Repudiation Of Claims Making Dispute Non-Arbitrable Is For Arbitral Tribunal To Adjudicate Upon, Not Courts At Section 11 Stage: Delhi High Court

The bench of Justice C. Hari Shankar, while hearing a petition under Section 11(6) of the A&C Act, has held that post SBI General Insurance, the scope of examination of a referral court has been restricted to examining the prima facie existence of arbitration agreement. The court under Section 11 jurisdiction cannot hold that the respondent's repudiation of the claim has made the dispute non-arbitrable, as this would amount to the court pronouncing on the arbitrability of the dispute.

Factual Overview:

The dispute originated from two insurance policies, Policy 33 and Policy 34, dated 31 March 2018, executed between the parties. The petitioner availed of these policies through Howden Insurance Broker (India) Pvt Ltd (Howden). For Policy 33, a sum of Rs. 20 cr was assured, and for Policy 34, a sum of Rs. 6.5 cr was assured by the respondent company. These policies covered various risks associated with cyber security breaches. On 7 April 2018, the petitioner was informed about the fraudulent transactions on the Core PG Payment Platform, which affected their two banking partners. The petitioner was stated to have suffered losses of over Rs. 8.58 cr in the attack.

The cyber attack amounted to “e-theft” within the definition clause under Policy 33 and “External Crime Theft” under Policy 34. An insurance claim for a total loss of Rs. 8.58 cr was lodged with the respondent under both policies by the petitioner through Howden. The claims were in the form of composite claims given overlapping causes and composite facts. Subsequently, BDO India LLP (BDO) was appointed as a forensic investigator to assess the loss. In the draft forensic report of BDO, the total damages incurred by the petitioner was Rs. 2.91 cr, covered under both policies. A legal notice dated 29 June 2021 was sent to the respondent requesting the release of the complete insurance claim within four weeks. The respondent, vide its repudiation letter dated 25 October 2022, rejected all the claims under both policies by relying on the Proclaim Surveyors & Loss Assessors Pvt Ltd's report. The cyber attack occurred in the bank's vulnerable networks, not the petitioner's. Therefore, the respondent did not fall under either of the policies. The petitioner issued A letter of protest in which they denied the repudiation and requested the respondent to withdraw the letter.

A Section 21 notice dated 22 July 2023 was sent to the respondent concerning the dispute arising out of a common cause of action under Policy 33 and Policy 34, seeking reference of the dispute to a sole arbitrator. In response to the notice, vide letter dated 25 August 2023 and 5 September 2023, the respondent rejected the names of the arbitrator nominations suggested by the petitioner and instead suggested another name as the sole arbitrator on their behalf.

Replies and Rejoinder:

Reply of the Respondent to the Section 11 Application:

• The application is untenable because the respondent has repudiated the petitioner's claim concerning Policy 33. No arbitrable dispute exists between the parties concerning the arbitration clauses in both policies, which are in the nature of quantum only arbitration clauses. This nature of the arbitration clause prohibits the reference of the dispute to arbitration where the respondent's liability under Policy 33 has not been admitted.
• The total coverage under Policy 34 is Rs. 6.5cr, insufficient to cover the petitioner's claim. The petitioner is seeking refuge under Policy 33, which is not permissible. Furthermore, there is no liability on the respondent to cover the petitioner's alleged losses under Policy 34, as the reason for repudiation was within the policy's terms and conditions.
• The courts' examination scope under Section 11 is restricted to the enquiry into a prima facie existence of an arbitration clause. The court has the power not to refer the dispute to arbitration where the subject matter appears to fall outside the scope of the arbitration clause.

