What is the Legal Effect of Receipt stating Amount Received “in Full and Final Settlement” [JUDGMENT]

What is the legal effect of the receipt signed and issued by the appellant to the respondent insurance company stating that he had received the amount “in full and final settlement” of the claim?

When a contract has been fully performed, there is a discharge of the contract by performance, and the contract comes to an end. In regard to such a discharged contract, nothing remains - neither any right to seek performance nor any obligation to perform. Where one of the parties to the contract issues a full and final discharge voucher confirming that he has received the payment in full and final satisfaction of all claims, and he has no outstanding claim, that amounts to discharge of the contract by acceptance of performance and the party issuing the discharge voucher/receipt cannot thereafter make any fresh claim or revive any settled claim, unless he proves that he signed and issued the discharge voucher/receipt under vitiating circumstances. Even if the claimant had agreed for settlement due to financial compulsions and commercial pressure or economic duress, if the decision to make a settlement was his free choice and if there was no coercion or compulsion by the insurer, the discharge voucher/receipt issued by him binds him. [Para 23]

IN THE HIGH COURT OF KERALA AT ERNAKULAM

V. CHITAMBARESH & R. NARAYANA PISHARADI, JJ.

Arb. Appeal No.32 of 2011

Dated this the 6th day of February, 2019

AGAINST THE ORDERIN AOP 508/2007 of DISTRICT COURT, ERNAKULAM DATED 10-01-2011

APPELLANT / RESPONDENT IN ARB.(O.P) NO.508/2007:

K.O. OOMMEN

BY ADVS. SRI.C.S.DIAS, N.K.SUBRAMANIAN

RESPONDENT / PETITIONER IN ARB.(O.P.) NO.508/2007:

BAJAJ ALLLIANZ GENERAL INSURANCE CO.LTD COMPANY LIMITED, IIIRD FLOOR, FINANCE TOWER,, KFC BUILDING, KALOOR, KOCHI-682017.

BY ADV.SRI.LAL GEORGE

J U D G M E N T

R. Narayana Pisharadi, J.

What is the legal effect of the receipt signed and issued by the appellant to the respondent insurance company stating that he had received the amount “in full and final settlement” of the claim? This is the issue for consideration in this appeal.

2. The appellant was conducting a textiles shop. On 31.07.2004, he had insured the stock in his shop with the respondent insurance company for Rs.42,50,000/-. On 16.09.2004, a fire broke out in his shop. The entire stock in the shop was destroyed in the fire.

3. On 09.10.2004, the appellant made a claim for Rs.40,76,000/- to the respondent. The surveyor appointed by the respondent had inspected the shop on different dates starting from 17.09.2004. As per the report dated 16.12.2004, the surveyor assessed the loss at Rs.19,84,602/- 

4. The respondent demanded additional documents from the appellant to verify the correctness of the inventory furnished by him. Meanwhile, correspondence had taken place between the appellant and the respondent. The appellant sent a letter dated 08.03.2005 to the respondent expressing his consent for accepting the claim on non-standard basis at 80% of the amount of loss assessed by the surveyor, in full and final settlement of the claim. On 09.03.2005, he gave a stamped voucher for receiving Rs.15,87,682/- from the respondent in full and final settlement of the claim under the policy.

5. On 20.04.2005, the appellant sent a lawyer notice to the respondent claiming balance amount of Rs.24,88,310/- from the respondent. The appellant filed A.R.No.48/2005 before this Court for appointment of an arbitrator as provided under the policy for resolving the dispute. As per the order dated 08.06.2006, this Court appointed a retired District Judge as arbitrator.

6. On 04.04.2007, the arbitrator passed an award. The arbitrator found that it is probable that the voucher for Rs.15,87,682/- was signed and issued by the appellant to the respondent not voluntarily and that he is entitled to realise a further amount of Rs.3,36,756/- from the respondent.

7. The respondent filed application in the District Court, Ernakulam under Section 34(1) of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as 'the Act') challenging the award passed by the arbitrator. The learned Additional District Judge found that there was novation of the agreement between the parties and that the award passed by the arbitrator on the basis of the original agreement is illegal. Accordingly, the learned Additional District Judge allowed the application and set aside the award. The aforesaid order is challenged in this appeal.

8. We have heard the learned counsel for the appellant as well as the respondent. We have also perused the records.

9. The facts narrated earlier are not disputed. There is also no dispute with regard to the fact that the appellant had received an amount of Rs.15,87,682/- from the respondent on issuing a discharge voucher for that amount in full and final settlement of the claim under the policy.

