Supreme Court of India: Interpretation of Arbitration Clause in an Insurance Policy/Contract; an arbitration clause can lay the postulate in which situations the arbitration clause cannot be given effect to.



In the case of Oriental Insurance Company Limited vs. M/s Narbheram Power and Steel Pvt. Ltd. ((@ S.L.P. (C) No. 33621 of 2017) decided on May 02, 2018), the Supreme Court while dealing with an arbitration clause in an insurance policy inter alia held that while the arbitration clause is required to be strictly construed yet if such clause stipulates that under certain circumstances there can be no arbitration, and they are demonstrably clear then the controversy pertaining to the arbitration has to be put to rest. The detailed analysis follows.

Factual Matrix

M/s Narbheram Power and Steel Pvt. Ltd.( Narbheram Power) insured entered into a Fire Industrial all Risk Policy with an insurance company Oriental Insurance Company Limited (Oriental). Narbheram Power suffered huge damages in a cyclone and it filed a claim with Oriental for the same. The said claim was not settled by Oriental and Narbheram Power invoked the arbitration agreement and requested Oriental to concur with the name of the arbitrator whom it had nominated. Oriental repudiated the claims and declined to refer the disputes to arbitration between the parties. Narbheram Power filed an application under Section 11(6) of the Indian Arbitration and Conciliation Act, 1996 for appointment of an arbitrator. The said application was contested by Oriental and the High Court, considering the language employed in Clause 13 of the policy and the reasons advanced while repudiating the claim of the claimant, appointed a retired Judge of the High Court as arbitrator. Aggrieved by the appointment of arbitrator, Oriental went to the Supreme Court against the order of the High Court.

Contentions raised by Parties

Oriental argued that once the claim was repudiated and the insurer had disputed or not accepted the liability under or in respect of the policy, no difference or dispute could have been referred to arbitration. Narbheram Power contested that the letter of repudiation, when appositely understood, does not relate to disputation and non-acceptance of the liability under or in respect of the policy but, in fact, amounts to denial of the claim that basically pertains to the quantum. It distinguished ‘liability’ from ‘refusal of the claim not having been substantiated.’

Arbitration Clause

“13. If any dispute or difference shall arise as to the quantum to be paid under this policy

(liability being otherwise admitted) such difference shall independently of all questions be referred to the decision of a sole arbitrator to be appointed in writing by the parties to or if they cannot agree upon a single arbitrator within 30 days of any party invoking arbitration, the same shall be referred to a panel of three arbitrator, comprising of two arbitrators, one to be appointed by each of the parties to the dispute/difference and the third arbitrator to be appointed by such two arbitrators and arbitration shall be conducted under and in accordance with the provisions of the Arbitration and Conciliation Act, 1996.

It is clearly agreed and understood that no difference or dispute shall be referable to arbitration as hereinbefore provided, if the Company has disputed or not accepted liability under or in respect of this policy. It is hereby expressly stipulated and declared that it shall be a condition precedent to any right of action or suit upon this policy that the award by such arbitrator/arbitrators of the amount of the loss or damage shall be first obtained.”

(Emphasis supplied)


On perusal of the arbitration clause above, the Court commented that it is quite clear that once the insurer disputes the liability under or in respect of the policy, there can be no reference to the arbitrator. It would be appropriate the previous authorities of cases in this regard and the same are given below:

Supreme Court on interpretation of arbitration clauses in Insurance contracts/policies

  • General Assurance Society Ltd. v. Chandumull Jain and another AIR 1966 SC 1644

In this case, the Constitution Bench of the Supreme Court, while dealing with the contract of insurance, has opined that such a contract is entered into on the basis of commercial transactions and while interpreting the documents relating to a contract of insurance, the duty of the court is to interpret the words in which the contract is expressed by the parties because it is not for the court to make a new contract, howsoever reasonable.

  • Oriental Insurance Co. Ltd. v. Samayanallur Primary Agricultural Co-op. Bank AIR 2000 SC 10

In this case, a two-Judge Bench of the Supreme Court has opined that insurance policy has to be construed having reference only to the stipulations contained in it and no artificial far-fetched meaning could be given to the words appearing in it.

  • United India Insurance Co. Ltd. v. Harchand Rai Chandan Lal (2004) 8 SCC 644

In this case, the Court has ruled that the terms of the policy shall govern the contract between the parties and they are bound to abide by the definitions given therein. That apart, the expression appearing in the policy should be given interpretation with reference to the terms of the policy and not with reference to the definitions given in any other law because the parties have entered into the contract with eyes wide open.

Supreme Court on right to appoint an arbitrator in Insurance Cases

  • Deep Trading Company v. Indian Oil Corporation and others (2013) 4 SCC 35

A three-Judge Bench was dealing with the right of the respondent therein to appoint the arbitrator after expiry of the time period. The Court referred to Clause 29 of the agreement that provided for procedure for appointment of the arbitrator. After referring to the earlier authorities, the Court held that the respondent therein has forfeited its right to appoint the arbitrator.

  • Newton Engineering and Chemicals Limited v. Indian Oil Corporation Limited and others (2013) 4 SCC 44,

In this case, there was an express, clear and unequivocal arbitration clause between the parties which provided that disputes shall be referred to the sole arbitration of the Executive Director (Northern Region) of the respondent Corporation and if the said authority was unable or unwilling to act as the sole arbitrator, the matters shall be referred to the person designated by such ED (NR) in his place who is willing to act as the sole arbitrator. The arbitration clause further provided that if none of them is able to act as an arbitrator, no other person should act as a sole arbitrator and if the office of the said authority ceases to exist in the Corporation and the parties are unable to arrive at any agreed solution, the arbitration clause would not survive and has to be treated having worked its course. The Court, interpreting the clause, expressed the view that in such a situation, the Court has no power to appoint an arbitrator for resolution of the disputes.

  • The Vulcan Insurance Co. Ltd v. Maharaj Singh and another (1976) 1 SCC 943

In this case, the company repudiated its liability to pay any amount of loss or damage as claimed by the claimant. The Court opined that the dispute raised by the company appertained to its liability to pay any amount of damage whatsoever and, therefore, the dispute raised by the appellant company was not covered by the arbitration clause.


  • That an arbitration clause is required to be strictly construed. Any expression in the clause must unequivocally express the intent of arbitration. But if a clause stipulates that under certain circumstances there can be no arbitration, and they are demonstrably clear then the controversy pertaining to the appointment of arbitrator has to be put to rest.
  • That the parties are bound by the clauses enumerated in the policy and the court does not transplant any equity to the same by rewriting a clause.
  • That the Court can interpret such stipulations in the agreement. It is because they relate to commercial transactions and the principle of unconscionability of the terms and conditions because of the lack of bargaining power does not arise. The said principle comes into play in a different sphere.
  • Oriental has, on facts, repudiated the claim by denying to accept the liability on the basis of the aforesaid reasons. Such a situation falls on all fours within the concept of denial of disputes and non-acceptance of liability.
  • The language used in the second part is absolutely categorical and unequivocal inasmuch as it stipulates that it is clearly agreed and understood that no difference or disputes shall be referable to arbitration if the company has disputed or not accepted the liability.


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