Prohibition Under Arbitration Clause To Refer A Dispute Equivalent To Non-Existence Of Arbitration Agreement: Andhra Pradesh High Court

"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…"

Justice R. Raghunandan Rao observed, "It is clearly agreed and understood that no difference or dispute shall be referable to arbitration as herein before provided if the company has disputed or not accepted liability under or in respect of this policy..."

Brief Facts of the Case

The applicant is a wholly owned Government of India undertaking engaged in the business of Telecom Services Operations. The applicant as part of its activities, had been offering WLL Mobile handsets to its customers. With a view to insure itself against any losses that may arise out of losses of these mobile handsets, the applicant had obtained an Insurance Policy from 1^st Respondent Company which was a general insurance company.

The applicant had raised a claim of Rs. 77,22,372/- towards compensation for losses incurred by applicant due to non-return of 1234 mobile handsets by its subscribers. The 1^st respondent refused to pay the claim amount. The applicant had thereafter issued notice invoking arbitration clause in the insurance policy, calling upon the respondents to agree to the appointment of a former Judge as a sole arbitrator to resolve the disputes. The respondents vide its replies refused to appoint an arbitrator. On account of said refusal, the applicant approached the Court by way of an application under Section 11 of Arbitration and Conciliation Act, 1996.

Contentions of Both sides

The contention of the respondent was that the respondent had rejected the entire claim of the applicant and the stipulation in arbitration clause stated that no dispute shall be referable to arbitration where the insurance company disputed the liability under the policy. It was contended that the respondents had rejected the entire claim and as such there was no arbitration agreement under which the dispute relating to claim could be adjudicated.

The counsel for petitioner submitted that the question of arbitrability of dispute was a matter which should be referred to arbitrator and the said question could not be looked by the Court in a Section 11 application.

Observations of the Court

Justice R. Raghunandan Rao relied on United India Insurance Company Limited vs. Hyundai Engineering and Construction Company Limited (2019) in which the Hon'ble Supreme Court had held after considering the arbitration agreement which was pari materia to the clause set out in the present case that an application for appointment of an arbitrator would be maintainable where the dispute was in relation to quantum of compensation and such an application would not be maintainable if the dispute related to the very liability of insurance company.

In another case Pravin Electricals Private Limited vs. Galaxy Infra and Engineering Private Limited (2021) the Hon'ble Supreme Court had held that when there was no arbitration clause, on the face of the agreement, the Court can reject an application for arbitration.

The court held as:

In the present case, the facts are clear that the respondents have rejected the claim in toto and the prohibition set out in the arbitration clause would apply to the present facts of the case. In the circumstances, there would be no necessity to refer the matter to an arbitrator to decide on the arbitrability of the dispute.

In view of the observations, the Arbitration Application was dismissed with the liberty to applicant to file a suit to avail civil remedies.

Counsel for Petitioner – Sri K. Narsi Reddy

Counsel for Respondent- Sri K. Subba Rao

Case Title: M/s. Bharat Sanchar Nigam Ltd., Versus The Oriental Insurance Company Ltd.