The Supreme Court set aside the judgment of the Madras High Court appointing an arbitrator without considering the non-fulfilment of the conditionality clause as stipulated in the arbitration agreement. In the case of United India Insurance Co Ltd V/s Hyundai Engineering and Construction Co Ltd, a claim for an amount of Rs.1,51,59,94,543/- was made by the JV to the company on account of losses that were suffered by the JV on account of an accident on one of its project sites, which was further assessed and evaluated to Rs.39,09,92,828/- by the company. As a result of variation in the assessment of the claims, the arbitration clause was invoked which was subseqeuently challenged and allowed by the Madras High Court on the following reasoning:

“I am enjoined to apply the provisions of 11(6A) which cast a limited mandate upon me solely to ensure the existence of an arbitration clause, leaving all other disputes including the applicability thereof, to the decision of the arbitral tribunal. The mandate imposed is to be exercised ‘notwithstanding the decision, decree or order of any Court’ making it apparent that legislature intended that even those issues that have hitherto been settled might call for reappreciation in the context of Alternate Dispute Resolution mechanisms, by the Tribunal under section 16 of the Act.”


Supreme Court’s Observation:

In the agreement between the disputing parties, the arbitration clause strictly construed as follows:

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.

The Bench comprising of Chief Justice Dipak Misra, Justice AM Khanwilkar and Justice DY Chandrachud made reference to the judgment in Oriental Insurance Company Limited vs. Narbheram Power and Steel Private Limited wherein it 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. In the instant appeal, it was highlighted by the Bench that the arbitration clause had been invoked without taking into consideration the condition specified in the clause. Triggering of the arbitration clause could only be affected after fulfilment of the condition stipulated and not otherwise.

The Bench concluded its observation in relation to the facts at hand as follows:

“14. Reverting to the communication dated 21st April, 2011, we have no hesitation in taking the view that the appellants completely denied their liability and repudiated the claim of the JV (respondent Nos.1 & 2) for the reasons mentioned in the communication. The reasons are specific. No plea was raised by the respondents that the policy or the said clause 7 was void. The appellants repudiated the claim of the JV and denied their liability in toto under or in respect of the subject policy. It was not a plea to dispute the quantum to be paid under the policy, which alone could be referred to arbitration in terms of clause 7. Thus, 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 Appeal was allowed and permission was granted to the Respondent JV to take recourse to civil suit to seek its claim as per its assessments.


Image Link:

Judgment: United India Insurance Co Ltd and Anr Versus Hyundai Engineering and Construction Co Ltd and Ors