A case commentary

Oriental Insurance Company Limited Appellant (s)

VERSUS
M/s Narbheram Power and Steel Pvt. Ltd. Respondent(s)1

(In the Supreme Court of India)

Bench- Dipak Mishra, A.M. Khanwilkar, D.Y. Chandrachud, JJ.

Abstract

Arbitration law aims at saving the courts from being overburdened by cases and encouraging
inter party settlements. This branch of law has always been known to encourage individual
autonomy and freedom, and wishes that individuals resolve their own disputes by ways of
reasonable mediation , and following the terms and conditions of the agreement that they have
entered on their by “keeping their eyes wide open”.

But what if there lies itself ambiguity about the significance and meaning of the terms and
conditions of the agreement as entered by the parties solely based on their individual autonomy
and conscious thinking?

The discussed case tries to answer the aforesaid question. It makes it very clear that an
arbitration agreement is entirely different from all kinds of agreements, and over here, court
cannot interfere at all- even if the terms and conditions of the contract appear to be illogical and
unreasonable- as long as it has been agreed to by both the parties.

The following case commentary would take on over a most recent and landmark judgment in the
field of Indian Arbitration law, and would involve a critical analysis and discussion of the
reasons given and authorities cited in the pronouncement of the judgment, and it would try to
criticize the shortcoming of the judgment, and would also highlight and appreciate the strong
points of the judgment,and in this manner try to bring out a balanced overview of this recent
landmark judgment in the field of Indian Arbitration law.

1
CIVIL APPEAL NO. 2268 OF 2018
(@ S.L.P. (C) No. 33621 of 2017)
Introduction

Arbitration law in India is governed by the Arbitration and Conciliation Act,1996,under which
the parties enter into an agreement to settle or resolve their disputes by a third party(one or more)
, whose proceedings and pronouncement is considered legally binding on the parties.

The legislative history of arbitration in India dates long back in 1772, when the Bengal
Regulation I2 was enacted to enable or rather recommend parties to resolve disputes by means of
intervention of third parties. The Civil Procedure Code of 1859 also gave rise to three kinds of
arbitration3, but none of them were exhaustive of the court proceedings, as all these were
enabling in nature, and not restrictive or exclusive of judicial orders.4 Also, Section 21 of The
Specific Relief Act,1877 provided that , except under the codes provided in the Civil Procedure
Code, no arbitration contract made at the volition of the parties shall be specifically enforced.

Then, there was the Indian Arbitration Act,1899, which allowed for cases filed in the
Metropolitan Cities and containing dispute regarding written submissions to be referred to an
arbitrator. However, as this act provided for very constricted scope of action, the Code of Civil
Procedure 1908 was enacted; it regulated issues relating to misconduct of the arbitrator,
enforcing arbitral award, and gave due importance to opinion of judges on the arbitral award.

But, even this failed to achieve the goal of consolidation of the arbitration laws in India, and so,
The Arbitration Act,1940 was enacted to give the proceedings a “exhaustive” nature and to
relieve the courts of the huge pressure of piled up cases. But, this Act failed in its’ Protocol and
Convention5 as observed by the court and could not maintain its’ objective with the changing
pace of time with economic reforms and opening up of the economy.

So, with the view to facilitate global trade and commerce, there was the enactment of the
Arbitration and Conciliation Act,1996 based on the model of United Nations Commission on
International Trade Law( UNCITRAL) , in consultation with all the member states to enact a
Model Law which would facilitate trade not only on an individual level, but also at a global
level.

2
The Bengal Regulation I, 1776
3
Section 312, Section 325, Section 326,Section 327 of Code of Civil Procedure
4
Jogessur Banerjee v Kulyanee Churn Deo [1875] 24 WR 41
5
Mahomed Haji Hameed v Pirojshaw R Vakharia (1932) 34 Bom LR 697
The main objective of the Act was to adopt the different intricacies and the positive traits of
different legal systems of the world, as to ensure smooth arbitration of particular cases, serving
both individual interests of the parties and also the global interest of the nations involved in inter-
State business to maintain cordial relationship amongst them.

