Essar Steel India Ltd. v. New India Assurance Co. Ltd.

Policy ("the policy"). ESSAR is the insured entity under the policy. New India Assurance being the insurer under the policy, has opposed the present Application on the basis that (i) no Arbitration Agreement exists between the parties; and (ii) without prejudice, the Applicant has foregone and/or waived any entitlement it may have had to refer the present dispute to arbitration.

2. A brief narration of the factual background in which the present Application has been filed is set out below.

2.1 Initially, a Comprehensive Mega Risks Insurance Policy bearing Policy No. 12140011/08/06/00000550 was issued by the New India Assurance to ESSAR for the period 1st September 2008 to 31st August 2009. It is not in dispute that this policy was renewed from time to time and premium in respect thereof has been paid. The latest renewal resulted in the subject Policy which is in issue in the present Application. This Policy was dated 11th January 2012 and was for the period 1st September 2011 to 31st August 2012. This document is to be found at page 53 of the Application and covers various installations of ESSAR, including but not limited to, the installation at Chitrakonda in Orissa, which is the subject of the present dispute. The Policy covered risks in relation to damage to insured property as well as losses caused due to business interruption. The Policy contains an arbitration clause, under which the present application has been moved.

2

2.2 The arbitration clause, contained in Clause 8.12 of the policy (page 77 of the Application) reads as under:

"8.12 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 other 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 arbitrators, 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."

2.3 ESSAR by its communication dated 31st October 2011 informed New India Assurance of an attack on the slurry pipeline by "unknown miscreants" on 24th October 2011, 26th October 2011 and 29th October 2011.

3

2.4 On 2nd August 2013, by a letter (page 81 of the Application) New India Assurance avoided the Policy and repudiated liability, inter alia, on account of the non-disclosure and misrepresentations on the part of ESSAR. New India Assurance took the position that ESSAR had failed to discharge its disclosure obligations and had withheld material facts while misrepresenting the real position to New India Assurance . More particularly, ESSAR had failed to mention similar incidents which had taken place on the same pipeline and, accordingly, New India Assurance was unable to accurately assess the risks. ESSAR had also failed to disclose that it had requested the State of Orissa for deployment of armed police in or around May 2010 and thereafter again in November 2011. New India Assurance referred to various press reports disclosing alleged nexus between ESSAR and the Maoist / Naxalites. These press reports, suggested that on 9th October 2011 the police in Chhattisgarh had arrested two men associated with ESSAR with large amounts of cash which they claimed were towards payments to be made on behalf of ESSAR to the Maoists. It was also reported that in the preceding 6 months, ESSAR had paid a sum of approximately Rs.7 - 8 crores to its contractor purportedly for onward payment to Maoists/ Naxalites. In or around September 2011, a General Manager of ESSAR was himself said to have been arrested with respect to these investigations. It was reported that ESSAR was channeling funds to the Maoists through an NGO called "Jai Johar", to whom payments of approximately Rs. 9 crores had been made. By its said letter, New India Assurance made it clear that in light of these non-disclosures and

4

misrepresentations, New India Assurance was avoiding the Policy and denying its liability in toto, inter alia, recording as under:

"Essar Steel's failure to make a full and frank disclosure, including as outlined above, entitles New India to avoid the Comprehensive Mega Risk Policy ab initio. New India does hereby avoid the policy ab initio and gives notice of that fact. New India considers Essar Steel's non- disclosures and misrepresentations to have been fraudulent and to have been in bad faith but, strictly without prejudice to the same, New India also hereby tenders the return of the premium paid."

In addition to this denial of liability and the avoidance of the Policy ab initio, New India Assurance had also stated, without prejudice to its contention that the Policy was void, that (i) the claim of ESSAR fell within the exclusions mentioned in the Policy; and (ii) insufficient documentation and information had been provided by ESSAR to substantiate its claims under the Policy.

2.5 By its letter dated 29th January 2014, ESSAR responded to the letter of New India Assurance dated 2nd August,2013, wherein ESSAR stated, inter alia, that all necessary information as sought for during the issuance of the Policy had been provided. It stated that, at no point of time before the claim was made, was any issue raised regarding the presentation of risk. It was contended that New India Assurance had always been aware of the nature of risk it was undertaking to insure and had charged a higher premium as a result thereof. It was contended that an insurer is bound to have knowledge of matters which are in the public domain and which they

5

might be fairly expected to know. Accordingly, New India Assurance could not now pretend to be ignorant about the risks it had undertaken to cover. ESSAR in its said letter also stated that the avoidance of the Policy through the letter dated 2nd August 2013 was an after-thought resorted to as a result of the substantial claim made by ESSAR. Therefore, ESSAR called upon New India Assurance to review its stance and confirm that it would process ESSAR's claims under the Policy.

2.6 On 16th April 2014, the Advocates for ESSAR addressed a letter (page 100 of the Application) invoking arbitration. This letter stated that New India Assurance through its letter of 2nd August 2013 had wrongfully and unilaterally sought to avoid liability under the Policy. It was stated that New India Assurance had incorrectly declared the Policy void ab initio on the ground of non-disclosure and misrepresentation. In view of this denial of liability, the Advocates for ESSAR stated that they were constrained to invoke arbitration under Clause 8.12 of the Policy. The Advocates for ESSAR proposed a name for appointment as sole arbitrator and requested New India Assurance to confirm the same.

