In a significant ruling, the Supreme Court has clarified that disputes regarding the full and final settlement of a contract can still be resolved through arbitration. The Court emphasized that if a disagreement arises over whether a contract has been fully discharged, this issue is arbitrable under the terms of the arbitration agreement within the contract.
The Court stated, “Once a contract is considered discharged by performance, there are no remaining rights or obligations to enforce. However, whether such a discharge has actually occurred involves both legal and factual questions. Disputes over contract discharge are therefore subject to arbitration as specified in the underlying contract’s arbitration clause.”
Typically, no arbitrable issues remain following a full settlement. Yet, if a dispute about the settlement itself emerges, courts can refer it to arbitration. The Bench, including CJI DY Chandrachud and Justices JB Pardiwala and Manoj Misra, underscored that disputes arising from the settlement fall under the original contract’s arbitration clause, allowing arbitration to proceed despite the settlement.
The Court further noted that when a settlement is contested, it can be seen as an issue related to the original contract. This perspective aligns with the precedent set in the National Insurance Co. Ltd. v. Boghara Polyfab case. Here, the Court maintained that executing a settlement receipt or discharge voucher does not preclude arbitration if the validity of such documents is disputed due to allegations of fraud, coercion, or undue influence.
In essence, the ruling establishes that arbitration remains a viable path for resolving disputes over contract settlements, reinforcing the robustness of arbitration agreements even post-settlement.
