No Appointment Of Arbitrator If There Is Violation Of Conditionality Clause In Arbitration Agreement: SC [Read Judgment]

“Arbitration clause would enliven or invigorate only if the insurer admits or accepts its liability under or in respect of the concerned policy “

 While setting aside a Madras High Court judgment appointing an arbitrator ignoring the conditionality clause in an arbitration agreement, the Supreme Court has observed that, even after the 2015 amendment insertion of sub-section 6A in Section 11 of the Arbitration and Conciliation Act, the arbitration clause has to be interpreted strictly considering the conditionality clause.

Context

In an agreement between a JV and insurance company, there is an arbitration clause. The clause also provides that no difference or dispute shall be referable to arbitration if the company has disputed or not accepted liability under or in respect of this policy.

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

The high court order was assailed before the apex court in United India Insurance Co. Ltd. vs. Hyundai Engineering and Construction Co. Ltd.

 To be interpreted strictly

The apex court bench comprising Chief Justice of India Dipak Misra, Justice AM Khanwilkar and Justice DY Chandrachud took note of a judgment rendered by a three-judge bench in Oriental Insurance Company Limited vs. Narbheram Power and Steel Private Limited that held that if a clause stipulates that under certain circumstances there can be no arbitration, and they are demonstrably clear, then the controversy pertaining to the appointment of arbitrator has to be put to rest.

The bench also noted that the reliance placed by the high court in the judgment of Duro Felguera, S.A. vs. Gangavaram Port Limited is misplaced as in that case the bench had made a general observation about the effect of the amended provision and not specific to the issue under consideration.

Allowing the appeals, the bench said: “It is clear that the arbitration clause has to be interpreted strictly. The subject clause 7 which is in pari materia to clause 13 of the policy considered by a three-Judge Bench in Oriental Insurance Company Limited (supra), is a conditional expression of intent. Such an arbitration clause will get activated or kindled only if the dispute between the parties is limited to the quantum to be paid under the policy. The liability should be unequivocally admitted by the insurer. That is the precondition and sine qua non for triggering the arbitration clause. To put it differently, an arbitration clause would enliven or invigorate only if the insurer admits or accepts its liability under or in respect of the concerned policy.”