2.7 In response to this, by its Advocates' letter dated 22nd May 2014 (page 105 of the Application), New India Assurance took the position that a reference to arbitration was not permissible. It stated that Clause 8.12 under which arbitration had been sought to be invoked did not cover disputes wherein liability had not been admitted by New India Assurance. It was pointed out that ESSAR's notice of

6

arbitration dated 16th April 2014 itself took cognizance of the position that liability had been denied by New India Assurance . Therefore, there was no question of proceeding with arbitration in relation to the dispute.

2.8 On 21st June 2014, New India Assurance filed a Suit before the Learned Civil Judge, Senior Division, Vadodara (hereinafter referred to as "Baroda Suit") seeking, inter alia, a declaration that the Policy was null and void ab initio and not binding on New India Assurance.

2.9 On 10th March 2015, ESSAR filed a Civil Application under Order VII Rule 11 of the Code of Civil Procedure, 1908 ("CPC") in the Baroda Suit wherein it contended that the Baroda Suit ought to be rejected on account of alleged infirmities in the repudiation of the claim by New India Assurance, non-joinder of necessary parties and on the basis that it was not properly verified. The pleadings in this Civil Application are complete and it is presently pending adjudication by the Learned Civil Judge, Senior Division, Vadodara.

2.10 On 24th September 2015, ESSAR subsequently filed a Civil Application in the Baroda Suit under Section 8 of the Act contending that the Arbitration Agreement under Clause 8.12 of the Policy would preclude the Baroda Suit from continuing. The pleadings in this Civil Application are also complete and it is presently pending adjudication before the Learned Civil Judge, Senior Division, Vadodara.

2.11 The present Arbitration Application was filed by ESSAR on 16th September

7

2015. New India Assurance filed its Affidavit in Reply dated 26th February 2016, to which ESSAR filed its Rejoinder dated 18th March 2016.

3. Mr. Nankani, the Learned Senior Advocate appearing for ESSAR, during the course of his argument has made the following submissions:

3.1 On a true and correct construction, clause 8.12 of the policy covers three different scenarios. These are:

(a) Where liability is admitted, but quantum is disputed. In such a case, the parties have agreed to the appointment procedure;

(b) where only liability is disputed, but not the quantum. This refers to those situations where the liability under or in respect of which policy has already been excluded at the time when the contract of insurance was concluded. It also covers a situation where a liability alone may be disputed, but not the quantum of damages or claim. These two situations are covered by second paragraph of Clause 8.12;

(c) where both liability and quantum are disputed. The present case is covered by this third scenario as is evident from a plain reading of the repudiation letter dated 2nd August, 2013 (Exhibit-C page 81) wherein New India Assurance has denied liability as well as disputed the quantum of the claim made by ESSAR.

3.2 Paragraph 1 of Clause 8.12 while setting out the procedure for appointment of Arbitrator, when there is a dispute as to the quantum, expressly provides that such

8

procedure of appointment is limited to disputes as to the quantum "independently of all other questions". If paragraph 1 of Clause 8.12 was confined only to disputes in relation to quantum, the words "independently of all other questions" would become redundant. It therefore follows that Clause 8.12 covers all disputes including those in relation to liability but the parties choose to agree on the appointment procedure only in relation to the quantum.

3.3 Since paragraph 1 of Clause 8.12 covers all disputes on account of the words

"independently of all other questions", what is excluded by paragraph 2 of Clause 8.1 are only those limited cases where the liability already stands excluded under or in respect of the Policy. Paragraph 2 of Clause 8.12 does not cover unilateral denial of liability. An assertion by one of the parties of no liability is not excluded by paragraph 2 of Clause 8.12. Paragraph 2 of Clause 8.12, significantly, refers to "no difference or dispute", and does not contain the words "no difference or dispute as to quantum". Paragraph 2 of Clause 8.12, to start with, is wide and generic in referring to all differences and disputes "herein before provided" meaning thereby all disputes or differences where on the question of liability or quantum shall be referable to arbitration, and the only exception would be those cases where the liability of New India Assurance Company has been excluded under or in respect of the Policy. The disputes in the present case are not excluded by any other clause of the Policy. Paragraph 2 of Clause 8.12 would, for example, cover cases falling under Clause 8.1 of the Policy, which provides that this insurance does not cover any loss resulting from

9

damage occasioned by or through or inconsequence, directly or indirectly of any of the occurrences mentioned therein like war, invasion etc.

3.4 It is settled law that the Arbitration Agreement cannot be read in isolation. The scope and ambit of the Arbitration Agreement must be gathered from the overall contract between the parties. On reading the contract of insurance in the present case as a whole, it is clear that paragraph 2 only excludes disputes in relation to liability of New India Assurance excluded under other provisions or clauses of the Policy.

3.5 It is equally settled law that an Arbitration Agreement must be given a pragmatic interpretation as observed and held in paragraphs 88 to 93 of the judgment of the Hon'ble Supreme Court in Enercon (India) Ltd. & Ors. vs. Enercon GMBH & Anr. ¹

3.6 That without prejudice to the above submissions, it is submitted that in the present case New India Assurance has disputed both the liability and quantum. The bar, if so held, under paragraph 2 of Clause 8.12 applies only when there is only denial of liability. Since New India Assurance has denied both its liability and the quantum in its repudiation letter dated 2nd August, 2013 ( Exhibit-C Page 81), these disputes in relation to both liability and quantum are referable to Arbitration.

