SC says Arbitration Clause in Insurance Policy is to be Construed Strictly

May 02, 2018

Case name: Oriental Insurance Company Limited v. M/s Narbheram Power and Steel Pvt. Ltd.

Date of Judgment: May 02, 2018

Brief Facts of the case

In this case, the Respondent had suffered damages on account of cyclone in Odisha in 2013. Accordingly, the respondent intimated the Appellant Insurance Company of the damages suffered by it and requested the appellant to settle the claim. However, the claim was not settled and consequently the respondent invoked the arbitration agreement and requested the appellant to concur with the name of the arbitrator whom it had nominated.

The appellant on the other hand objected to arbitration proceedings and declined to refer the disputes to arbitration in view of Clause 13 of the policy which stated that once the claim was repudiated and the insurer had disputed or not accepted the liability under or in respect of the policy, no difference or dispute could have been referred to arbitration.

Bench’s Verdict

The Three-Judge Bench of the Supreme Court headed by Chief Justice Dipak Misra in the case has allowed the appeal and consented to appellant’s plea that the impugned matter could not be referred to arbitration. While allowing the appeal, the Supreme Court relied on plethora of earlier judgments and made following observations in the case:

That the parties are bound by the clauses enumerated in the policy and the court does not transplant any equity to the same by rewriting a clause.

That the Court can interpret such stipulations in the agreement. It is because they relate to commercial transactions and the principle of unconscionability of the terms and conditions because of the lack of bargaining power does not arise.

That an arbitration clause is required to be strictly construed. Any expression in the clause must unequivocally express the intent of arbitration. It can also lay the postulate in which situations the arbitration clause cannot be given effect to.

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.

With reference to the instant case, the Court opined that Clause 13 categorically postulated that if the insurer has disputed or not accepted the liability, no difference or dispute shall be referred to arbitration. Thus, such a situation squarely fell within the concept of denial of disputes and non-acceptance of liability.