Also, the Act tries to serve the secondary objective of reducing the supervision of Courts in
disposal of such cases.

In the present case, this very objective of the law is being challenged; where despite clear
conditions and terms related to arbitration, the parties asked for supervision of courts on the
interpretation of the terms of the contract. So, a big question is to be answered in the present
case, as an arbitration agreement, is drafted solely on the basis of the discretion of the parties to
it, and when there is an issue with that itself and not with the enforcement with the agreement,
which could have handled under the Arbitration and Conciliation Act,1996, how the Court is
going to deal with it- in terms of giving meaning to the terms of the contract, and if it is an
arbitration agreement that relates to a special form of contract i.e. insurance?

Facts of the case

In the Oriental Insurance Company Limited, herein the appellant and M/S Narbheram Power and
Steel Pvt. Ltd. ,herein the respondent, had entered into an agreement of insurance, where the
appellant insured the building and apparatus of the respondent and agreed to bear the loss of any
damage that occurs due to natural causes and forces. Also, Clause 13 of their agreement states it
clearly that any dispute regarding the admission of the liability of the claim will not be referred
to any arbitration , but any question regarding the quantum of damages , after the admission of
the liability by the respondent, can be referred to arbitration, and this would be the only grounds
on which an arbitration may be called upon.

In October 2013, there was a cyclone named as “Phailin” which affected large parts of the State
of Odisha. Because of the said cyclone, the respondent suffered damages which it estimated at
Rs. 3,93,36,224.00. An intimation was given to the appellant-insurer and it appointed one Ashok
Chopra & Company as surveyor which visited the factory premises on 20th and 21st November,
2013. A series of correspondences were exchanged between the respondent and the insurer. On
22.12.2014, the respondent commented on the surveyor’s report and requested the appellant to
settle its claim. As ultimately the claim was not settled, the respondent sent a communication
dated 21.01.2017 intimating the appellant that it had invoked the arbitration agreement and
requested it to concur with the name of the arbitrator whom it had nominated. The appellant
replied to the said letter repudiating the claim made by the respondent and declined to refer the
disputes to arbitration between the parties. As the insurer declined to accede to the request made
by the respondent, it filed an application under Section 11(6) of the Arbitration and Conciliation
Act, 1996 (for brevity the “1996 Act”) for appointment of an arbitrator so that he could, along
with the arbitrator nominated by the respondent, proceed to appoint a presiding arbitrator to
adjudicate the disputes and differences that had arisen between the parties.. The said application
was contested by the insurer. The High Court, considering the language employed in Clause 13
of the policy and the reasons advanced while repudiating the claim of the claimant, appointed a
retired Judge of the High Court as arbitrator. The said order was then contested and put into
appeal in the Supreme Court of India.

Issues raised
The main legal contentions raised in the case were four-
1. Whether the two parts of the Clause 13, one which speaks about the admission of a claim
and one which speaks about the quantum of damages, with respect to arbitration , should
be read in harmony or to be read disjoint?
2. Whether the words in an arbitration agreement mean only what the parties intend it to
mean or can they be assigned any other meaning as given by any statutory provisions or
judicial pronouncements?
3. Whether the “Scott vs Harvey”6 principle is to be applied in the present case?
4. Whether an arbitration agreement arising out of an insurance agreement be given any
special consideration as under contracts which are of commercial in nature or should be
dealt with as any other ordinary arbitration agreement?

Decision of the court

6
(1856) 25 LJ Ex 308 : 5 HLC 811 : 4 WR 746
The court held that the appeal is allowed and the appointment of the arbitrator by the High Court
is of impugned nature and no arbitration process would take place in the present case as it does
not satisfy the conditions necessary for arbitration as expressed in the present case, rather it falls
exactly under such a situation in which no arbitration would take place ,as expressed in the
arbitration agreement.
The authorities cited by the court and the reasons given would be discussed now and a critical
analysis of them would be made.

