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The New Great Insura... v. United Equipments An...

Calcutta High Court

Aug 27, 1969

Judgment

Subsequent
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Concise Analytical Summary of the Opinion

Factual and Procedural Background

The petitioner is an insurance company; the opposite party insured a motor car which was involved in an accident on 8 March 1963. The opposite party submitted a filled claim form and a detailed repair estimate and paid Rs. 1,113.35 to Barman & Company for repairs. By letter dated 24 August 1964 (Exhibit 2) the petitioner insurer repudiated the claim on the ground that the insured had removed the motor car from the garage and had not given the company's appointed surveyor an opportunity to inspect it.

The opposite party thereupon sued in the Small Causes Court at Calcutta for recovery of Rs. 1,113.35. Before the trial judge, the petitioner relied solely on clause 7 of the insurance contract, which provided for reference of differences to arbitration and expressly made the making of an award a condition precedent to any right of action against the company. The trial court rejected that contention and decreed the suit. The petitioner obtained a Full Bench decision under Section 38 of the Presidency Small Cause Courts Act, which upheld the trial court. The present opinion arises from the application challenging those decisions.

Legal Issues Presented

Whether a contractual clause making the making of an arbitration award a condition precedent to any right of action is valid and operative in India, or whether such a clause offends Section 28 of the Indian Contract Act by ousting the courts' jurisdiction.
Whether, in the present case, clause 7 of the insurance policy (which requires arbitration and states that an award is a condition precedent to a right of action and contains a 12-month provision in case of disclaimer) prevents the insured from instituting the suit before resort to arbitration, rendering the suit premature.
Whether, if there is only a provision for reference to arbitration (without an express condition precedent), the remedy of the other party is to seek a stay under Section 34 of the Arbitration Act, or whether a clause amounting to a condition precedent must lead to dismissal of a prematurely filed suit.

Arguments of the Parties

Petitioner (Mr. Gupta) — Summary of Arguments

The courts below took an erroneous view of the law in upholding the insured's suit.
Where a contract contains only a provision for reference to arbitration, a suit may still be instituted and the other party's remedy is to seek a stay under Section 34 of the Arbitration Act.
However, where the contract contains an additional clause making the making of an award a condition precedent to any right of action, that clause is legally valid and must be given effect; therefore, in the present case (where clause 7 contains such a stipulation) the suit should have been dismissed as premature because arbitration had not been resorted to.
He relied on authorities and Halsbury's to support the proposition that a Scott v. Avery-type clause (making the award a condition precedent) is valid.

