An insurance contract is signed between the parties in order to secure the interests of the insured person in their life, property or any other asset. The purpose of these contracts is to reimburse the party whose goods were insured and usually in cases of mishaps, the quantifiable amount of loss incurred is paid back. However, if such payment is faulty or is hit by economic duress, then the purpose of insurance seems defeated. Duress is defined in the Black’s Law Dictionary as “any unlawful threat or coercion used… to induce another to act [or not act] in a manner [they] otherwise would not [or would]”.
This article discusses the Supreme Court’s decision in Oriental Insurance Co. Ltd. & Anr. v. Dicitex Furnishing Ltd., in which owing to the reduced payment of assessed loss, the insured party invoked the arbitration clause of the contract. The Insurer denied the appointment of the arbitrator and contended that the payment was final as the unconditional voucher was signed by the Insured party. The Court held that mere signing of such voucher does not imply that the settlement is completed. The financial condition of the party signing the voucher must also be considered as dire requirement of claim can also be a reason for signing the voucher even when it is for a reduced amount. Therefore, the Arbitrator was appointed under Section 11(6) of the Arbitration and Conciliation Act, 1996.
Background and Brief Facts
In this case, the Appellant (The Insurer) had challenged the decision of a single judge bench of the Bombay High Court which allowed for the appointment of an arbitrator under Section 11(6) of the Act, as the Judge found economic duress in the full and final discharge of insurance claim requested by the Respondents (The Insured). Dicitex Furnishing Ltd. (The Insured) obtained an insurance policy from Oriental Insurance Co. Ltd. (The Insurer). The goods of the Insured were destroyed. The Insurer, without consulting the Insured, appointed surveyors who assessed the payable amount to be less than the claimed amount. Despite having knowledge about the financial instability of the Insured, the Insurer sent a notice as a pre-condition stating that an unconditional voucher must be signed for the release of the assessed amount as a final settlement. The Insured, under economic duress, complied with the notice. Consequently, the payment was transferred. Later, the Insured objected that there was an unconditional acceptance to receive the amount and therefore, requested the Insurer to enforce the arbitration clause of the insurance policy.
Contentions of the Parties
The contentions of the parties revolved around the invocation of the arbitration clause for the appointment of an arbitrator and in order to decide, the judges ascertained if there was voluntary acceptance of the unconditional voucher by the Insured. The unconditional voucher here refers to a certificate submitted by the Insured that the payment made to it would be full and final. Satisfaction of both the parties was a prime consideration for the Court. The Insurer contended that the appointment of the arbitrator under Section 11(6) of the Act was not valid as full and final payment was received by the Insured to which they agreed voluntary through the unconditional voucher. The learned counsel for the Insurer argued that economic duress cannot be established as there were two assessments conducted in order to be sure of an equitable claim amount. It was further stated that the two assessments also imply the desire to ensure accord and satisfaction of both the parties. The Supreme Court judgment of National Insurance Co. Ltd v. Boghara Polyfab Pvt. Ltd was cited where it was held that a full and final settlement attained with accord and satisfaction from both the sides cannot become an arbitrable dispute and an appeal under Section 11 will not be maintainable in such cases. The learned counsel for the Insured asserted that the Boghara Polyfab Case has been interpreted partially by the Insurer as the judgment clearly stipulated in the paragraph 26 that if the execution of the unconditional voucher can be ascertained to be hit by coercion, fraud or duress then the dispute could be arbitrable. Defying the argument of two assessments, the counsel for the Insured argued that there was no consultation or mutual consent between the parties in deciding the Chartered Accountants. The absence of mutual consent amounts to no accord in settlement of the claim.
In their next submission, the counsel for the Insurer focused on the withdrawal of letter of protest against the reduced amount and the signing of the unconditional voucher act as proofs of acceptance. The argument was emphasised with the judgments of New Indian Assurance Co. Ltd v. Genus Power Infrastructure Ltd and Union of India (UOI) and Ors. v. Master Construction Co. where it was held that acceptance of the proffered amounts by the Insured barred the claim of coercion or duress. However, the Counsel for Insured contended that the withdrawal of the letter of protest must not be prima facie relied upon to decide the maintainability of the application instead, the financial condition of the Insured must also be considered which reflects the presence of economic duress to accept the reduced recoverable amount as enunciated in the paragraph 24 of the Boghara Polyfab Case. The Counsel for the Insured also argued that the Insurer insisted upon it to sign a clean voucher and to withdraw the letter of protest, failing which, the Insurer would not release the amount. This was even reflected in the unconditional voucher that a clean discharge was emphasised upon. Additionally, the request made by the Insurer to issue a clean discharge voucher before payment was released does not concur with any clause of the insurance policy or any provision of law.
