Supreme Court of India: a pre-condition in an arbitration clause is sine qua non for triggering the arbitration in an insurance policy

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In the case of United India Insurance Co. Ltd. & Anr. v. Hyundai Engineering and Construction Co. Ltd. & Ors., Civil Appeal no. 8146 of 2018 decided on 21.09.2018, the Supreme Court of India held that where the arbitration clause in an insurance policy is conditional upon unequivocal admittance of liability by the insurer, the arbitration can only be triggered if the insurer admits or accepts its liability under or in respect of the concerned policy. Detailed case analysis given below:

Factual Matrix

The Appellant awarded some construction contract to the Respondent. The Appellant obtained an insurance policy to cover the entire construction project. The insurance policy had an arbitration clause which is reproduced below. During the construction an accident occurred due to which the Respondent suffered huge losses which was duly conveyed to the Appellant. As per the Surveyor’s and Loss Adjuster’s report, the damage was on account of the faulty design and improper execution of the project and not payable under the policy. Besides the stated report, a Committee of Experts was set up by the Ministry of Road Transport and Highways, Government of India, to enquire into the accident. The Appellant conveyed this to the respondents that their claim was found to be not payable and hence stands repudiated. The Respondent entered correspondence with the appellants to reopen and re-assess its decision of repudiation of the claim. Finally, the appellants informed the respondents that it was unable to “reconsider” the claim which has already been repudiated. The Respondent invoked the arbitration. Unable to reach any agreement on the appointment of an arbitrator, the Respondent filed a petition to the High Court for the appointment of an arbitrator under Sections 11(4) & 11(6) of the Indian Arbitration Act. The High Court appointed an arbitrator having opined that arbitration agreement existed in the form of clause 7 of the Insurance Policy.

Arbitration Clause

“7 If any difference shall arise as to the quantum to be paid under this Policy (liability being otherwise admitted) such difference shall independently of all other questions be referred to the decision of an arbitrator to be appointed in writing by the parties in difference, or if they cannot agree upon a single arbitrator to the decision of two disinterested persons as arbitrators of whom one shall be appointed in writing by each of the parties within two calendar months after having been required so to do in writing by the other party in accordance with the provisions of the Arbitration Act, 1940, as amended from time to time and for the time being in force in case either party shall refuse or fail to appoint arbitrator within two calendar months after receipt of notice in writing requiring an appointment the other party shall be at liberty to appoint sole arbitrator and in case of disagreement between the arbitrators, the difference shall be referred to the decision of an umpire who shall have been appointed by them in writing before entering on the reference and who shall sit with the arbitrators and preside at their meetings.

It is clearly agreed and understood that no difference or dispute shall be referable to arbitration as herein before 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 or umpire of the amount of the loss or damage shall be first obtained.

It is also hereby further expressly agreed and declared that if the Company shall disclaim liability to the insured for any claim hereunder and such claim shall not within 3 calendar months from the date of such disclaimer have been made the subject matter of a suit in a court of law, then the claim shall for all purpose be deemed to have been abandoned and shall not thereafter be recoverable hereunder.”

Parties’ Contentions

The Appellant argued that as per the arbitration clause the policy was hedged with a pre-condition expressly predicating that no difference or dispute shall be referable to arbitration, if the appellants disputed or did not accept its liability under or in respect of the policy. In other words, in case of repudiation of the claim by the appellants, the remedy of the insured was to file a suit within 3 months of such disclaimer and since the claim is filed after limitation period, the dispute cannot be referred to arbitration.

Analysis

The Court relied on three-judge decision of the Supreme Court of India in Oriental Insurance Company Limited Vs. Narbheram Power and Steel Private Limited (2018) 6 SCC 534 wherein the Court inter alia held that 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. Detailed case analysis available at

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.

Further, the Court draw a distinction between the present case and its earlier decision of the two-Judge Bench in Duro Felguera, S.A. Vs. Gangavaram Port Limited (2017) 9 SCC 729 firstly, because it is a two-Judge Bench decision and also because the Court was not called upon to consider the question which arises in the present case, in reference to clause 7 of the subject insurance policy. As per the Court, the exposition in this decision is a general observation about the effect of the amended provision and not specific to the issue under consideration.

Conclusions

The Court held that the arbitration clause has to be interpreted strictly. The subject clause 7 is a conditional expression of intent. Such an arbitration clause will get activated or kindled only if the dispute between the parties is limited to the quantum to be paid under the policy an arbitration clause would enliven or invigorate only if the insurer admits or accepts its liability under or in respect of the concerned policy. Thus, there can be no arbitration in cases where the insurance company disputes or does not accept the liability under or in respect of the policy. After, going through evidence regarding the repudiation of claim, the court further held that the plea of the appellants falls in an excepted category and non-arbitrable matter within the meaning of the opening part of clause 7.

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