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

The Delhi High Court, following the law laid down in SBI General Insurance Co Ltd v. Krish Spinning, has held that the aspects of non-arbitrability of a claim are for the arbitral tribunal to adjudicate, and courts at Section 11 stage cannot examine the same. 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....

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

Mohd Talha Hasan

Tags