3.7 That in a similar Comprehensive Mega Risks Insurance Policy for the earlier period (2008-2009), where a similar kind of incident had occurred resulting in a

10

similar type of claim made by ESSAR, New India Assurance had advanced the same reason to repudiate the claim as now advanced viz. that there is no liability on the part of New India Assurance since the contract of insurance is bad in law and null and void, on account of failure on the part of ESSAR to make a full and frank disclosure. This contention of New India Assurance was rejected by this Court by an order dated 8th May, 2013 in Arbitration Application No. 18 of 2013 between the parties. This inter partes order has attained finality because the Special Leave Petition filed by New India Assurance against the said order came to be dismissed by the Hon'ble Supreme Court vide order dated 2nd September, 2015. New India Assurance is therefore estopped from raising the same issue or plea in avoiding reference to Arbitration. Therefore the plea that the contract is ab initio, null and void cannot be a ground for non-appointment of the Arbitrator under Section 11 of the Act.

3.8 That it is true that New India Assurance has filed a Suit before the Civil Judge, Senior Division, Vadodara and before filing the Application under Section 8 of the Act, ESSAR has filed an application for dismissal of the Suit under Order 7 Rule 11 of the Code of Civil Procedure, 1908 on the ground of non-joinder of necessary parties. However, ESSAR has not filed any statement on the substance of the dispute. The Application under Order 7 Rule 11 of the CPC is in the nature of interlocutory or interim application. Relying on the decisions of the Hon'ble Supreme

11

Court in Rashtriya Ispat Nigam Ltd. vs. Verma Transport ²and the decision of the Hon'ble Supreme Court in the case of Booz Allen & Hamilton Inc. vs. SBI Home Finance Ltd. ³it has been submitted that such an application is not a bar for reference to arbitration under Section 8 (1) of the Act and there has been no waiver of the right on the part of ESSAR.

3.9 That since ESSAR has neither filed any statement on the substance of the disputes before the Civil Court nor has it waived its right under the Arbitration Agreement, the disputes are required to be referred to arbitration. This is also the mandate of sub-section (3) of Section 8 of the Act which provides that notwithstanding that an application has been made under sub-section (1) and that the issue is pending before the judicial authority, an arbitration may be commenced or continued and an Arbitral Award made. Consequently, the pendency of the Application under Section 8 (1) of the Act by ESSAR cannot oust the jurisdiction of this Court in the appointment of the second Arbitrator under Section 11 of the Act.

3.10 In the circumstances, it is submitted that the Application be allowed and the second Arbitrator be appointed/nominated.

4. Mr. Dhond, the Learned Senior Advocate, appearing for New India Assurance made the following submissions:

4.1 There does not exist any arbitration agreement between the parties, whereunder a reference to arbitration can be made. A physical presence of an

12

arbitration clause in a contract is not automatically synonymous with an agreement to arbitrate. The physical presence of the arbitration clause in the Insurance Contract policy would not automatically import, or suggest the existence of, an arbitration agreement. What therefore needs to be examined is whether there exists an arbitration agreement, whereunder a reference to arbitration can be made in the present case.

4.2 The question of the existence or non-existence of an arbitration agreement is emphatically and clearly answered by the explicit and unambiguous language of the arbitration clause in the Insurance Contract.

4.3 Clause 8.12 of the Insurance Contract contains the clearest manifestation of the intention of the parties that the remedy of arbitration would only be available where (i) liability was admitted; and (ii) the inquiry/adjudication to be made was solely on quantum. Parties had with open eyes agreed upon a clause under which the mandatory pre-condition or condition precedent was that the Insurance Company had admitted liability, arbitration being restricted to quantum. Viewed in the converse, the parties had categorically, explicitly and unambiguously agreed and stipulated that there would be no arbitration agreement (or for that matter arbitration) where the Insurance Company had disputed liability.

4.4 The words of clause 8.12 were clear and constituted a clear and inherent limitation on the arbitration agreement. A stated limitation in the arbitration agreement could (and ought to be )examined in an application under Section 11, since

13

what the Court was doing was determining the existence of an arbitration agreement. This was very different from deciding whether an individual claim fell within the scope of the arbitration agreement.

4.5 In the present case no arbitration agreement existed.

4.6 More particularly, the manner in which the clear language of Clause 8.12 was being construed by Essar, was patently misconceived and would lead to absurdity. The words of Clause 8.12 are plain and unambiguous and emphatically negates any arbitration where liability is disputed. The first part of Clause 8. 12 requires admission of liability for a matter to be sent to arbitration. The second part explicitly states that no difference or dispute would be referred to arbitration if New India Assurance had disputed or not accepted liability in respect of the Policy. Therefore the clause clearly provided that only disputes regarding the quantum to be paid under the Policy could be sent to arbitration.

