Judgment: Oriental Insurance Company Limited v. M/s Narbheram Power and Steel Private Limited
Citation: (2018) 6 SCC 534
Court: Supreme Court
Coram: Dipak Mishra, A.M. Khanwilkar and Dr D.Y. Chandrachud.
Date: May 2, 2018
Overview: In this case the Supreme Court noted the unique nature of dispute resolution clauses in insurance contracts and interpreted the language of arbitration clauses commonly found in insurance policies was looked at.
Issue: [No issue in document]
Narbheram Power and Steel Limited (“Petitioner”) obtained a Fire Industrial All Risk Policy for a factory in Odisha. In October 2013, a cyclone affected large parts of the state including the Petitioner’s factory. The Oriental Insurance Company Limited (“Appellant”) was informed and a surveyor was appointed.
Based on the surveyor’s report, the Petitioner requested the Appellant to settle their claim. Failing settlement, the Petitioner issued a notice invoking arbitration as per the dispute resolution clause under the policy; reproduced below:
“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 (hereinafter referred to as Part I).
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 (hereinafter referred to as Part II).
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 (hereinafter referred to as Part III).”
In reply, the Appellant repudiated the claim in entirety stating reasons and declined to refer the disputes to arbitration. The Petitioner approached the Calcutta High Court u/s 11(6) of the Act.
The High Court opined that the present arbitration clause was not clear and was ambiguous. To make the clause workable, it made a distinction between loss suffered due to peril covered under the policy and loss suffered due to peril not covered under the policy. It opined that it would be in the latter case that the Appellant could deny their liability completely and hold that such a claim is not arbitrable. If the arbitrator could determine both questions of whether loss was on account of peril covered under the policy and the quantum of such loss then Part II and Part III will be incongruous, and as such nothing much will be left for the suit court to determine. Without elucidating on the applicability of this analysis to the present facts, the High Court held that the dispute could be referred to arbitration.
The Supreme Court overturned the Calcutta High Court’s order. At the outset, the Court stated that insurance contracts are to be interpreted exactly in the words in which the contract is expressed. It held that High Court had proceeded under the assumption that Part II and Part III of the arbitration clause do not have harmony, and in fact sound a discordant note.
It stated that its judgment in Vulcan Insurance Co. Ltd. v. Maharaj Singh & Anrwas clear on this point and dispels any ambiguity in construing Part II and Part III of the arbitration clause. Vulcan Industriesdealt with a similar arbitration clause. In the said case, the insurer repudiated its liability to pay any amount claimed by the insured. The court said that the dispute related to insurer’s liability to pay any amount whatsoever. Therefore, the dispute raised by the insured fell under Part I of the clause, and it was therefore covered by the arbitration clause. The court analysed Part II and III to hold that there is no incongruity in them.
Clauses like Part III that make the award condition precedent to any right of action or suit are known as ‘Scott v. Avery Clauses’. These have been repeatedly held to be valid. The court held that where policy is completely denied, no obligation lies on the insured to arbitrate the amount before commencing an action on policy since the dispute itself was not covered by arbitration.
The Supreme Court opined that this was a case of denial of liability, not a dispute pertaining to quantum. While doing so, the Supreme Court made no comment on the distinction made by the High Court with respect to coverage or otherwise of a liability under the policy. It ruled that the arbitration clause clearly provided that no difference or dispute shall be referable to arbitration if the Company has disputed or not accepted liability under the policy. The remedy available to the insured was to institute a civil suit for its grievances.