Award Can Be Set Aside U/S 34 Of Arbitration Act If Arbitrator Travels Beyond Arbitration Agreement: Madhya Pradesh HC

The Madhya Pradesh High Court bench of Justice Subodh Abhyankar affirmed that if arbitrator travels beyond the terms of the arbitration agreement while passing an award, such an award is liable to be set aside under section 34 of the Arbitration Act.

Brief Facts

This Arbitration Appeal under Section 37 of the Arbitration and Conciliation Act, 1996 has been filed by the appellant-United India Insurance Co. Ltd., against the order dated 14.11.2017, passed by the District Judge, Ratlam in Misc.Civil Case No.22/2007 (old No. 17/2004) whereby, the Award passed by the Arbitrator dated 13.9.2004, has been affirmed and the application filed by the appellant u/s.34 of the Act of 1996, has been rejected.

The respondents no.1 and 2 had obtained a fire policy from the appellants United India Insurance Co. Ltd., covering their stocks, lying in the premises of the Respondent factory. The policy was valid for the period 13.5.1989 to 12.5.1990.

During the policy period, a claim was put forth by the respondents, alleging fire in their premises, which resulted in damages. The appellant appointed surveyor/investigator and found that the fire was deliberate, and repudiated the claim vide their communication dated 24.12.1991. Copy of the repudiation letter has also been placed on record. Being dissatisfied by the decision of repudiation, the respondents filed a regular civil suit for recovery of Rs.24,12,500/-/.

The newly added defendant (Punjab National Bank) moved an application, that since the policy contained an arbitration clause , the matter be referred for arbitration. In spite of opposition by the appellant, the said application was allowed, and the matter was referred to the Arbitration.

The arbitration tribunal vide their award dated 13.9.2004, allowed the claim of the respondent against the appellant and directed for payment of Rs. 24,12,500 with interest to the respondent no.1 Smt Rekha & respondent no.2 Prakiran Being aggrieved of the same, the appellant filed an application u/s.34 of the Arbitration and Conciliation Act, 1996, and by order dated 14.11.2017, the trial court rejected the objections.

Contentions

The appellant submitted that not only that the Arbitration Tribunal itself was not properly constituted, in fact, even as per the Arbitration Agreement between the parties, it was not a dispute which could be referred to the Arbitration Tribunal.

That clause 13 of the agreement provides that if any difference arises between the parties as to the quantum to be paid under the policy, liability being otherwise admitted, only 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. In this case, entire claim was repudiated.

That since the Arbitrator appointed by the appellant/Insurance Company, Shri H.R.Choudhary had already sent a letter dated 02.9.2004, to the other Arbitrators, that he is relinquishing the post of Arbitrator, in such circumstances, the remaining only two Arbitrators could not have passed the Award which was clearly in violation of S.10 of the Act of 1996, which provides that the number of Arbitrators cannot be even.

Per contra, the respondents submitted that in the civil suit filed by the respondents no.1 & 2, the appellant Insurance Company did not object to the appointment of the Arbitrator.

That the Award has been passed by the Presiding Officer Shri O.P. Agrawal and Jayant Bohara, who was also the other Arbitrator, and in such circumstances, it cannot be said that it was decided by the even number of the Arbitrators.

Court's Analysis

The court, at the outset, referred to clause 13 of the Arbitration Agreement and noted that the dispute, which could be referred to the Arbitration was only in respect of the quantum to be paid under the policy, and not all the disputes under the policy could be referred to the Arbitration. In other words, when the liability is accepted by the Insurance Company, and the dispute is in relation to the quantum of compensation, only such dispute could be referred to the Arbitration and not others.

In Oriental Insurance Co. Ltd. v. Narbheram Power and Steel (P) Ltd., (2018), the Supreme Court has held that 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. An arbitration clause would enliven or invigorate only if the insurer admits or accepts its liability under or in respect of the policy concerned, the court noted.

Based on the above, the court observed that in the present case, it is an admitted fact that the Insurance Company had already denied the claim, and thus, it was not a case where there was any dispute existed between the parties regarding the quantum of the compensation to be paid by the appellant-Insurance Company to the Ratlam Syenthetic rope manufacturing company, hence, the matter was not required to be referred to the Arbitration.

It is well settled that the arbitrator cannot travel beyond the agreement and in the present case assuming jurisdiction by the arbitrator when it did not have in the face of clause 13 was not justified therefore any award passed is liable to be set aside as it is non-est in law.

The arbitration tribunal consisted of three arbitrators by the order of the court, and if one of the Arbitrators had left the arbitration proceedings midway, it was incumbent upon the remaining two Arbitrators to get the third Arbitrator appointed through the court or to direct the parties to get the third Arbitrator appointed through the court,the court noted.

The court observed that Instead, both the Arbitrators have proceeded with the Arbitration and have passed the award, which procedure, in the considered opinion of this court could not have been adopted by the arbitrators, as the mandate was for the appointment of the three arbitrators. And thus, on this ground also, the Award passed by the arbitration tribunal being non-est in the eyes of law, is liable to be set aside.

It is a settled position of law as also enshrined u/s.16 of the Act of 1996 that an arbitral tribunal is competent to rule on its jurisdiction even when the objection has been raised by a party who has acquiesced to appointment of arbitrator, the court noted.

The court concluded that the appellant has clearly made out a case for interference and the Award and the impugned judgment passed by the learned Judge of the district court under Section 34 of the Act of 1966, clearly falls within the category of sub-clause (iv) & (v) of Clause (2) of Section 34 of the Act, which provides for the dispute not contemplated by the Arbitration, and secondly, on the ground of composition of the Arbitral Tribunal which was not in accordance with the agreement of the parties.

Accordingly, the present appeal was allowed and the impugned order was set aside.

Case Title: UNITED INDIA INSURANCE CO. LTD. AND OTHERS Versus RATLAM SYENTHETIC ROPE MANUFACTURING COMPANY THROUGH SMT. REKHA AND OTHERS

Case Reference: ARBITRATION APPEAL No. 8 of 2018

Judgment Date: 14/11/2024

Click Here To Read/Download Order