4.7 The third part of clause 8.12 was a common term in insurance contracts known as a 'Scott v. Avery' clause. It had repeatedly been considered by various courts including the Hon'ble Supreme Court and the Courts in England to mean that where the disputes related to quantum (as contrasted with liability being disputed), parties could make the determination thereof by an arbitral tribunal a condition precedent to any action. In other words, where liability had been accepted and the quantum was all that remained to be done, arbitration as a condition precedent was valid. Since this case did not relate to a dispute solely with respect to the quantum to

14

be paid under the Policy, but pertained to 'liability' as well, the third part of Clause

8.12 was not per se applicable. As a note, Mr. Nankani also had therefore advisedly confined his arguments and analysis to the first and second part.

4.8 The letter from New India Assurance dated 2nd August, 2013 made it abundantly clear that it had denied its liability outright. New India Assurance had avoided the policy ab initio on account of non-disclosure and misrepresentation. The non-disclosure and misrepresentation was stated to have been fraudulent in nature and in bad faith. Even ESSAR had fully understood the import of this letter dated 2nd August, 2013 as having denied liability and avoided the policy. ESSAR has in its response dated 29th January, 2014 and in its Advocates notice of arbitration dated 16th April, 2014, taken a clear position that New India Assurance had denied liability and avoided the policy. The statement in the letter dated 2nd August, 2013 regarding the insufficiency of information and supporting documents with respect of quantification was made without prejudice to the policy itself being void ab initio and the losses claimed falling within the exclusions contained in the Policy. Therefore, ESSAR's suggestion that the present dispute related to quantum to be paid is incorrect and deserves to be rejected.

4.9 That Clause 8.12 of the Policy expressly excluded any arbitration where liability is denied. Even if the dispute with respect to quantum was coupled with a dispute as to liability, the same could not be referred to arbitration. The submissions made by ESSAR about three types of disputes cannot be accepted. The correct

15

manner of classifying disputes was to categorise them in two classes alone viz. liability disputed and liability not disputed. Once liability is disputed outright, in principle, the question of quantum either does not arise at all or is purely incidental.

4.10 That the submissions advanced on behalf of New India Assurance are fortified by the decision of the Hon'ble Supreme Court in The Vulcan Insurance Co. Ltd. vs. Mahgaraj Singh and another ⁴, the decision of this Court in Tainwala Personal Care Products Pvt. Ltd., Mumbai v. Royal Sundaram Alliance Insurance Co. Ltd., Mumbai ⁵and the decision of the Madras High Court in Jumbo Bags Ltd. vs. The New India Assurance Co. Ltd.⁶

4.11 That the reliance by ESSAR on the decision dated 8th May, 2013 in Arbitration Application No. 18 of 2013 is wholly misplaced. The arbitration clause which was subject matter of the decision dated 8th May, 2013 was entirely different from clause 8.12 of the Policy as rightly held to be so by the Madras High Court in its decision in Jumbo Bags Ltd. (supra).

4.12 Clause 8.12 could therefore not be described as being "unworkable" and hence the ratio laid down in the decision of Enercon (India) Ltd. (supra) would not apply.

4.13 Without prejudice to the contention that no arbitration agreement exists, any entitlement of ESSAR to invoke arbitration stood abandoned in the light of ESSAR having elected a civil remedy in the Baroda Suit. It is submitted that ESSAR has

16

consciously elected a civil remedy by filing an application under Order VII Rule 11 of the CPC in the Baroda Suit and has thereby abandoned his rights to seek arbitration. The Application under Order VII Rule 11 of the CPC was made on 10th March 2015 whereas the application under Section 8 in the Baroda Suit was filed more than 6 months thereafter on 24th September 2015. The latter was clearly filed as an afterthought and could not derogate from the decision and /or election of ESSAR to pursue its civil remedies. It was contended during arguments of ESSAR that the Application under Order VII Rule 11 of the CPC was not made on the merits of the dispute. This is not correct. The expression 'merits of the dispute' cannot be given an unduly restrictive meaning to mean that confined to the correctness of allegations. It includes objections to the structure, frame and content. In particular, ESSAR had raised the fact that the Policy was issued by various co-insurers and had been repudiated by only one. An issue was also raised with respect to the manner in which the Baroda Suit had been verified and the authorization of New India Assurance to file the Baroda Suit. These were issues squarely on the substance of the dispute and attracted the provisions of Section 8(1) wherein a reference to arbitration can only be made if the party so applying does so before submitting his first statement on the substance of the dispute.

4.14 Without prejudice thereto, the Application under Order VII Rule 11 was an application under the CPC and a Suit remedy. It sought a dismissal of the Suit simpliciter, not on a reference to arbitration and therefore manifested a desire not to

17

be arbitrated. In Rashtriya Ispat Nigam Limited (supra), a reply had been filed to an injunction application where ex parte ad-interim relief had already been granted in favor of the Plaintiff and was running against the Defendant. It was in this light that the Defendant had filed its reply to the injunction application and had specifically raised the issue of the dispute being the subject matter of an arbitration agreement. Accordingly, the Hon'ble Supreme Court was pleased to hold that the Defendant would not be precluded by Section 8(1) of the Arbitration Act as a result of his filing the reply to the injunction application. On the contrary, in the present case, ESSAR has itself taken out a proceeding seeking to put an end to the Baroda Suit. Furthermore, this proceeding, while dealing with the alleged infirmities in the repudiation, squarely deals with the substance of the disputes between the parties. As such, even if ESSAR was entitled to proceed to arbitration in respect of the subject dispute, which it is not, it has abandoned these rights by filing the Application under Order VII Rule 11 of the CPC in the Baroda Suit. Again, the distinction drawn in the decision of the Rashtriya Ispat Nigam Limited (supra) between an incidental and supplemental proceeding and the main proceeding would not apply in the present case given that the Application under Order VII Rule 11 of the CPC has been made in the main proceeding inasmuch as it prays for rejection of the Plaint as being barred by law.