10. Discharge by 'accord and satisfaction' refers to the contract being discharged by reason of performance of certain substituted obligations. The doctrine of accord and satisfaction has been explained by the Privy Council in Payana Reena Layana Saminathan Chetty v. Pana Lana Palaniappa Chetty (1914 AC 618) as follows: 

"The 'receipt' given by the appellants, and accepted by the respondent, and acted on by both parties proves conclusively that all the parties agreed to a settlement of all their existing disputes by the arrangement formulated in the 'receipt'. It is a clear example of what used to be well known in common law pleading as "accord and satisfaction by a substituted agreement". No matter what were the respective rights of the parties inter se they are abandoned in consideration of the acceptance by of a new agreement. The consequence is that when such an accord and satisfaction takes place the prior rights of the parties are extinguished. They have in fact been exchanged for the new rights; and the new agreement becomes a new departure, and the rights of all the parties are fully represented by it." 

11. The aforesaid principle has been approved by the Supreme Court in Union of India v. Kishorilal Gupta (AIR 1959 SC 1362) wherein it has also been held that the existence of the contract is a necessary condition for the operation of the arbitration clause in it and it perishes with the contract. The parties may put an end to the contract as if it had never existed and substitute a new contract for it solely governing their rights and liabilities thereunder and then, as the original contract is extinguished by the substituted one, the arbitration clause of the original contract perishes with it.

12. Section 16(1)(a) of the Act provides that the arbitral tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement, and for that purpose an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract. Under Section 16(1), the legislature makes it clear that while considering any objection with respect to the existence or validity of the arbitration agreement, the arbitration clause which formed part of the contract, has to be treated as an agreement independent of the other terms of the contract.

13. The fact that the arbitral tribunal has the competence to rule on its own jurisdiction and to define the contours of its jurisdiction only means that when such issues arise before it, the tribunal can, and possibly, ought to decide them. This can happen when the parties have gone to the arbitral tribunal without recourse to Section 8 or 11 of the Act. But where the jurisdictional issues are decided under these sections, before a reference is made, Section 16 cannot be held to empower the arbitral tribunal to ignore the decision given by the judicial authority or the Chief Justice. The competence to decide does not enable the arbitral tribunal to get over the finality conferred on an order passed prior to its entering upon the reference by the very statute that creates it (See the decision of the seven Judge Bench of the Apex Court in SBP and Company v. Patel Engineering Limited : AIR 2006 SC 450).

14. We have perused the order passed by the designated Judge of this Court under Section 11 of the Act in A.R.No.48 of 2005. The question whether there was any surviving dispute to be referred to arbitration under an existing contract was not considered at the time of appointing the arbitrator. Therefore, in the instant case, the arbitral tribunal had the power to decide that question. In other words, the arbitrator had the power to decide whether the appellant had voluntarily signed and issued the discharge voucher and accepted the amount in full and final settlement of the claim or whether he had issued the discharge voucher under any vitiating circumstances.

15. In fact, the arbitrator had passed an interim award on 09.08.2006 and found that there is an arbitrable issue for consideration.

16. The plea made by the appellant in the claim statement filed before the arbitrator as well as the proof affidavit filed by him in the arbitral proceedings, with regard to the issuing of discharge voucher by him, is as follows: He had availed overdraft facilities and also borrowed substantial amounts from banks, financial institutions and relatives and friends. They had started exerting pressure on him to pay the interest on the amount or to repay the amount due to them. He approached the respondent on several occasions to settle the claim but the respondent evaded the issue by stating lame excuses and also demanding documents which were not available with him. The respondent, fully knowing the financial difficulties and hardship of the appellant, with oblique motives, called him to its office and issued a cheque for Rs.15,87,682/- advising him to pay off the amount due to the bank and the creditors. He believed that the cheque was issued by the respondent as part payment being the first instalment of the claim and he accepted the cheque. The officials of the respondent insurance company deceptively made him to believe that after conducting an internal enquiry and after obtaining administrative sanction from the Head Office, the balance amount would be paid to him. He was made to sign various printed forms and blank papers. The claimant being an illiterate person, and having complete faith and belief in the respondent, signed the said papers and forms. The respondent unilaterally and fraudulently filled up the blank forms and papers in which the signature of the claimant was obtained and fabricated documents stating that the amount paid was towards full and final settlement of his claim.

17. The finding of the arbitrator is that it is probable that the appellant was misguided by the officials of the respondent insurance company and that the discharge voucher was signed and issued by the appellant not voluntarily.

18. The appellant had not stated in the claim statement or in the proof affidavit, particulars of the loans availed of by him from the banks and his relatives and friends. He had not even disclosed the total amount for which he was indebted to others. In the absence of such particulars, the arbitrator could not have entered a finding that the appellant was under financial stress and that it was under economic compulsion that he signed and issued the discharge voucher.

