A full bench of the Hon’ble Supreme Court of India (the Court) in the case of United India Insurance Co. Limited v Hyundai Engineering and Construction Co Ltd & Ors (Civil Appeal no 8146 of 2018) has clarified that the observation of the Court in the case of Duro Felguera SA v Gangavaram Port Limited ((2017) 9 SCC 729) (Duro Felguera) with respect to powers of court under the amended Section 11(6-A) of the Arbitration and Conciliation Act, 1996 (the Act) is a ‘general observation about the effect of the amended provision and not specific to the issue’, thus effectively overruling the law laid down in the case of Duro Felguera.  

Background

The Respondent Nos 1 and 2 (Hyundai Engineering and Construction Co. Limited and Gammon India Limited, respectively) had set up a joint venture (JV) for design, construction and maintenance of a bridge across the River Chambal pursuant to a contract awarded by the National Highway Authority of India (Project). 

After commencement of the work, the JV obtained a Contractor All Risk Insurance Policy (CAR Policy) dated 5 December 2007 from United India Insurance Co. Limited (the Appellant) covering the entire Project. The arbitration clause contained in the CAR Policy read as follows:

“7. If any difference shall arise as to the quantum to be paid under this Policy (liability being otherwise admitted) such difference shall independently of all other questions be referred to the decision of an arbitrator…

… It is clearly agreed and understood that no difference or dispute shall be referable to arbitration as herein before provided, if the Company has disputed or not accepted liability under or in respect of this Policy.

During the construction of the bridge, an accident occurred, and the JV made a claim under the CAR Policy. The Appellant repudiated the JV’s claim and denied its liability under the CAR Policy. This was intimated by the Appellant to the JV through two separate communications. Consequently, the JV issued a notice to the Appellant, invoking the arbitration clause under the CAR Policy and when no response was received, the JV filed an application under Section 11 of the Act, before the High Court of Madras (HC).

The Appellant contended that it had denied its liability under CAR Policy in the communications sent to the JV and that the arbitration clause in the CAR Policy was a conditional clause. It argued that no arbitrator could be appointed under the CAR Policy unless the liability was admitted, and dispute was limited to the quantum to be paid under the CAR Policy. The HC, placing reliance on the law laid down in the case of Duro Felguera held that the enquiry under Section 11 of the Act is limited to examination of existence of an arbitration agreement and admission of the same by the parties and nothing more even where the arbitration clause is conditional, and appointed an arbitrator under the CAR Policy

Supreme Court’s Order 

The Court set aside the judgement of HC and held that a conditional arbitration clause under the CAR Policy will be triggered only if the dispute between the parties is limited to the quantum of insurance to be paid under the CAR Policy and does not cover a dispute regarding the liability of the Appellant under the CAR Policy. In the present case the liability should be unequivocally admitted by the Appellant as the same is pre-condition and sine qua non for triggering the arbitration clause. Therefore, the arbitration clause would come to life only if the Appellant admits or accepts its liability under or in respect of the CAR Policy. Further, the Court stated, that an enquiry should have been made by the HC before passing any orders, to examine whether the communications sent by the Appellant fell in the excepted category of repudiation and denial of liability under the CAR Policy as a whole, or had the effect of acceptance of liability by the Appellant under the CAR Policy and were limited to a dispute regarding the quantum. The Court further held that the observations made by the Court in Duro Felguera case are general observation about the effect of the amended provision and are not specific to the issue under consideration.

Comment

The Court has effectively overruled its judgment in Duro Felguera and has held that there can be a limited enquiry on facts by courts under Section 11(4) and (6) of the Act. However, the Court should have protected the legislative intent behind amendment to Section 11 of the Act by way of insertion of sub-section (6A) and maintained a fine balance between the “power of High Court or Supreme Court to appoint an arbitrator under Section 11” and the “power of the arbitrator himself to decide the question of jurisdiction”. The law laid down in the present judgment comes in the way of speedy disposal of petitions under Section 11 of the Act and may cause considerable delay in appointment of an arbitrator.

Further, the present judgment virtually nullifies the effect of Section 11(6A) of the Act and resultantly reads down the same.

- Udayarkar Rangarajan (Associate Partner) and Praveenkumar Hiremath (Associate)