Opposite Party (Mr. Amarendra Mohan Mitra) — Summary of Arguments

The principles of Scott v. Avery do not apply in India; a clause making the making of an award a condition precedent to a right of action offends Section 28 of the Contract Act and is therefore void.
The last sentence of clause 7 (the 12-month provision after disclaimer) should be read independently and separately from the earlier part of the clause and is void because it limits the insured's right to have recourse to the courts, thereby contravening Section 28.
If that later portion is read separately (and not as making the award a condition precedent), then the insured's suit would lie and the insurer's proper remedy would be an application for a stay under Section 34 of the Arbitration Act.
He relied specifically on the decision reported as AIR 1937 Lah 851 in support of his contentions.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Scott v. Avery ((1843-60) All ER 1 : (1856) 10 ER 1121)	Authority for the proposition that an agreement making the making of an award a condition precedent to any right of action is valid; Lord Campbell's observations endorsing party autonomy in contracting for such conditions.	The court treated Scott v. Avery as the leading authority supporting the validity of a clause that makes arbitration and an award a condition precedent to court action and relied on it as controlling principle applied to the clause in the insurance policy.
Coringa Oil Co. Ltd. v. Koegler ((1876) ILR 1 Cal 466)	Illustrates that Section 28 of the Contract Act does not invalidate mere provisions referring disputes to arbitration; distinguishes between a clause merely referring to arbitration and one that wholly excludes recourse to courts.	The court cited this Calcutta decision to show that Indian courts have recognised the validity of clauses referring disputes to private decision-makers and that such clauses do not, by themselves, oust court jurisdiction.
M. D'cruz v. Secretary of State for India in Council ((1936) 40 Cal WN 865)	Considered a rule that made an award/order/decision by a designated referee a condition precedent to any right of action; held that where no reference was made, plaintiffs had no cause of action.	The court relied on this decision to support the proposition that where a contract or rule makes the referee's decision a condition precedent, no cause of action accrues until the reference and decision have occurred.
Aghore Nath Baneriee v. Calcutta Tramways Co. Ltd. ((1885) ILR 11 Cal 232)	Used in argument to show Section 28 does not prevent applying Scott v. Avery principles in India.	The court referenced this case (via M. D'cruz) as part of the line of Indian authorities supporting the applicability of the Scott v. Avery principle.
Trainor v. Phoenix Fire Assurance Co. ((1891-65 LT 825)	Authority for the principle that the Scott v. Avery principle applies where the referee has power to determine liability and his decision is not limited to quantum.	The court cited this case to show that the principle of excluding a right to action until a private decision is given is applicable where the referee can determine liability, supporting the validity of condition precedent clauses.
Tredwen v. Holmon ((1862) 7 LT 127)	One of the English cases cited alongside Scott v. Avery as authority for similar principles regarding arbitration clauses functioning as conditions precedent.	The court treated it as supporting the English line of authority that a Scott v. Avery clause is valid and may be given effect where appropriately framed.
Firm Jowahir Singh v. Fleming Shaw & Co. Ltd. (AIR 1937 Lah 851)	Cited for the proposition that access to the courts is an important facet of the rule of law and a fundamental right of a suitor.	The court acknowledged the case as emphasising the importance of access to courts but noted that the decision did not involve or decide the specific legal proposition about clause-making an award a condition precedent, and thus it did not support the opposite party's broader contention that such clauses are void.

Court's Reasoning and Analysis

The court's analysis proceeded in these principal steps, reflecting the text of the opinion:

The court began by affirming the fundamental importance of a party's access to the courts, citing Firm Jowahir Singh as pointing out that right. It then turned to the scope of Section 28 of the Indian Contract Act, which declares void any agreement that absolutely restricts a party from enforcing contract rights by ordinary legal proceedings, while noting that Section 28 contains Exception 1 permitting arbitration agreements.
The court explained Exception 1: parties may agree that disputes will be referred to arbitration and that only the amount awarded in such arbitration shall be recoverable in respect of the dispute so referred. On this basis it introduced the English authority of Scott v. Avery and associated English commentary (Halsbury's) as supporting the validity of clauses making an award a condition precedent.
The court surveyed Indian authorities (Coringa Oil Co., M. D'cruz, Aghore Nath Baneriee, Trainor) and concluded that Indian courts have followed the Scott v. Avery principle: a clause that makes an award a condition precedent to suit is valid and does not amount to an absolute ouster of court jurisdiction under Section 28.
The court distilled the applicable principles: an agreement that absolutely prohibits recourse to courts is void under Section 28; by contrast, parties may validly agree to refer disputes to arbitration and may validly make the making of an award a condition precedent to any right of action. Such a clause does not close the final door to courts; rather it staggers or delays the right to sue until the arbitration procedure and award have occurred.
The court distinguished two situations: (a) where there is only a provision to refer disputes to arbitration (without an award-as-condition-precedent clause), a suit may still be instituted and the other party's remedy is to apply for a stay under Section 34 of the Arbitration Act; and (b) where making of an award is expressly a condition precedent to a right of action, the suit would not lie and must be dismissed as premature — Section 34 would not apply because the right to sue is staggered rather than stayed.
Addressing the opposite party's contention that the last sentence of clause 7 (the 12-month provision dealing with disclaimer) should be read independently and is void, the court held that the last sentence must be read in connection with the earlier portion of clause 7 (the use of "If" indicates that connection). The court construed the sentence as an extension of the time for arbitration to 12 calendar months where the insurer has disclaimed liability, rather than an independent, separable ouster of jurisdiction.
The court also observed that even if that last sentence were to be read separately, it would still not oust jurisdiction because parties may validly stipulate a time limit after which rights are lost — a time limit is not the same thing as an absolute exclusion of court jurisdiction under Section 28.
The court therefore concluded clause 7, taken as a whole, requires arbitration of all differences arising out of the policy (including those based on disclaimer of liability) and makes the making of an award a condition precedent to any right of action. Because the insurer had disclaimed liability and the insured had not referred the matter to arbitration, the suit was premature.

