Arbitration Clause Is Limited To Quantum Of Damages, Termination Of Proceedings Is Valid : Delhi High Court

The High Court of Delhi has held that when the scope of arbitration clause is limited to quantum of damages only in the eventuality that the liability to pay is admitted by the insurance company, there can be no arbitration if the liability is denied.

The bench of Justice V. Kameshwar Rao held that the suggestions given by the Surveyor in its report, though of substantial evidentiary value, are not binding on the insurance company.

The Court also held that as per the IRDA (Protection of Policyholders‟ Interests) Regulations, 2017, the appointment of surveyor is a mandatory requirement and cannot be said to be an admission as to the liability to pay by the insurance company.

Facts

The petitioner availed the insurance policy dated 05.12.2015 offered by the respondent for professional indemnity which includes indemnity against acts of libel & slander, fraud, dishonesty, negligence, fraud, omissions and errors, as well as loss of documents and breach of confidentiality of clients committed by its employees including own, contractual, casual and outsourced employees, towards its clients' businesses, which include banking organisations.

In August 2017, the petitioner received certain notices from its clients regarding the offences committed by its employees and claiming an amount of Rs. 25 Crores approximately. Accordingly, the petitioner intimated the respondent of all such claims from time to time.

However, the respondent cancelled the Insurance Policy on grounds of misrepresentation and concealment of facts by its order dated 18.05.2018. Aggrieved by the order of cancellation, the petitioner filed a writ petition before the Delhi High Court to set aside the order of cancellation. The HC set aside the cancellation order and directed the respondent to treat the cancellation order as show cause notice and allowed the petitioner to furnish its response to the said notice. Thereafter, the respondent appointed a Surveyor to assess the damage suffered by the petitioner. There was an inordinate delay in the preparation of report by the surveyor. The surveyor in its preliminary report had recommended a sum of Rs. 13.50 crores.

Aggrieved by the delay in damage assessment, the petitioner invoked the arbitration clause and requested the respondent to suggest the names of the sole arbitrator to be appointed with mutual consent. On failure of the parties to mutually appoint an arbitrator, the petitioner filed an application before the High Court under Section 11 of the A&C Act. The Court, vide order dated 24.05.2021 allowed the application and appointed a sole arbitrator without prejudice to the right of the respondent to raise objection of non-arbitrability if the claims are ultimately repudiated.

On 17.06.2021, the respondent issued a repudiation letter on the grounds of breach of conditions of the insurance policy. Thereafter, it moved an application under Section 32(2) of the Act for the termination of the arbitral proceedings. The arbitrator allowed the application and terminated the proceedings on the ground that after the repudiation of the claims by the respondent, the dispute has become non-arbitrable as the clause provided for arbitration only in case the liability was admitted and only quantum was to be determined by the tribunal.

Aggrieved by the termination of the proceedings, the petitioner challenged the award under Section 34 of the Act.

Grounds of Challenge

The petitioner challenged the order on the following grounds:

• The parties were at liberty to raise all the contentions regarding the inapplicability of arbitration clause and repudiation letter before the arbitral tribunal, therefore, the arbitrator could not have terminated the proceedings merely because the respondent had issued a repudiation letter.

• The respondent has not complied with the guidelines stipulated in the IRDA Regulations, 2017. The Surveyor was appointed after a delay of nearly two years. After delayed appointment of the Surveyor, it took another 1.5 years to complete the survey. This inordinate delay caused by the respondent reeks of arbitrariness and abuse of dominant position. Had the Surveyor acted in accordance with law, the survey should have been completed by February 12, 2020.

• The language of the arbitration clause suggests that arbitration can only be precluded when there is denial of liability. The denial of liability was sought to be done by the respondent vide its cancellation letter dated May 18, 2018. The letter of cancellation has been set aside by this Court and the act of denial of liability by the respondent has been declared invalid. Thereafter, the respondent accepted the representation of the petitioner and appointed the Surveyor for assessment of claim. Therefore, it has accepted the liability and the appointment of surveyor further establishes the same.

• The only question that remains is the quantum of damages and the tribunal was appointed for that purpose only.

• The order of termination is passed in complete disregard to Section 32 of the Act as none of the condition stipulated therein has arisen in this case.

• The cancellation of earlier repudiation letter has settled the matter of repudiation once and for all. The petitioner cannot be made to go two rounds of litigation for the same thing.

The respondent made the following submissions:

• The scope of arbitration clause is very limited as it provides for determination of quantum of damages by the tribunal only when the insurance company has not denied its liability to pay.

• The respondent has repudiated the claims of the petitioner for material suppression of facts and for being in contravention of the terms of the policy, therefore, there is an express denial of liability, thus, the continuation of arbitral proceedings was impossible.

• The arbitration was invoked before the surveyor could finish the examination and assessment of documents, therefore, much before the respondent could take any decision on its liability.

• The order of this court in cancelling the first order of termination cannot be read to mean that the court had finally settled the issue of repudiation but the court had merely directed that an opportunity be given to petitioner. The subsequent notice of repudiation has been issued after complying with that requirement.

• The arbitration clause is similar to the one that Supreme Court considered in the case of United India Insurance and held that arbitration was contingent upon the admission of liability.

• Conditional arbitration clause would only become operational once the pre-condition is fulfilled.

Analysis by the Court

The Court held that when the scope of arbitration clause is limited to quantum of damages only in the eventuality that the liability to pay is admitted by the insurance company, there can be no arbitration if the liability is denied. It held that conditional arbitration clause would only become operational once the pre-condition is fulfilled.

The Court held that the suggestions given by the Surveyor in its report, though of substantial evidentiary value, are not binding on the insurance company, therefore, the petitioner cannot rely on the findings given in the report of the surveyor to contend that liability was admitted by the respondent.

The Court also held that as per the IRDA (Protection of Policyholders‟ Interests) Regulations, 2017, the appointment of surveyor is a mandatory requirement and cannot be said to be an admission as to the liability to pay by the insurance company, therefore, the petitioner cannot contend that merely because the respondent agreed to appoint the surveyor, the same cannot amount to an admission of liability.

The Court further held that the order of the Court wherein the first termination order was cancelled cannot amount to settling the issue of repudiation as the Court had merely held that the issue of repudiation must be decided only after giving the petitioner a chance to respond to the allegations.

The Court also held that the order appointing the arbitrator also cannot mean that only the quantum of damages was to be determined by the tribunal but also the issues relating to non-arbitrability were also reserved for the tribunal, therefore, the decision of the tribunal in terminating the proceedings cannot be faulted.

Accordingly, the Court dismissed the petition.

Case Title: Geo Chem Laboratories Pvt Ltd v. United India Insurance Co. Ltd. O.M.P. (COMM) 88 of 2022

Citation: 2022 LiveLaw (Del) 1190

Counsel for the Petitioner: Mr. Rajshekhar Rao, Sr. Adv. with Mr. Dinesh Sharma, Ms. Ritika Jhurani and Mr. Akshay Chitkara, Advs.

Counsel for the Respondent: Mr. Amit Kumar Singh, Mr. Apratim Animesh Thakur and Mr. Amrit Kaul, Advs.

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