Arbitration Clause in an agreement should be interpreted strictly
United India Insurance Co. Ltd. and Ors. v. Hyundai Engineering and Construction Co. Ltd. And Ors.
The Constitution bench of the Supreme Court has laid down a precedent that even after the amendment of 2015 and insertion of subsection 6A under section 11 of the Arbitration Act, the Arbitration clause has to be interpreted strictly considering the conditionality clause.
The joint venture Company comprising of Respondent 1 (Hyundai Engineering and construction) and 2 (Gammon India) executed a Contractor All Risk Insurance Policy valued at Rs. 2,13,58,76,000/-. The clause contained that the disputes arising as to the quantum of the claim shall be referred to arbitration and further contained that arbitration shall not be invoked if the company disputes or does not accept the liability at all. Following an accident, the respondent company filed for the claim of Rs. 1,51,59,94,543/- and accordingly two reports were formed one by the appellant and the other by the Ministry of Road Transport and Highways, Government of India which concluded that the accident occurred due to faulty design and deficient workmanship and thus in pursuance of the report the appellant rejected the claim under clause 7 of the agreement. The JV Company then approached the Madras High court under section 11(4) and 11(6) for the appointment of an arbitrator.
The Issue before the Court
Whether the arbitration clause under the agreement shall be interpreted strictly?
The decision of Madras High Court
The Madras High Court held that insertion of the clause 6A in section 11 of the new Arbitration and Conciliation Act, 2015 limits the mandate of the court to just examination of the existence of the arbitration agreement.
The Court in order to determine the arbitrability of a dispute relied upon the judgement passed by the Supreme Court in Oriental Insurance Company v. Narbheram Power and Steel Pvt Ltd that any expression in a clause shall unequivocally show the intent of arbitration but if a clause contains specific disputes that cannot be referred to arbitration then arbitration clause cannot be invoked.
While observing another judgement passed by the Madras High Court in Jumbo Bags Ltd. v. The New India Assurance Co. that the dispute which is not referable to arbitration being not covered by the clause cannot be over the subject matter of the arbitration.
The court did not rely upon the judgement cited by the respondent in Duro Felguera S. A. v. Gangavaram Port Limited as it is a two-judge bench and the issue in that case, was a general issue and not specific in mentioning as to what is arbitrable in nature.
The Supreme Court also, while upholding its decision in Vulcan Insurance Company Ltd. v. Maharaj Singh and another, stated that the question of quantum of claim does not arise at all when the claim itself has been repudiated.
After analysing the relevant judicial precedents, the court concluded that the high court had made no efforts to properly examine clause 7 of the said agreement and has plainly read clause 6A of section 11. Such an arbitration clause will only come into force 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. The reason given by the appellant for repudiation of the claim is also specific and also no plea was raised by the respondent challenging the clause. Therefore, the court ordered to set aside the judgment passed by the Madras High court and held that the issue is not subject to arbitration and that the respondent should resort to remedy of a suit.