Holding and Implications

Core Holding: SUIT DISMISSED AS PREMATURE; JUDGMENTS BELOW SET ASIDE.

The court made the rule absolute, set aside the judgments and decrees of the courts below, and ordered that the suit be dismissed. Each party was directed to bear its own costs throughout.

Practical consequences for the parties: the insured plaintiff's claim for Rs. 1,113.35 was dismissed as premature because arbitration – made a condition precedent by clause 7 of the policy – had not been resorted to after the insurer's disclaimer of liability.

Broader implications: The opinion affirms the validity of Scott v. Avery-type clauses in India and reconfirms that parties may validly make an arbitration award a condition precedent to suit. The court noted the issue was not strictly covered by any single reported decision in India, but it relied on existing Indian decisions and English authority to resolve the question. The opinion does not purport to create a novel legal principle beyond the line of authority it applies.

Rule made absolute.

Show all summary ...

1. This case raises a very important and interesting point as to the right of the party to a contract of insurance to file a suit where under the contract it is provided for that all differences arising out of the policy are to be referred to arbitration and that the making of an award shall be a condition precedent to any right of action against the company. The broad facts of this case are admitted. The opposite party's motor car was insured with the petitioner company and it was involved in an accident on the 8th of March, 1963. The opposite party sent the claim form duly filled in and signed, together with detailed estimate of repairs done by Barman and Company in respect of the damage to whom it had paid a sum of Rs. 1113.35 on this account. The petitioner company by its letter dated the 24th August, 1964 (Exhibit 2) contended that the opposite party had taken away the motor car from the garage and did not give any opportunity to the surveyor appointed by the petitioner company to inspect the car, and as such, the petitioner company repudiated the claim. Thereafter the opposite party filed the instant suit in the court of the Small Causes, at Calcutta for recovery of the sum of Rs. 1113.35 paise. Before the learned trial Judge the petitioner raised only one point and it was to the effect that in view of clause 7 of the Contract of Insurance the dispute in question was to be referred to arbitration, and the making of an award was a condition precedent to the institution of the suit, and as arbitration had not been resorted to, the suit was a premature one and should be dismissed. The learned trial Judge did not accept this contention and decreed the suit. The petitioner filed an application under Section 38 of the Presidency Small Cause Courts Act before the Full Bench of the small causes Court at Calcutta and that Full Bench also upheld the decision of the trial Court. Hence this application.

2. Mr. Gupta, learned counsel appearing on behalf of the petitioner submits that the Courts below have taken an erroneous view of the law. He submits that where, in the contract, there is only a provision for reference to arbitration, then a suit may still lie, and the remedy of the other party would be to apply for stay under Section 34 of the Arbitration Act. He further urges that if, however, in addition there is a clause to the effect that the making of an award shall be a condition precedent to any right of action, that clause is a legal and valid one, and will have to be given effect to, and as in the present case there is such a clause, the suit should have been dismissed, as admittedly there had been no reference to arbitration. It would be convenient at this stage to quote Cl. 7 of the contract of insurance.

