examines the issue of ‘accord and satisfaction,’ it would amount to usurpation of the power which the parties had intended to be exercisable by the arbitral tribunal alone and not by the national courts. Such a scenario would impeach arbitral autonomy and would not fit well with the scheme of the Act, 1996,” the Court said.
The bench criticized previous tests for judicial interference in arbitration laid down by the apex court, such as the “eye of the needle” and “ex-facie meritless” tests. These tests, while minimizing judicial interference, require the referral court to examine contested facts and appreciate prima facie evidence, which does not align with modern arbitration principles that prioritize arbitral autonomy and judicial non-interference, the Court observed.
The judgment addressed the scope and standard of judicial scrutiny when a plea of “accord and satisfaction” is raised in an application under Section 11(6) of the 1996 Act.
The case involved SBI General Insurance (appellant) and Krish Spinning (respondent) over insurance claims related to two fire incidents at the respondent’s factory. Unable to resolve the dispute, the respondent invoked the arbitration clause and moved the Gujarat High Court for appointing an arbitrator. The appellant argued that the respondent had already settled the claim by signing a consent letter and a discharge voucher. The High Court appointed an arbitrator, leading to the present appeal.
Three issues arose before the apex court:
Whether the execution of a discharge voucher towards full and final settlement bars invoking arbitration.
The scope and standard of judicial scrutiny under Section 11(6) when a plea of “accord and satisfaction” is raised.
The effect of the decision in the case concerning the interplay between the Arbitration and Conciliation Act and the Indian Stamp Act on the powers of the referral court under Section 11.
The Court held that disputes over whether a contract has been discharged are arbitrable. The discharge of obligations under a substantive contract does not imply that parties intended to forego their obligation to settle disputes through arbitration.
Regarding judicial scrutiny, the Court referred to Section 11(6A), which limits the referral court’s jurisdiction to examining the existence of an arbitration agreement. Despite the introduction of Section 11(6A), divergent views persisted on whether referral courts could address “accord and satisfaction” claims. The Court clarified that such questions should be decided by the arbitral tribunal first.
On the third issue, the Court reiterated that unstamped arbitration agreements are inadmissible but not void ab initio, emphasizing arbitral autonomy and limiting national courts’ interference.
The Court upheld the arbitration agreement, including the appointment of retired Gujarat High Court judge Justice KA Puj as arbitrator. It stressed that the scope of inquiry at the stage of appointing an arbitrator is limited to confirming the existence of the arbitration agreement. The issue of “accord and satisfaction” should be decided by the arbitral tribunal, not the courts.
Advocates Ketan Paul, Saurav Agrawal, Madhav Misra, Arjun Bose, Shubhi Pandey, Astha Nishad, Rajat Abhale, Rajat Chhabra, Shivam Chaudhary, and Chakshu Purohit appeared for SBI General Life Insurance. Advocates Savita Singh, Rakesh Malhotra, Bharat Malhotra, and Kushal Malhotra appeared for Krish Spinning.
