United India Assurance Co. Ltd. & Anr. v. Hyundai Engineering and Construction Co. Ltd.

&
Ors. 1 (August 21, 2018) Case No. CIVIL APPEAL NO. 8146 OF 2018 (Arising out of SLP(C)
No.4260/2018)

INTRODUCTION

In an insurance policy, the arbitration clause stipulated that disputes between the parties shall
not be referred to arbitration if the insurance company has disputed or not accepted liability
under or in respect of the insurance policy. In an appeal filed by the insurance company against
a judgment under Section 11 of the Arbitration and Conciliation Act, 1996 (“the Act”), the
Supreme Court examined the construction of the arbitration clause, to eventually conclude that
the arbitration agreement was incapable of being enforced as the insurer expressly denied its
liability.

FACTUAL BACKGROUND

Hyundai Engineering and Construction Co. Ltd. & Ors. (“Respondent”) was awarded a contract
for the design, construction, and maintenance of a bridge. Subsequently, the Respondent
obtained a Contractor All Risk Insurance Policy (“Policy”) from United India Assurance Co. Ltd. &
Anr. (“Appellant”/ “Insurer”) for the entire project.

During the construction of the bridge, a fatal accident occurred which resulted in significant
losses to the contractor. The Respondent submitted a claim for these losses to the Appellant.
While the Appellant appointed a surveyor to assess the loss, the Ministry of Road Transport and
Highways, Government of India set up a committee of experts (“Expert Committee”) to enquire
into the accident. The surveyor and the Expert Committee both concluded that the accident
was caused due to faulty design and improper execution of the project by the contractor.

Relying upon the findings of the surveyor and the Expert Committee, the Appellant addressed
correspondences to the Respondent and repudiated the claims as the Policy specifically
excluded losses/damages caused by faulty design, defective workmanship or material. While
the Respondent requested the Appellant to re-assess its decision of repudiation of the claim,
the Appellant rejected the Respondent’s pleas for a reassessment.

Thus, disputes arose between the parties which led to the Respondent invoking the arbitration
clause in the Policy. The Respondent nominated a sole arbitrator and called upon the Appellant
to confirm the nominee or to nominate its own arbitrator in terms of the arbitration clause. As
the Appellant did not accede to the request to appoint an arbitrator, the Respondent filed an
application under sections 11(4) and 11(6) of the Act, before the High Court of Madras (“High
Court”) for the appointment of an arbitrator.

1
 In the proceedings before the High Court, the Appellant placed reliance on the arbitration
clause in the Policy which inter alia provided that “no difference or dispute shall be referable to
arbitration as herein before provided, if the Company [Appellant] has disputed or not accepted
liability under or in respect of this Policy”. The Appellant resisted reference to arbitration and
contended that the only remedy which the Respondent can take recourse to is institution of a
civil suit. The Appellant also contended that the period of limitation to institute a suit started
would start from the date of receipt of the first intimation through which the Appellant denied
the claim. However, the High Court observed that an arbitration agreement existed between
the parties, and by way of an Order dated 30 November 2017, the High Court nominated an
arbitrator on behalf of the Appellant (“Order”).

Aggrieved by the Order, the Appellant filed an appeal before the Supreme Court by way of a
Special Leave Petition. The issue which arose for consideration before the Apex Court was
whether the disputes were barred from reference to arbitration since such disputes were not
covered by the arbitration clause. 1 CIVIL APPEAL NO. 8146 OF 2018 (Arising out of SLP(C)
No.4260/2018) 2 Oriental Insurance Company Limited Vs. Narbheram Power and Steel Private
Limited, (2018) 6 SCC 534

PROVISION OF LAW

Section 11 of THE ARBITRATION AND CONCILIATION ACT, 1996

11 Appointment of arbitrators. —

(1) A person of any nationality may be an arbitrator, unless otherwise agreed by the parties.

(2) Subject to sub-section (6), the parties are free to agree on a procedure for appointing the
arbitrator or arbitrators.

(3) Failing any agreement referred to in sub-section (2), in an arbitration with three arbitrators,
each party shall appoint one arbitrator, and the two appointed arbitrators shall appoint the
third arbitrator who shall act as the presiding arbitrator.

(4) If the appointment procedure in sub-section (3) applies and—

(a) a party fails to appoint an arbitrator within thirty days from the receipt of a request to do so
from the other party; or

(b) the two appointed arbitrators fail to agree on the third arbitrator within thirty days from the
date of their appointment, the appointment shall be made, upon request of a party, by the
Chief Justice or any person or institution designated by him.

2
(5) Failing any agreement referred to in sub-section (2), in an arbitration with a sole arbitrator,
if the parties fail to agree on the arbitrator within thirty days from receipt of a request by one
party from the other party to so agree the appointment shall be made, upon request of a party,
by the Chief Justice or any person or institution designated by him.