3. Clause 7:—

“All differences arising out of this party policy shall 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 arbitrators one to be appointed in writing by each of the parties within one calendar month after having been required in writing so to do by either of the parties or in case the Arbitrators do not agree of an umpire appointed in writing by the Arbitrators before entering upon the reference. The Umpire shall sit with the Arbitrators and preside at their meeting and the making of an Award shall be a condition precedent to any right of action against the company. If the Company shall disclaim liability to the insured for any claim hereunder and such claim shall not within twelve calendar months from the date of such disclaimer have been referred to arbitration under the provisions herein contained then the claim shall for all purposes be deemed to have been abandoned and shall not thereafter be recoverable hereunder.”

4. Mr. Gupta has referred to a number of decisions and also to different parts of Halsbury's Laws of England. I will refer to the same as and when it would be convenient.

5. To have recourse to a Court of law for redress of one's grievances or injury is a fundamental right so to say. It is a facet of the rule of law, and is inherent in every suitor as has been pointed out in the case of Firm Jowahir Singh v. Fleming Shaw and Co. Ltd., AIR 1937 Lah 851. This right has been considered to be so very important that some countries have gone so far as to lay down, either by specific legislation, or through judicial decisions, that its citizens cannot contract themselves out of this right, or, in other words, cannot shut out the jurisdiction of the Courts absolutely by any agreement between themselves. Our country is no exception to this salutary rule, and has provided in Section 28 of the Contract Act, that every agreement by which any party thereto is restricted absolutely from enforcing his rights under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals or which limits the time within which he may thus enforce his rights, is void to that extent. But this proposition is not an absolute one. Law provides also that if the parties so desire they may settle their disputes by arbitration. Exception 1 to Section 28 of the Indian Contract Act is to that effect, and runs as follows:

6. Exception 1:—

“This section shall not render illegal a contract by which two or more persons agree that any dispute which may arise between them in respect of any subject or class of subjects shall be referred to arbitration, and that only the amount awarded in such arbitration shall be recoverable in respect of the dispute so referred.”

7. The leading case in England in this respect is that of Scott v. Avery, (1843-60) All ER 1 : ((1856) 10 ER 1121). In this case Lord Campbell has observed as follows:

“But what pretence can there be for saying that there is anything contrary to public policy in allowing parties to contract that they shall not be liable to any action until their liability has been ascertained by a domestic and private tribunal upon which they themselves agree? Can the public be injured by it? It seems to me that it would be a most inexpedient encroachment upon the liberty of the subject, if he were not allowed to enter into such a contract.”

“An agreement to refer a dispute to arbitration couched in such language as entirely to oust the jurisdiction of the Courts is invalid; but there is no legal objection to an agreement which makes it a condition precedent to the enforcement of a claim that the liability and the amount shall first be determined by arbitration.”

(Halsbury's Laws of England, Third edition, volume 1, pages 17 and 18).

“As a general rule, however, the arbitration clause provides that the award of an arbitrator is to be a condition precedent to any action on the policy, and that no action is to be brought except for the amount of the award. In this case the cause of action is not complete until an arbitration has taken place in accordance with the clause and an award has been made by an arbitrator.” (Halsbury's Laws of England, third edition, volume 22, page 257).

“So long as the arbitration agreement only requires certain condition precedent or subsequent in order to constitute the right of action, it does not oust the jurisdiction of the Court and a provision in an arbitration agreement, known as a Scott v. Avery, (1843-60) All ER 1 : (1856) 10 ER 1121 clause whereby the making of the award is to be considered a condition precedent to any right of action in respect of any of the matters agreed to be referred, is valid.” (Halsbury's Laws of England, 3rd Edition, volume 2, page 19).

