Supreme Court on Denial of Claim and Arbitration Clause - Oriental Insurance Company Ltd. v. Narbheram Power & Steel Pvt. Ltd.

Brief Facts

The Appellant in the instant case is an Insurance Company that provided a Fire Industrial All Risk Policy to a Factory operated by Respondent Company. Due to a natural calamity (cyclone), the Respondent Company suffered heavy losses. The Respondent Company intimated this to the Appellant Company and a Surveyor was appointed for assessment. The Surveyor submitted its report based on which the Respondent requested the Appellant to settle the claims to the tune of ₹4 Crores (approx.).

Ultimately, the claim was not settled and the Respondent intimated the Appellant that it had invoked the Arbitration Agreement and requested the Appellant to concur with the name of the Arbitrator nominated by the Appellant. The Appellant refused to do so. Basically, the Appellant denied its liability and denied existence of any dispute between the parties by ascribing following reasons: -

“1. Alleged loss of imported coal is clearly an inventory shortage.

2.    There was no actual loss of stock in process.

3.   The damage to the sponge iron is due to inherent vice.

4. The loss towards building/sheds etc. are exaggerated to cover insured maintenance.

5. As there is no material damage thus business interruption loss does not trigger.”

The matter went to the Hon’ble High Court under Section 11 (6) of the Arbitration and Conciliation Act, 1996 (in short, “Act of 1996”). The High Court appointed an Arbitrator which was challenged by the Appellant before the Supreme Court.

The Arbitration Clause is reproduced hereinbelow: -

“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.”

It is the highlighted and underlined portion of the Arbitration Clause which was the subject-matter of academic dissection before the Hon’ble Supreme Court.

Issue Involved

In case the Insurer (Appellant Company) had disputed or not accepted the liability under or in respect of the Policy, could the dispute have been referred to Arbitration?

Reasoning of the Court

According to the Court, the disputation squarely comes within the ambit of highlighted and underlined portion of the Arbitration Clause (referred above). The said Part of the Clause clearly spells out that the parties have agreed and understood that no differences and disputes shall be referable to arbitration if the company has disputed or not accepted the liability.

It was further held that the reasons provided by the Insurer (Appellant Company) are nothing but denial of liability in toto. It was said by the Court that the present Arbitration Clause is not one which can be interpreted in a way that denial of a claim would itself amount to dispute.

The Court observed that the language used in the Second part (highlighted and underlined portion) of the Arbitration Clause 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.

Thus, it was held that where the Arbitration Clause specifically excludes the mode of adjudication by Arbitration if the liability is denied in toto and in such cases, the Arbitration Clause is to be strictly construed. 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.

The Court referred to the case of Vulcan Insurance Co. Ltd v. Maharaj Singh and another, (1976) 1 SCC 943, wherein it was held that: -

“The dispute which is not referable to arbitration, being not covered by the clause cannot be over the subject matter of arbitration, and the remedy of the insured in this case is only to institute a suit.

 I am of the view that the remedy of arbitration is not available to the petitioner herein in view of the arbitration clause specifically excluding the mode of adjudication of disputes by arbitration, where a claim is repudiated in toto. The remedy would thus only be of a civil suit in accordance with law.”

Another incidental question that arose in this case was with respect to the remedy available to Respondent as Part III of the Arbitration Clause reproduced hereinabove states that Award by the Arbitrator of the amount of loss/damages is a condition precedent for instituting any Suit or Action. The Court said that once the Appellant has denied the claim in toto, no question of computation of the amount of loss/damages arises and Part III of the Arbitration Clause will have no applicability in such cases. Hence, taking cue from Vulcan Insurance (supra), the Court said that the only remedy left with the Respondent is to institute a Civil Suit for mitigation of its grievances.