4.15 That therefore the above Arbitration Application be dismissed with compensatory costs.

18

5. In rejoinder, Mr. Nankani submitted that the judgment in the case of Vulcan Insurance (supra) was rendered by the Hon'ble Supreme Court in an Appeal arising out of an Application made under Section 20 of the erstwhile Arbitration Act, 1940. The object and purpose as well as the Scheme of the Act of 1996 is entirely different and distinct from that of the erstwhile Act, 1940. The 1996 Act is based on the UNCITRAL Model Law, which is based on minimum judicial intervention where greater and wider powers have been conferred on the Arbitral Tribunal, including the power to determine its own jurisdiction based on the principle of competence- competence enshrined in Section 16. So also, the role of the Courts in the appointment of Arbitrator under Section 11 of the Act is also restricted, more so after the amendment to the Act effective 1st January, 2016. Sub-section (6A) of Section 11 of the 1996 Act, as in force, now provides that the designated Court shall confine itself to the examination of the existence of an Arbitration Agreement and the Arbitration Agreement exists in Clause 8.12. It is submitted that the judgment in the case of Vulcan Insurance Company (supra) rendered under the erstwhile Arbitration Act, 1940 therefore has no application after the coming into force of the Act, specially after the amendment.

5.1 As regards the decision relied upon by New India Assurance in Tainwala Personal Products (supra) , Mr. Nankani submitted that the same is not applicable for two reasons. It deals with the case where the Policy document was not executed and therefore there was no Arbitration Agreement in existence. Secondly, this judgment

19

merely follows the judgment of the Hon'ble Supreme Court in Vulcan Insurance Co. (supra) which, as submitted by ESSAR, is not applicable in the context of the Act of 1996. Mr. Nankani submitted that the judgment of the Madras High Court in the case of Jumbo Bags Ltd. (supra) is not binding on this Court inasmuch as the same does not consider the interpretation or construction of Clause 8.12 as sought to be interpreted by ESSAR viz. the three scenarios covered thereunder. It also does not consider the law laid down by the Hon'ble Supreme Court in Enercon (India) Ltd. (supra).

6. I have considered the submissions advanced on behalf of ESSAR and New India Assurance as well as the case law relied upon by them. As stated earlier, ESSAR has contended that an Arbitration Agreement exists between the parties and this is to be found in clause 8.12 of the Policy. The main thrust of the submission on behalf of New India Assurance is that no Arbitration Agreement exists for the parties to be referred to arbitration and that this is clear from a plain reading of clause

8.12 of the Policy. In view thereof, at the cost of repetition, clause 8.12 of the Policy is once again reproduced hereunder:

"8.12 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 other 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

20

panel of three arbitrators, 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."

7. In my view, a reading of clause 8.12 establishes that the words used therein are plain and unambiguous. Clause 8.12 repeatedly asserts that there would be no arbitration where liability had been disputed. Arbitration was restricted to only those situations where liability had been accepted. Clause 8.12 therefore emphatically negated any arbitration where liability had been disputed. This intention had been repeatedly worked into the words of the clause. The first part of Clause 8.12 itself states that liability must be admitted for a matter to be sent to arbitration. To reinforce this and put matters beyond doubt, the second part explicitly states that no difference or dispute would be referred to arbitration if New India Assurance had disputed or

21

not accepted liability in respect of the Policy. The intention of the parties where liability is disputed is absolutely clear. The clause specifically limited the scope of the arbitration agreement and/or the arbitral reference to matters regarding the quantum to be paid under the policy. The clause specifically excluded or excepted arbitration in cases where liability had been disputed. In other words, the express intention of the parties ( and manifestly borne out by the clear language of the clause itself ) was that there would be no agreement to arbitrate or arbitration, where liability had been disputed (or not admitted). This was not a clause which was unworkable in any manner whatsoever and therefore the paragraphs of the decision in Enercon (India) Ltd. (supra) relied upon by ESSAR would not be applicable whilst interpreting Clause

8.12 of the policy.

11. Therefore, Clause 8.12 of the Policy expressly excludes any arbitration where liability is denied. In view thereof, the moment liability is disputed or denied, arbitration stands excluded. Whether denial of liability is the only defence or whether it is coupled with others (e.g. quantum) matters little. Once liability had been disputed, arbitration is out of the picture. Disputing liability is anathema to arbitration. The two were mutually exclusive. The former operates to exclude the latter. Accordingly, even if matters with respect to quantum is coupled with matters as to liability, the same could not be referred to arbitration.