8. Even in our country the principles laid down in Scott v. Avery have been followed. The first case of this kind is the Coringa Oil Co., Ltd. v. Koegler, (1876) ILR 1 Cal 466. In this case the contract was to the effect that in case of any dispute the same is to be decided by two competent London brokers—one to be appointed by the buyers and the other by the seller's agents; such broker's decision is to be final. The contract did not provide that no action should be brought till such decision was pronounced. The Court on a consideration of Section 28 of the Contract Act came to the conclusion that such clause is legal and valid. This Court observed as follows:

“That section does not apply to contracts which merely contain a provision for referring disputes to arbitration but to those which wholly or partially prohibit the parties from having recourse to a Court of law. If, for instance, a contract were to contain a stipulation that no action should be brought upon it, that stipulation would, under the first part of Section 21, be void, because it would restrict both parties from enforcing their rights under the contract, in the ordinary legal tribunal, and so, if a contract were to contain a double stipulation, that any dispute between the parties should be settled by arbitration and that neither party should enforce their rights under it in a Court of law that would be a valid stipulation, so far as regards its first branch, viz. that all disputes between the parties should be referred to arbitration, because that by itself would not have the effect of ousting the jurisdiction of the Courts; but the latter branch of the stipulation would be void; because by that, the jurisdiction of the Court would be necessarily excluded. Then the first exception in the 28th section applies only to a class of contracts where (as in the cases of Scott v. Avery, (1843-60) All ER 1 : (1856) 10 ER 1121) and Tredwen v. Holmon, ((1862) 7 LT 127 cited by Phear, J.) the parties have agreed that no action shall be brought until some question of amount has first been decided by a reference, as for instance, the amount of damage which the assured has sustained in a marine or fire policy. Such an agreement does not exclude the jurisdiction of the Courts; it only stays the plaintiff's hand till some particular amount of money has been first ascertained by reference.”

9. The other important case in this respect is the case of M. D'cruz v. Secretary of State for India in Council (1936) 40 Cal WN 865. In that case Rule 26 of the Provident Fund Rules came up for consideration and it was provided therein that in cases of dispute the matter in dispute was to be referred in writing to the Advocate General or Standing Counsel in Calcutta and an award, order or decision of the said referee shall be a condition precedent to any right of action of any party in difference in respect of any of the matters by the rules provided or in any way arising there out or connected there with and whatever award, order or decision shall be made by the said referee shall be binding and conclusive on all parties and shall be final to all intents and purposes without any appeal. No reference contemplated by the rule was made in that case. The Court observed as follows:

“The legality of a clause in a contract to the effect that no cause of action can accrue until a third person has decided on any difference that may arise between the contracting parties was recognised long ago in Scott v. Avery, (1843-60) All ER 1 : ((1856) 10 ER 1121). In Aghore Nath Baneriee v. Calcutta Tramways Co. Ltd., ((1885) ILR 11 Cal 232) this Court held that there is nothing in the Contract Act which prevents the principle from being applicable from Trainor v. Phoenix Fire Assurance Co., (1891-65 LT 825) that the principle holds good when the referee has power to determine liability and his decision is not limited to quantum. It follows, therefore, that the plaintiffs have no cause of action in respect of the Provident Fund.”

10. From the above discussions the following principles may be laid down. An agreement between the parties by which recourse to a Court of law is absolutely prohibited would be against Section 28 of the Contract Act and would be void, but it is still open to the parties to stipulate by a valid agreement between themselves that any dispute between them will be referred to arbitration and that the making of an award shall be the condition precedent to any right of action. Even our Courts in India have held such a clause to be valid. Such a clause does not close the final door to a Court of law. If it so does, it would be void but it does not do so. The approach to the Court may be not by the straight path, but by the byelanes or in other words, the approach may be a staggered one and that would not be a contravention of S. 28. If there is only a clause to the effect that the parties are to refer the matter to arbitration, then a suit would still lie, and the remedy of the other party would be to apply under Section 34 of the Arbitration Act for a stay of the suit. If, however, the making of an award is made a condition precedent to a right of action, the suit would not lie: and if such a suit is brought, it would be dismissed as a premature one and the party cannot be referred to a prayer for a stay in the suit under Section 34 as S. 34 would not apply, the right of the party to file a suit being staggered.

