The Madras High Court, by an Order dated December 06, 2024, allowed an application filed by Tagros Chemicals India Private Limited (“Insured”) against United India Insurance Company Limited (“Insurer”) under Section 11(6) of the Arbitration and Conciliation Act, 1996, and appointed a sole arbitrator for deciding the disputes under an Industrial All Risks Policy (“Policy”).
The Policy covered loss arising out of Material Damage (“MD”) and / or Business Interruption (“BI”). The dispute stemmed from a fire mishap that took place at the Insured’s chemical plant in Gujarat that caused substantial losses and damage to the Insured.
The Policy contained a peculiar arbitration clause that provided for only quantum-related disputes to be resolved by arbitration (provided that the Insurer had admitted liability). In cases where coverage / liability was not admitted by the Insurer, arbitration was not available.
After the fire mishap occurred, the Insured made claims to the Insurer for loss suffered on account of MD and BI. After assessment, the Insurer had admitted liability for the MD claim and paid some amounts to the Insured. On the BI claim, however, the Insurer simply denied liability and repudiated the Insured’s claim citing breach of Policy conditions.
When the Insured approached the Madras High Court for appointment of arbitrator, the Insurer took the defence that since it had not admitted liability under the BI claim, on a plain reading of the arbitration clause, the dispute as regards the BI claim could not be referred to arbitration. The Insurer also contended that MD and BI constituted two separate contracts and therefore, admitting liability of the MD Claim did not amount to automatic admission of liability of the BI Claim. The Insured, inter alia, contended that the BI claim was directly linked to the MD claim in as much as once the liability for loss arising out of MD is admitted, there is no scope to deny liability of a BI Claim. The dispute which would remain would necessarily be that of quantum. On facts of this case, it was contended that even the Surveyor’s and the Insurer’s finding to the effect that the Insured had suffered no loss but experienced increase in profit during the affected period, was a question of fact that related to quantum.
The Court analysed the Policy provisions on MD and BI, particularly the latter of which provided coverage for business losses “in consequence of loss destruction or damage indemnifiable under Section I” (Section I providing MD cover). The Court found that an interesting question of law had arisen as to whether the entire dispute. i.e., for MD and BI claims, could be referred to arbitration. The Court observed that the MD and BI claims were interdependent and could not be separated. Since the Insurer had admitted liability under the MD claim and even released payments, the BI claim, being consequential to the material damage, could not be excluded from arbitration. The Court rejected the Insurer’s interpretation of the Policy that simply because the liability had been declined, the dispute could not be referred to arbitration.
The Court extensively referred to case laws cited by parties to support its findings. The Insurer had relied upon Supreme Court judgments in Oriental Insurance v. Nabheram Power (May 2018) and United India Insurance v. Hyundai Engineering (August 2018) to argue that arbitration clauses are triggered only when liability is admitted by the insurer and that courts had refused to refer disputes to arbitration based on the insurer’s rejection of liability. The Court, however, noted a shift in the above legal position following the recent judgment of the Supreme Court in Vidya Drolia v. Durga Trading (December 2020) and SBI General Insurance v. Krish Spinning (July 2024), which were further expounded by the Delhi High Court in PayU Payments v. New India Assurance (September 2024). By virtue of this shift, the current legal position limited the scope of judicial intervention under Section 11 of the Act to the existence of the arbitration agreement, leaving substantive disputes to be decided by the arbitral tribunal. The Court also rejected the argument that MD and BI constituted two separate contracts.
Based on the interconnected nature of the two claims, the Court concluded that the BI claim could not be segregated from the MD claim, as both arose from the same incident. It emphasized that referring one claim to arbitration and relegating the other to a civil court would be inefficient and against the principles of arbitration. Consequently, the Court appointed an arbitrator to adjudicate upon the disputes.
This decision underscores the evolving jurisprudence on arbitration in India, emphasizing the primacy of arbitration agreements, minimal judicial interference, and the necessity of interpreting insurance contracts holistically to avoid fragmenting claims across different forums.
AUTHORS: Smiti Tewari (Partner) | Shreyas Lele (Associate) | Aditya Nair (Associate) | Vaidehi (Associate)