12. The submissions made by ESSAR about 'three types of disputes' are

22

conceptually and logically flawed. Firstly, the correct manner of classifying disputes, in light of the explicit language employed in Clause 8.12 is to categorize them into two classes alone, viz. (i) liability disputed; and (ii) liability not disputed. The remedy available followed this classification. It would be incorrect or rather illogical to contend that where liability is disputed (simpliciter) arbitration is expressly excluded but where the disputing of liability is coupled with more (e.g. disputing of quantum as well) arbitration is to be the remedy. To interpret Clause 8.12 in such a manner would involve inflicting violence on the plain words and require distorting its clear language. To use the words in the very decision relied upon by ESSAR i.e. Enercon (India) Ltd. (supra) this would not be "within the permissible limits of the law and without stretching it beyond the boundaries of recognition". Moreover, this interpretation cannot hold its own even on a fundamental or conceptual basis. Once liability is denied outright, in principle, the question of quantum either does not arise at all or purely incidental. The correspondence between the parties also makes it clear that the issue in question was regarding the liability of New India Assurance under the Policy rather than the quantum to be paid under the Policy.

13. The decision of the Hon'ble Supreme Court in the case of The Vulcan Insurance Co. Ltd vs. Maharaj Singh and Anr (supra), is of assistance in interpreting the subject clause i.e. Clause 8.12 of the policy. Paragraph 9 of the judgment reads thus:

23

"19. In order to discuss and determine the questions which fall for determination in this appeal it is necessary to read the relevant clauses of the Insurance policies:

"13. If the claim be in any respect fraudulent, or if any false declaration be made or used in support thereof, or if any fraudulent means or devices are used by the insured or any one acting on his behalf to obtain any benefit under this Policy; or, if the loss or damage be occasioned by the wilful act. Or with the connivance of the insured: or, if the claim 66 be made and rejected and an action or suit be not commenced within three months after such rejection, or (in case of an arbitration taking place in pursuance of the 18th condition of this Policy) within three months after the Arbitrator or Arbitrators or Umpire shall have made their award, all benefit under this Policy shall be forfeited."

"18. If any difference arises as to the amount of any loss or damage such difference shall independently of all other questions 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 disinterested persons as Arbitrators ..........And it is hereby expressly stipulated and declared shall be a condition precedent to any right of action upon this policy that the award by such arbitrator, or Umpire of the amount of the loss or damage if shall be first obtained."

"19. In no case whatever shall the company be liable for any loss or damage after the expiration of twelve months from the

24

happening of the loss or damage unless the claim is the subject of pending action or arbitration."

The above clause as is the case in the present was also restricted to those differences arising as to the amount of any loss or damage. The arbitration agreement included a 'Scott v. Avery' clause wherein it was a condition precedent to any right of action or suit upon the policy that an award as to the amount of loss or damage should first be obtained. Even in this case the insurance company had repudiated the claim altogether and had contended that the repudiation of the claim would not amount to the raising of a dispute as to the amount and/or quantum of the loss or damage. It was contended that, only if the rejection had arisen from the amount and/or quantum could the dispute have been sent to arbitration. The Hon'ble Supreme Court agreed with this proposition and stated that, in the event of a rejection of the claim for reasons other than the quantum of loss, the only remedy available to the insured was to commence a civil proceeding. Various judgments of the Courts in England were referred to while considering the 'Scott v. Avery' clause. Relying on these decisions, it was held that the clause would be inapplicable because the disputes raised were not covered by the arbitration itself inasmuch as they did not relate to quantum. The arbitration clause in totality was a carefully drawn clause wherein the parties agreed that the quantum, as distinguished from liability was settled by arbitration. This may result in a situation where two proceedings were necessary, one in respect of quantum and one in respect of liability, but this could not be a grievance of parties who had

25

knowingly entered into the contract. In conclusion, the Hon'ble Supreme Court held that the difference which arose between the insurance company and the insured related to the insurance company's repudiation of the claim, which was not the subject matter of the Arbitration Agreement. Accordingly, the insured's remedy was to file a Suit to establish the liability of the insurance company. The said decision is therefore a binding and authoritative precedent on the interpretation of similar clauses in insurance policies which stipulate that arbitration is a remedy available only when "liability is not disputed" and where liability is disputed the only remedy is filing a Suit. The submission of ESSAR that the judgment in the case of Vulcan Insurance Co. Ltd. (supra) was rendered under the erstwhile Arbitration Act, 1940 and has no application after the coming into force of 1996 Act (specially after the Amendment which has , inter alia, introduced Sub-section 6-A in Section 11) cannot be accepted. Firstly, the introduction of sub-section 6-A is not of much assistance to the Applicant, since as discussed in detail above, and reiterated hereafter, I have specifically examined the issue of the existence of an arbitration agreement and found that no arbitration agreement exists. Hence the argument of the Applicant based on sub-section 6-A lacks merit. Turning now to the argument that the decision in Vulcan Insurance (supra) has no applicability to cases and situations under the 1996 Act, I do not think that the same is correct. Mr. Nankani submitted that the 1996 Act, is based on the UNCITRAL Model and the principle of competence competence and contemplates minimal judicial interference, and a greatly restricted role for Courts

26

(including under Section 11). This is very different from the scheme of the 1940 Act where the room for judicial interference and intervention was greater. He therefore submitted that the decision in Vulcan Insurance (supra) was in a case under Section 20 of the 1940 Act and had thus no applicability under the 1996 Act and was thus neither a binding or a persuasive precedent. I am unable to subscribe to this argument. I do not see how any changes that the 1996 Act may have brought about diminish or dilute the applicability of that decision. To my mind, a considered analysis of the judgment in Vulcan Insurance (supra) makes it evident that the ratio or essence of the decision is on the correct construction or interpretation of a very similar contractual term containing an arbitration clause. In my view the 1996 Act has not brought forth any significant departure (from the 1940 Act position) on how contractual clauses/terms couched in very similar language, are to be interpreted. In my view, the decision of the Apex Court in Vulcan Insurance (supra) on how such clauses are to be understood and the intention of parties is to be inferred, continues to be a binding precedent and judicial discipline and propriety require that this ambitious argument not be countenanced.