11. Mr. Amarendra Mohan Mitra, learned advocate appearing on behalf of the opposite party, submits that the principles of Scott v. Avery, (1843-60) All ER 1 : (1856) 10 ER 1121 do not apply to cases in India and that if there is any clause in any contract under which the making of an award is made a condition precedent to a right of action, that would be offending Section 28 and would be void. I am not in a position to accept the proposition of Mr. Mitra in view of the fact of independent decisions referred to above.

12. Mr. Mitra has relied on the case of AIR 1937 Lah 851 which has been referred to above, but that case does not lay down such a proposition of law. In that case there was no clause to the effect that the making of an award shall be a condition precedent to any right of action, and that decision does not refer to any such clause. Moreover the cases I have referred to above will show that this contention is not correct.

13. Mr. Mitra submits further that the last sentence in clause 7 of the contract of Insurance is to be read independently and separately, and that this clause is void, inasmuch as, it limits the right of the party to have recourse to any Court of law, and as such, contravenes Section 28 of the Contract Act Let us examine this proposition of Mr. Mitra carefully. In the first place, I do not think that this last sentence in clause 7 can be read divorced from the previous portion of the same clause. The use of the term “If” at the beginning of this last sentence would also show that it is to be construed with reference to the foregoing provision in the same clause. In my view, the only reasonable construction of this portion would be that under the earlier portion of Cl. 7 all differences are to be referred to the decision of the Arbitrator within one calendar month after having been received in writing so to do, but if the differences relate to the disclaimer of liability to the insured, then this time is extended in favour of the insured to a period of 12 calendar months from the date of such disclaimer. Or in other words, such an arbitration is to be resorted to within twelve months from the date of disclaimer instead of one month as in the earlier portion of the same clause.

14. Even assuming Mr. Mitra's contention in this respect to be correct and this portion to be read separately and independently, still I do not think that it ousts the jurisdiction of the Court at all. It is perfectly open to the parties to a contract to stipulate that the other party would lose his right to enforce it on the lapse of a particular time, or in other words, to have a time limit for the purpose of the contract, and to provide that if it is not performed within the time stipulated by parties concerned, the other party would lose his right. That is not a case of ouster of jurisdiction of Courts. In this view of the matter this clause cannot be held to have contravened the provision of Section 28 of the Contract Act.

15. Mr. Mitra next submits that this portion is to be read separately and Independently and as this clause does not refer to the making of an award as a condition precedent to a right of action, the suit would lie and the only remedy of the other party would be to apply for a stay of the suit under Section 34 of the Arbitration Act. If this portion is read independently and separately, then I will have to uphold the contention of Mr. Mitra. But as I have already pointed out, this later portion also forms an integral part of Cl. 7, and cannot be read divorced from the rest of the clause. In the circumstances, this contention of Mr. Mitra also fails. Clause 7, in my opinion, clearly indicates that all differences between the parties arising out of the policy including the differences based upon disclaimer of liability by the Insurance Company, will have to be referred to arbitration, and that the making of an award was to be a condition precedent to any right of action against the company. J., this particular case, as I have pointed out in the earlier portion of my judgment, the insurance company had disclaimed its liability in to, and it was therefore, necessary for the opposite party to have referred the matter to arbitration before it could file the instant suit. As that has not been done, the suit is premature and must be dismissed.

16. The result, therefore, is that this Rule succeeds and is made absolute. The judgments and decrees passed by the Courts below are set aside and the suit be dismissed. Each party will bear its own costs all through. I must place on record, the help and assistance I have received from Counsel on both sides in deciding this case, which does not appear to be covered strictly by any reported decisions in our country.

17. Rule made absolute.