Critical Analysis of the Decision

This decision would remain to be a landmark decision in the field of arbitration law in India, for
two reasons-
1. It made it clear that an arbitration agreement arising out of an insurance agreement would
be treated just in the same manner as any other arbitration agreement, and not under a
special treatment as of any other transactional and business agreement.
2. In an arbitration agreement, words would meaning only what the parties intend to mean ,
and no far fetched meaning would be given to the words as under any statutory
provision, or other legal provisions.
The given case revolves around the Clause 13 of the Insurance policy, let us first see what does it
talk about-
“If any dispute or difference shall arise as to the quantum to be paid under this policy (liability
being otherwise admitted) such difference shall independently of all questions be referred to the
decision of a sole arbitrator to be appointed in writing by the parties to or if they cannot agree
upon a single arbitrator within 30 days of any party invoking arbitration, the same shall be
referred to a panel of three arbitrator, comprising of two arbitrators, one to be appointed by each
of the parties to the dispute/difference and the third arbitrator to be appointed by such two
arbitrators and arbitration shall be conducted under and in accordance with the provisions of
the Arbitration and Conciliation Act, 1996.

It is clearly agreed and understood that no difference or dispute shall be referable to arbitration as
hereinbefore provided, if the Company has disputed or not accepted liability under or in respect
of this policy. It is hereby expressly stipulated and declared that it shall be a condition precedent
to any right of action or suit upon this policy that the award by such arbitrator/arbitrators of the
amount of the loss or damage shall be first obtained.”

The court relied on the decision of General Assurance Society Ltd. v. Chandumull Jain and
another7 and held that while dealing with the contract of insurance, has opined that such a
contract is entered into on the basis of commercial transactions and while interpreting the
documents relating to a contract of insurance, the duty of the court is to interpret the words in
which the contract is expressed by the parties because it is not for the court to make a new
contract, howsoever reasonable.
But, this can be criticized on the grounds that the abovesaid related to the terms and conditions of
premium payable, which is purely commercial in nature, but not on terms of arbitration
agreement arising out insurance contract. So, reliance upon the context on which a particular
context on which a contract is declared to be of purely commercial in nature , may not be the
same in other contexts too.8

The court further held that the conditions expressly agreed upon the parties are to be respected
and no far-fetched artificial meaning is to be given to the words present in the contract as the
parties enter into the contract with their eyes wide open.
This approach taken by the court can be contested on the grounds of “principle of
unconscionability of the terms and conditions” 9 where the parties have unconsciously entered
into a contract without the conscious understanding of meaning and significance terms and
conditions of the contract , and here the court must intervene to resolve the ambiguity in the
interpretation of the contract i.e. the arbitration agreement in the present context.

The court referred to the authority of the case of Deep Trading Company v. Indian Oil
Corporation and others10, the court referred to a case dealing with limitation of period of