(6) Where, under an appointment procedure agreed upon by the parties,—

(a) a party fails to act as required under that procedure; or

(b) the parties, or the two appointed arbitrators, fail to reach an agreement expected of them
under that procedure; or

(c) a person, including an institution, fails to perform any function entrusted to him or it under
that procedure, a party may request the Chief Justice or any person or institution designated by
him to take the necessary measure, unless the agreement on the appointment procedure
provides other means for securing the appointment.

(7) A decision on a matter entrusted by sub-section (4) or sub-section (5) or sub-section (6) to
the Chief Justice or the person or institution designated by him is final.

(8) The Chief Justice or the person or institution designated by him, in appointing an arbitrator,
shall have due regard to—

(a) any qualifications required of the arbitrator by the agreement of the parties; and

(b) other considerations as are likely to secure the appointment of an independent and
impartial arbitrator.

(9) In the case of appointment of sole or third arbitrator in an international commercial

arbitration, the Chief Justice of India or the person or institution designated by him may
appoint an arbitrator of a nationality other than the nationalities of the parties where the
parties belong to different nationalities.

(10) The Chief Justice may make such scheme 1 as he may deem appropriate for dealing with
matters entrusted by sub-section (4) or sub-section (5) or sub-section (6) to him.

(11) Where more than one request has been made under sub-section (4) or sub-section (5) or
sub-section (6) to the Chief Justices of different High Courts or their designates, the Chief
Justice or his designate to whom the request has been first made under the relevant sub-
section shall alone be competent to decide on the request.

3
(12) (a) Where the matters referred to in sub-sections (4), (5), (6), (7), (8) and (10) arise in an
international commercial arbitration, the reference to ‘‘Chief Justice'' in those sub-sections shall
be construed as a reference to the ‘‘Chief Justice of India''.

(b) Where the matters referred to in sub-sections (4), (5), (6), (7), (8) and (10) arise in any other
arbitration, the reference to “Chief Justice” in those sub-sections shall be construed as a
reference to the Chief Justice of the High Court within whose local limits the principal Civil
Court referred to in clause (e) of sub-section (1) of section 2 is situate and, where the High
Court itself is the Court referred to in that clause, to the Chief Justice of that High Court.

OR

11 [(6A) The Supreme Court or, as the case may be, the High Court, while considering any
application under sub-section (4) or sub-section (5) or sub-section (6), shall, notwithstanding
any judgment, decree or order of any Court, confine to the examination of the existence of an
arbitration agreement.

DECIDED CASE

In Oriental Insurance Company Limited Vs. Narbheram Power and Steel Private Limited, (2018)
6 SCC 534, the Supreme Court relied upon its ruling in Oriental Insurance , wherein in a similar
factual scenario, the Supreme Court observed that the arbitration clause can carve out
exceptions to exclude the applicability of the arbitration clause. Strictly construing the
arbitration clause, the Supreme Court 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.”

FINDINGS OF THE COURT

The Supreme Court concurred that the insurer should unequivocally admit its liability to trigger
the arbitration clause, and therefore the dispute between the parties would be limited to the
quantum payable under the Policy.

Testing the judicial precedents in light of the present facts, the Supreme Court observed that,
the Appellant expressly denied its liability and therefore the arbitration clause was “ineffective
and incapable of being enforced, if not non-existent”. The Supreme Court held that the dispute
was therefore “non-arbitrable”.

CONCLUSION

In view of the above, the Supreme Court accepted the plea of the Appellant, allowed the
appeal and set aside the Order. While the Supreme Court observed that the only remedy the

4
Respondent can take recourse to is to institute a civil suit for mitigation of grievances, it kept
the issue of limitation open for determination before the appropriate forum.

With the intent of determining whether the Appellant had excluded the applicability of the
arbitration clause between the parties, the Supreme Court examined the facts of the case.
However, a brewing cause of concern is that the amended Act had sought to limit the scope of
the court’s intervention specifically to examining the existence of an arbitration agreement.
While Section 11 (6-A) of the Act provides that at the time of considering an application for
appointment of an arbitrator the court shall confine itself to “the examination of the existence
of an arbitration agreement”, in the present case the Supreme Court has diverged from the
very essence of section 11 (6-A)

CRITICAL EVALUATION

The trend of judicial pronouncements after the 2015 Amendment clearly shows that despite
the strict language of Section 11(6A) commanding Courts to firmly affix blinkers to their eyes, at
the end of the day, a common sense approach still has to be followed by Courts when deciding
on whether to refer parties to arbitration. It is a correct approach that will ultimately bring to
fruition what parties must have intended and also avoid unnecessary litigation.