19. True, the letter dated 08.03.2005 sent by the appellant to the respondent would indicate that the officials of the respondent had some role in the preparation of it. The language and the wordings and the tone and tenor of the letter indicate so. However, it cannot be found that it is a letter fabricated by the respondent by using any blank signed papers allegedly given by the appellant to the respondent. The signature of the appellant in the discharge voucher is affixed on a stamp. The appellant has admitted his signature in the discharge voucher. The voucher is on a form printed by the respondent insurance company. The appellant had not raised any plea that the respondent had obtained his signature on any stamp affixed on a printed blank form. Moreover, the letter is countersigned by the Manager of the Central Bank of India with whom the appellant had maintained loan account.

20. It is also to be noted that it was only on 20.04.2005 that the appellant sent a lawyer notice to the respondent insurance company demanding further amount. After issuing the discharge voucher on 09.03.2005, till the lawyer notice was sent by him to the respondent on 20.04.2005, he had not made any claim for further amount from the respondent company. No communication was sent by him to the respondent company during that period demanding any balance amount.

21. With regard to the silence of a party for a long period in making any claim for further amount, it is apposite to refer to the observations made by the Apex Court in New India Assurance Company v. Genus Power Infrastructure Limited : (2015) 2 SCC 424) which reads as follows: 

“In our considered view, the plea raised by the respondent is bereft of any details and particulars, and cannot be anything but a bald assertion. Given the fact that there was no protest or demur raised around the time or soon after the letter of subrogation was signed, that the notice dated 31.03.2011 itself was nearly after three weeks and that the financial condition of the respondent was not so precarious that it was left with no alternative but to accept the terms as suggested, we are of the firm view that the discharge in the present case and signing of letter of subrogation were not because of exercise of any undue influence. Such discharge and signing of letter of subrogation was voluntary and free from any coercion or undue influence. In the circumstances, we hold that upon execution of the letter of subrogation, there was full and final settlement of the claim” 

(emphasis supplied).

22. Learned counsel for the appellant relied upon the decision of a learned Single Judge of this Court in New India Assurance Company Limited vs. Insurance Ombudsman (2016(2) KLT 926) in support of his contention that receipt or voucher signed and issued by a person stating that he has received the amount in full and final settlement of the claim cannot be considered as voluntarily made if he was in extreme financial distress and the insurance company was in a dominating position. This decision has no application to the facts of the present case. In the aforesaid decision, the copy of the report of the surveyor had not been given to the insured. It was a case in which the insured had agreed to settle without knowing about the survey and assessment of the loss. In that case, the insurer had also not denied financial distress of the insured. The aforesaid decision turns on its own facts and it has to confine to such facts.

23. When a contract has been fully performed, there is a discharge of the contract by performance, and the contract comes to an end. In regard to such a discharged contract, nothing remains - neither any right to seek performance nor any obligation to perform. Where one of the parties to the contract issues a full and final discharge voucher confirming that he has received the payment in full and final satisfaction of all claims, and he has no outstanding claim, that amounts to discharge of the contract by acceptance of performance and the party issuing the discharge voucher/receipt cannot thereafter make any fresh claim or revive any settled claim, unless he proves that he signed and issued the discharge voucher/receipt under vitiating circumstances. Even if the claimant had agreed for settlement due to financial compulsions and commercial pressure or economic duress, if the decision to make a settlement was his free choice and if there was no coercion or compulsion by the insurer, the discharge voucher/receipt issued by him binds him (See National Insurance Company Limited v. M/s Boghara Polyfab Private Limited : AIR 2009 SC 170).

24. True, unreasonableness of an award is not a matter for consideration of the court in an application filed under Section 34(1) of the Act. The court cannot examine the reasonableness of the reasons given by the arbitrator. The court cannot reappreciate the evidence for the purpose of finding whether on the facts and circumstances, the award in question could have been made. But, when the award passed by the arbitrator is not based on any pleadings or evidence, and when it is perverse, the court can interfere. If the decision is based on no legal evidence or in coming to his conclusion, the arbitrator has taken into account irrelevant and extraneous considerations not germane to the resolution of the dispute, the award is perverse. It will be an affront to the law which cannot be overlooked. In O.N.G.C. Limited v. Garware Shipping Corporation Limited : AIR 2008 SC 456, the Apex Court has held that there is no proposition that the courts could be slow to interfere with the award of the arbitrator, even if the conclusions are perverse, and even when the very basis of the award is wrong. If the Court finds that the award is vitiated by gross perversity and consequently vitiated by patent illegality, the Court should not hesitate to invoke the power under S.34(2)(b)(ii) of the Act. When errors of finding of facts having a bearing on the dispute are patent and is easily demonstrable without the necessity of carefully weighing the evidence, interference with the award is possible on the ground of patent illegality.

25. In the instant case, the award of the arbitrator is patently illegal. His finding that the appellant issued the discharge voucher not voluntarily is based not on sufficient pleadings and proof especially regarding the financial distress of the appellant and the fraud played upon him by the insurance company. Therefore, we see no ground to interfere with the order of the learned Additional District Judge.

Accordingly, the appeal is dismissed. No costs.