7
AIR 1966 SC 1644
8
Ponnamma v Kotamma AIR 1932 Mad 745
9
Newton Engineering and Chemicals Limited v. Indian Oil Corporation Limited and others (2013) 4 SCC 44
10
(2013) 4 SCC 35
referring a dispute before the arbitrator, as agreed to by the parties, where it was held that the
Court cannot interfere with the terms of contract even if they are ambiguous as to the parties.
This ground taken by the court can be criticized in the above said case , there was a foreplay of a
statutory provision, regarding the filing of claims i.e. the Limitation Act,1963, and ignorant to
which the parties drafted the arbitration agreement, which cannot be ignored by the Court. But,
in the present case there has been no such presence of a statutory provision and the Court could
have decided to resolve the ambiguity by itself.
The Court scanned the anatomy of Clauses 13 and 18 and then referred to the decision in Scott v.
Avery11 naming the clause to be Scott v. Avery clause and quoted a passage from Russel on
Arbitration which is to the following effect:-
“Even a clause of this type, however, is not absolute in effect: where the court orders that the
arbitration agreement cease to have effect in relation to a particular dispute, it has a discretion to
order further that the Scott v. Avery clause cease to have effect too”.12
Reliance was placed upon a few paragraphs of the Fifth Edition of MacGillivray on Insurance
Lawby the learned counsel for the respondent. The said passage reads thus:-
“There is a rule of law that parties cannot by their private contract oust the jurisdiction of the
court; but it has been held that parties to a contract may nevertheless agree that no cause of
action shall arise upon it until any matter in dispute between them shall have been determined by
arbitration and then only upon the arbitrators‟ award.”
On behalf of the respondent, the following passage was taken aid of-
“As a rule, where the amount of the loss or damage is the only matter which the parties refer to
arbitration, then if the insurers repudiate any liability on the policy there is no obligation on the
assured to arbitrate as to the amount before commencing an action on the policy.”
The Court though accepted the reliance as raised by the appellants ,but could not provide a
satisfactory reason and justification so as to why the authority cited by the respondents were not
valid.
Dislodging the judgment of the High Court, this Court ultimately held:-
“But in this case on a careful consideration of the matter we have come to the definite conclusion

11
(1856) 25 LJ Ex 308 : 5 HLC 811 : 4 WR 746
12
H. Russell,, Russell on Arbitration, Pg. 407, 23 rd Edition, Sweet and Maxwell
that the difference which arose between the parties on the company‟s repudiation of the claim
made by Respondent 1 was not one to which the arbitration clause applied and hence the
arbitration agreement could not be filed and no arbitrator could be appointed under Section 20 of
the Act. Respondent was ill-advised to commence an action under Section 20 instead of
instituting a suit within three months of the date of repudiation to establish the company’s
liability.”
It may be considered while arriving to the conclusion of what is to be considered while deciding
on the appointment of Arbitrator , the Court has placed reliance on the Section 20 of the Act, but
it was held in the case of Ranjeet Combine v B N Khanna13 that “ while deciding the validity of
the arbitrator as appointed , only the provisions of the arbitration agreement to be taken care of
and not of any other section of the Arbitration Act”.
This case appears to be materially overlooked by the Court.
The Court further opined that -
“It is our obligation to mention here that though the respondent has placed reliance upon the said
authority, yet the same does not assist him. On the contrary, it dispels the perception of
ambiguity in Part II and Part III of the arbitration clause as perceived by the High Court. That
apart, it throws light on the issue of repudiation”
Now, coming to the appreciable parts of the judgment-
1. It made it clear that the Part II and Part III of the .judgment to be read in a disjoint
manner, as one relates to arbitration and other relates to suit. The High Court made the
mistake of not being able to separate the ambit between the two.
2. Also, made it very clear that the meaning to the terms as expressed and agreed by the
parties , have to be rendered as it is and no far fetched artificial meaning would be
ascribed to it, as it would be held that the parties have entered the contract with their eyes
wide open, and they cannot take the plea of being unconscious to the meaning and
significance of terms and conditions of the arbitration agreement.

Conclusion

13
2000 (3) ARBLR 348 Delhi, 86 (2000) DLT 687
The Supreme Court with the help of this case achieve two very important objectives. It provided
the much needed direction that the parties cannot overburden the courts despite having
arbitration agreements14, as to clarity regarding the terms and conditions and held that the
arbitration agreement is to be treated as per the express provisions of it, and no further
interpretation of it is to be entertained by the courts.
It also achieved the second objective of declaring that an arbitration agreement as contained in
the Insurance policy is to treated just like other arbitration agreement and no special treatment is
to be given as to other commercial transaction contracts.
It is lastly submitted that the decision would serve as a landmark decision in the days to come in
field of Indian arbitration law, but it was highly expected to explore the sphere and basis of
distinguishing the Insurance policy as against the commercial business transactions with better
legal clarity.

14
Firm Ashok Traders v Gurumukh Das Saluja (2004) 3 SCC 155