14. Even in the case of Tainwala Personal Care Products Pvt. Ltd., Mumbai v Royal Sundaram Alliance Insurance Co. Ltd. Mumbai (supra), an Application under Section 11 of the Act had been filed by an insured against an insurance company. A risk cover note was issued but, in this case, no Policy document was executed. This Court held that there was no specific arbitration agreement which bound the parties

27

and hence an Application under Section 11 of the Act could not be maintained. Nevertheless, despite having reached this conclusion, this Court also examined the arbitration clause contained in the unsigned policy document which was identical to clause 8.12 of our Policy. This Court concluded that even a plain reading of the clause made it evident that it was only when the insurer admitted liability but raised a dispute with respect to the quantum payable under the policy that the matter would be sent to arbitration. Since in that case, like in ours, the insurer had not admitted liability and had in fact repudiated liability, in light of the decision in Vulcan Insurance (supra) this Court concluded that no reference to arbitration could arise. Again, the distinction sought to be advanced on behalf of ESSAR to contend that the above decision does not assist New India Assurance is rejected.

15. In the case of Jumbo Bags Ltd. Vs The New India Assurance Co. Ltd. (supra) the relevant arbitration clause is extracted at paragraph 8 of the judgment which is practically identical to clause 8.12 in this case. In that case, like in the present, the insurance company had taken the position that it was only when the liability was admitted and a dispute arose regarding the quantum that the arbitration clause could be invoked. Since there was no dispute as to quantum and there had been a total repudiation of the insurance contract, the invocation of the arbitration clause was not tenable. In paragraph 13 of this judgment, the decisions in Vulcan Insurance Company (supra) and Tainwala Personal Care Products Pvt. Ltd. (supra) were considered and relied upon in support of the proposition that only disputes regarding

28

the quantum of damage could be referred to arbitration and that no application under Section 11 would be maintainable if the insurers had repudiated their liability in respect of the respective policies. Pertinently, the Madras High Court also dealt with arguments based on the decision of this Court dated 8th May 2013 relied upon by ESSAR. This decision was distinguished on the basis that the arbitration clause in that case was entirely different. The language used in the arbitration clause considered by this Court in its decision of 8th May 2013 was as follows: "If the insured-and-Underwriters fail to agree in whole or in a part regarding any aspect of this policy". It was because of the very wide language employed therein ("any aspect of this policy") that this Court had held that the contention that the Policy was void ab initio was itself arbitrable. The Madras High Court even considered the implication of the decision of the Hon'ble Supreme Court in Booz Allen and Hamilton Inc v SBI Home Finance Ltd (supra) with respect to the proposition that the role of a Court in an Application under Section 11 of the Arbitration Act was only to examine the existence of an Arbitration Agreement. It concluded that where the arbitration clause specifically excluded arbitration in certain circumstances, the matter could not be referred to an arbitrator for adjudication of what had been specifically excluded. As such, there was no arbitration agreement in existence in relation to such matters. It was reiterated that the clause made it explicitly clear that what could be referred to arbitration was only the quantum to be paid under the Policy. The arbitration clause was specifically circumscribed by the stipulation

29

"liability being otherwise admitted". Therefore, unless the insurance company admitted that in principle it was liable although to payment of a lesser amount, the issue of liability would not be determined in arbitration. The interpretation of a contract to make any part of it otiose would not be accepted. If the contention of the insured was to be accepted, it was held that the phrase "liability be otherwise admitted" would become superfluous / otiose. The Madras High Court was also of the view that any doubt that may remain had been removed by the second part of the arbitration clause which stipulated (as it does in our case) that the parties had clearly agreed and understood that there would be no reference to arbitration if the insurance company had not accepted liability under the Policy. Once the insurance company was of the view that it was not liable to pay a single penny, not on the issue of quantification, but as a concept, the arbitration clause would stand excluded. It was therefore held that taking a contrary view would amount to a creation of an arbitration clause over a subject matter where there was no such clause. Accordingly, the Madras High Court held that the remedy of arbitration would not be available since the claim had been repudiated in toto and that the only remedy available was to file a civil Suit. The reasons given on behalf of ESSAR in support of its contention that the decision in the case of Jumbo Bags Ltd. (supra) is not binding on this Court are untenable and baseless and hence rejected.

16. The reliance by ESSAR on the decision dated 8th May 2013 of this Court in Arbitration Application No. 18 of 2013 is wholly misplaced. For convenience, the

30

arbitration clause of the policy in that case is set out hereunder :

"18. Arbitration:

If the Insured-and-Underwriters fail to agree in whole or in part regarding any aspect of this Policy, each party shall, within ten (10) days after the demand in writing by either party, appoint a competent and disinterested arbitrator and the two chosen shall before commencing the arbitration select a competent and disinterested umpire."

