2018 (8) TMI 1469 - SC - Indian Laws

Insurance policy - Examination of Arbitration agreement - insertion of sub-section 6A in Section 11 of the Act - Arbitration and Conciliation Act, 1966 - Whether clause 7 of the subject Insurance Policy dated 5th September, 2007 posits unequivocal expression of the intention of arbitration or is hedged with a conditionality? Held that - From the line of authorities, it is clear that the arbitration clause has to be interpreted strictly. The subject clause 7 which is in pari materia to clause 13 of the policy considered by a three-Judge Bench in Oriental Insurance Company Limited 2018 (5) TMI 327 - SUPREME COURT OF INDIA , 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. The liability should be unequivocally admitted by the insurer. That is the precondition and sine qua non for triggering the arbitration clause - an arbitration clause would enliven or invigorate only if the insurer admits or accepts its liability under or in respect of the concerned policy. Whether the communication sent on 21st April, 2011 falls in the excepted category of repudiation and denial of liability in toto or has the effect of acceptance of liability by the insurer under or in respect of the policy and limited to disputation of quantum? - Held that - The High Court has made no effort to examine this aspect at all. It only reproduced clause 7 of the policy - the plea taken by the appellants is of denial of its liability to indemnify the loss as claimed by the JV, which falls in the excepted category, thereby making the arbitration clause ineffective and incapable of being enforced, if not non-existent. It is not actuated so as to make a reference to arbitration. In other words, the plea of the appellants is about falling in an excepted category and non-arbitrable matter within the meaning of the opening part of clause 7 and as re-stated in the second paragraph of the same clause. The dispute in question is non-arbitrable and respondent Nos.1 2 ought to have resorted to the remedy of a suit. The plea of respondent Nos.1 2 about the final repudiation expressed by the appellants vide communication dated 17th April, 2017 will be of no avail. Appeal allowed.

Summary

Issues Involved:
1. Interpretation of Clause 7 of the Insurance Policy.
2. Applicability of Arbitration and Conciliation Act, 1966, post-amendment.
3. Existence and scope of the arbitration agreement.
4. Repudiation of the insurance claim and its impact on arbitration.

Detailed Analysis:

1. Interpretation of Clause 7 of the Insurance Policy:
The central issue is whether Clause 7 of the Insurance Policy dated 5th September 2007 unequivocally expresses the intention of arbitration or is conditional. Clause 7 stipulates that any difference as to the quantum to be paid under the policy, with liability otherwise admitted, shall be referred to arbitration. However, it explicitly states that no difference or dispute shall be referable to arbitration if the company disputes or does not accept liability under or in respect of the policy. This clause is conditional and specifies that arbitration can only be invoked if the insurer admits liability.

2. Applicability of Arbitration and Conciliation Act, 1966, Post-Amendment:
The High Court, in its judgment, relied on the amendment of the Arbitration and Conciliation Act, 1966, effective from 23rd October 2015, which inserted sub-section 6A in Section 11 of the Act. This amendment limits the Court's mandate to examining the existence of an arbitration agreement. The High Court referred to the decision in Duro Felguera, S.A. Vs. Gangavaram Port Limited, which emphasized the limited role of courts in the appointment of arbitrators post-amendment.

3. Existence and Scope of the Arbitration Agreement:
The appellants argued that the arbitration clause in the policy is hedged with a pre-condition that arbitration is not applicable if the insurer disputes the liability. They relied on the three-Judge Bench decision in Oriental Insurance Company Limited Vs. Narbheram Power and Steel Private Limited, which interpreted a similar clause and concluded that arbitration is not applicable if the insurer disputes liability. The Supreme Court in this case reiterated that an arbitration clause must be strictly construed and any clause that unequivocally excludes arbitration in certain circumstances must be respected.

4. Repudiation of the Insurance Claim and Its Impact on Arbitration:
The appellants repudiated the insurance claim on 21st April 2011, stating that the loss was due to faulty design and defective workmanship, which are not covered under the policy. The respondents attempted to reopen the claim, but the appellants reaffirmed their repudiation on 17th April 2017. The High Court did not examine whether the repudiation fell within the excepted category of disputes not referable to arbitration. The Supreme Court held that the appellants' repudiation of the claim constituted a complete denial of liability, thus falling within the excepted category and making the arbitration clause ineffective.

Conclusion:
The Supreme Court concluded that the dispute was non-arbitrable as the appellants had completely denied liability under the policy. The respondents should have resorted to a civil suit for mitigation of their grievances. The appeal was allowed, the High Court's judgment was set aside, and the original petition was dismissed with liberty to the respondents to file a civil suit if advised. The Court did not express any opinion on the merits of the issues to be answered in the civil proceedings.