Rejoinder by the petitioner to the respondent's reply:

• The BDO report acknowledging the admissibility of partial claims amounting to Rs. 2.91 cr for losses incurred due to the man-in-the-middle attack under Policy 33, the quantum of which is disputed by the petitioner, remains subject to challenge and is amenable to arbitration under Policy 33.
• The law laid down in United India Insurance can be distinguished from the facts of this case due to the respondent issuing two policies to cover the same liabilities arising from the exact cause of action, with one policy including an arbitration clause for disputes concerning rejected claims. Furthermore, the composite nature of the cause of action coupled with shared facts in dispute renders the arbitration under both policies composite and inseparable. The clause in Policy 34 is widely worded to cover the disputes arising in Policy 33.

Submissions:

The respondent made the following submissions opposing the Section 11 application:

• Policy 33's arbitration clause cannot be used as a ground to refer the dispute to arbitration, as the petitioner's claims have been repudiated by the respondent. Therefore, the arbitration clause is not applicable in this case.
• Placing reliance on paras 35 to 37 and 135 of SBI General Insurance, it was submitted that this case category is one of the exceptions to the general law laid down in SBI General Insurance. Reliance was placed on the judgment of the Supreme Court in Oriental Insurance Co Ltd v. Narbheram Power and Steel Pvt Ltd and United India Insurance Co. Ltd. v. Hyundai Engineering and Construction Co. Ltd.

Analysis of the Court:

The bench observed that the Supreme Court in SBI General Insurance does not say that the referral court cannot refer the dispute to arbitration where the claimant's claim in the arbitral proceedings relates to the respondent's liability to pay insurance. It is a settled principle of interpretation of judgments that what is expressly said in a court's judgment should be treated as an authority and not what can logically flow from it. The court in SBI General Insurance does not say that disputes involving the insured party's claim relating to the insurance company's liability would be rendered non-arbitrable due to the exclusion covenant in the insurance contract.

In essence, the respondent's argument is a challenge to the arbitrability of the disputes. It was held in SBI General Insurance that any objection regarding the arbitrability or non-arbitrability of a dispute must be referred to the arbitral tribunal. The decision in Oriental Insurance and United India Insurance was rendered when SBI General Insurance was not yet pronounced. In both these judgments, a referral court could examine the scope of arbitrability of the dispute, following the law laid down in Vidya Drolia v. Durga Trading Corporation. However, the decision in SBI General Insurance has brought a paradigm shift in the scope of examination by a referral court. Now, a referral court cannot examine the arbitrability of the dispute.

The bench further observed that if the respondent's submission were to be accepted and hold that the dispute cannot be referred to the arbitration due to the respondent's repudiation of the claim, it would effectively mean that the claims have been rendered non-arbitrable because the respondent's repudiation. This would amount to the court ruling on the arbitrability of the dispute, which the court cannot do following the dictum laid down in para 120 of SBI General Insurance. The bench declined to interpret the law laid down in SBI General Insurance in a manner that would dilute the court's intent to minimize the scope of examination of a referral court. Concerning the petitioner trying to invoke Policy 33, despite only paying the premium, Policy 34 is the aspect that must be argued before the arbitral tribunal.

Lastly, the bench recorded that Policy 34's arbitration clause envisages a sole arbitrator and, if that fails, contemplates a three-arbitrator tribunal. The Section 21 notice sought a reference of the dispute to a sole arbitrator. Without prejudicing all the defences they can raise before the arbitral tribunal, the respondent requested that the dispute be referred to a three-arbitrator tribunal. With the parties' consent, each party was allowed to nominate their arbitrator. The presiding arbitrator would be appointed by the nominee arbitrators per the A&C Act.

The bench while keeping the questions of facts and law open to be argued before the tribunal, disposed of the petition.

Case Title: PayU Payments Private Limited v. The New India Assurance Co Ltd

Case Number: ARB.P. 1209/2023

Counsel for the Petitioner: Mr. Rajeeve Mehra, Senior Advocate with Mr. V. Anush Raajan and Ms. Tanisha Dhoot, Advocates.

Counsel for the Respondent: Dr. Amit George, Ms. Gurkaranbir Singh and Mr. Dushyant Kishan Kaul, Advocates.

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