A perusal of the above clause makes it evident that the arbitration clause which was the subject matter of the decision dated 8th May 2013 was entirely different from Clause 8.12 of the Policy as rightly held to be so by the Madras High Court. The arbitration clause in consideration there did not have any exclusion for a situation where liability was denied nor did it contain any restriction to its application only in disputes regarding quantum. As such, ESSAR's reliance on this decision is completely misplaced. Reference is also made to paragraph 27 of the Application where it was contended by ESSAR that Clause 8.12 and the clause under consideration in the decision dated 8th May 2013 were "almost similar clauses". A bare reading of the two clauses side by side would make it clear that they are entirely different and the said decision therefore is of no assistance to ESSAR.

17. It is therefore clear that the Policy has been entered into between two business entities both of whom should be familiar and conversant with the legal implications

31

of agreements they enter into. The arbitration clause contained in the Policy is a carefully worded clause that records the Agreement between the parties for what can be determined by arbitration and what cannot. It is trite law and has been specifically stated in the decision of he Hon'ble Supreme Court in Enercon (India) Ltd. (supra) that the construction of arbitration clauses should take into account a common sense approach where the Court must adopt the attitude of a reasonable business person having business common sense as well as being equipped with the knowledge which may be peculiar with that business venture. In other words, Courts should not adopt a hyper-technical approach or a purely legalistic mind set while construing an arbitration agreement or clause. Even when faced with a seemingly unworkable arbitration clause, the Court should attempt to make it workable within the permissible limits of the law but cannot stretch it beyond the boundaries of recognition. Unfortunately, the interpretation sought to be given by ESSAR to Clause

8.12 of the Policy falls squarely within stretching it beyond the boundaries of recognition. It is ESSAR which is adopting, and asking this Court to adopt, a pedantic and over-ambitious approach to construe Clause 8.12. The clause itself is neither unworkable nor in need of any interpretative gymnastics.

18. Clause 8.12 contemplates arbitration only on quantum where liability is otherwise admitted such cases can be sent to arbitration. If liability is denied or disputed, the remedy of arbitration is not open. This is clear in itself from the first part of Clause 8.12. However, to ensure that there is no scope for doubt, the parties

32

have inserted the second part of Clause 8.12, which records the clear Agreement and understanding between the parties that parties would not be referred to arbitration if the insurance company has disputed or not accepted liability in respect of the Policy. No amount of ambitious interpretation can derogate from the ordinary, common sense and business minded understanding of this clause.

19. According to New India Assurance, this Court should affirm the same construction placed on the clause by other Courts so that there is certainty and consistency of approach when dealing with standard clauses such as the present. In its letter dated 2nd August 2013, New India Assurance has made it amply clear that it has repudiated and avoided the Policy ab initio. A bare reading of this letter will show that New India Assurance has denied liability entirely. Even the contemporaneous correspondence evidences this as being the understanding between the parties. The letters from ESSAR dated 29th January 2014 and from its Advocates dated 16th April 2014 take umbrage to what they regard an unlawful and wrongful denial of liability. None of this correspondence would support the argument that the present dispute is a dispute with respect to quantum.

20. To attempt bypassing this insurmountable hurdle, it has been argued on behalf of ESSAR that, where a mixed dispute regarding liability and quantum arises, it should be sent to arbitration. This flies in the face of a plain reading of Clause 8.12. The said clause does not contemplate three situations i.e. dispute relating to

33

quantum; dispute relating to liability; and dispute relating to both quantum and liability. It is clear in its application that only disputes as to quantum will be referred to arbitration and that disputes where liability is denied will not be referred to arbitration.

21. ESSAR's contention that the letter of 2nd August 2013 also questioned the quantum is clearly misconceived. Once liability is denied, challenging the quantum is immaterial since, on principle, the insurance company has refused to pay a penny. This being so, a without prejudice statement made that the quantification of loss had also not been supported cannot be stretched to suggest that the dispute is one relating to quantum. As held in the judgments of the Hon'ble Supreme Court, this Court and Madras High Court, the ambit of the Arbitration Agreement contained in Clause 8.12 of the Policy is clear. Once liability is denied, the only remedy available to the insured is to file a Suit. I therefore hold that no Arbitration Agreement exists between ESSAR and New India Assurance in the facts of the present case.

22. In view of this Court having come to the conclusion that no arbitration agreement exists between ESSAR and New India Assurance in the facts of the present case, although it is not strictly required to enter into a discussion regarding the Application under Order VII Rule 11 of the CPC in the Baroda Suit, it appears that ESSAR has clearly made a conscious election to pursue its civil remedies. ESSAR has itself taken out a proceeding, inter alia, with respect to the infirmities in

34

the repudiation by New India Assurance. This is per se on the substance of the dispute and falls within Section 8(1) of the Arbitration Act. Having elected to pursue civil proceedings, ESSAR cannot now seek a reference to arbitration.

23. In light of the aforesaid, the present Arbitration Application is not maintainable and is dismissed. However, there shall be no order as to costs.

(S. J. KATHAWALLA, J.)

35