The decision of the Supreme Court
The decision pronounced by the Court is in favour of the Insured (Respondent) as the application was found to be maintainable and appointment of arbitrator was also allowed. Further, the Court did not go on the merits of the case and stated that the issue before it was, to determine whether an arbitrable dispute existed in the light of coercion on the insured. The nature of the case and the amount was to be ascertained by the arbitrator.
In order to declare that there was economic duress, the Court relied heavily on the Boghara Polyfab Case in which illustrations were highlighted for describing the conditions for involuntary transactions to be arbitrable or not. The illustrations where the matter is arbitrable are:
First, when an employer reduces the payment for a contract and asks for an unconditional voucher as a pre-condition for payment and if the contractor signs it at that moment, then he can later invoke the arbitration clause as there was duress.
Second, if a contractual relationship between the parties exists, the consent to an unconditional voucher is not deemed to be voluntary if the financial position of the Insured is unstable and there is acceptance of no-dues certificate before a payment which is less than the claimed amount.
The Court held that the facts of the present case subsume under the second illustration as the Insured was financially crippled but was sent with a notice to accept an unconditional voucher for a full and final settlement. The Insurer also had knowledge about the financial instability and still sent the notice which subtly implies that there was inducement to make the Insured accept the reduced amount.
The Court also illustrated that economic duress is determined not only on the basis of the documents adducing the unconditional discharge of payments but also on the position in which the aggrieved party was when such documents were duly issued. The principle set forth in the case of Union of India (UOI) and Ors. v. Master Construction Co. was considered to be of relevance in the present case. It stated that there exists no universal rule which determines that there was coercion, fraud or duress on the claimant, the Judge must check whether the dispute raised is genuine and bona fide. If it appears that any certificate has been attained by the respondents without the free consent of the claimant, the dispute may be referred to an arbitrator.
Analysis and Conclusion
This judgment thus, adds authority to the ground rules of assessing the credibility of discharge vouchers as it sets forth a premise following the line of reasoning as enunciated in the precedents. It is imperative to note that even if this decision would have been passed in favour of the Insurer, the Insured could have filed a case under Section 89 of the Civil Procedure Code, 1908 requesting an order from the Courts to refer the matter to alternative dispute resolution methods. The order of the Court would have been considered as a legislative mandate in that case.
Considering the viability of the recourse available, it is clear that the Insured had a very valid stance but the judgment did not reciprocate the same level of tilt towards the Insured as it just furthered what was already stated in the cases of Boghara Polyfab Case and Genus Power Infrastructure Ltd. Case. This judgment could have been even more decisive had the Court laid down a clear procedure with respect to the circumstances relating to financial instability and the acceptance of unconditional vouchers. The illustrations of the Boghara Polyfab Case do set forth a perspective but those are limited illustrations and do not provide an exhaustive procedure to analyse and assess whether the dispute must be referred to arbitration. Some more illustrations and considerations that the Court can include in the suggested procedure are:
Where there is an intentional delay in payment by one party to curb the free will of other party
Where there is a lack of mutual consent in reaching important decisions relating to the performance of the contract.
Judges other than the Chief Justice must also be made competent in determining whether the case must be referred to arbitration in cases of unconditional acceptance superseding the Boghara Polyfab Case in that regard.
It is agreeable that there is no absolute rule which can be enunciated and the facts of a particular case decide whether the dispute is arbitrable. However, adding more illustrations can expedite the process of referring the cases for arbitration. To conclude, it is agreeable that justice was done in this case as the case was referred to arbitration but for justice to appear to have been done, the Court should have established a proper mechanism for the aforesaid situations.
[i] Akshat Shukla is a Second Year Student at National Law Institute University, Bhopal. He is primarily inclined towards the field of Arbitration and has an academic interest in Constitutional Law and Intellectual Property laws. Ayushi Shukla is a Fourth Year Student at National Law University Odisha, Cuttack. She is interested in Intellectual Property laws and is also intrigued by new perspectives of Alternate Dispute Resolution.
Preferred Citation: Ayushi Shukla and Akshat Shukla, "Economic Duress as a Valid Claim for Appointing an Arbitrator", Arbitration and Corporate Law Review, Published on 25th July 2020.