Arbitration Clause Is Limited To Quantum Of Damages, Termination Of Proceedings Is Valid: Delhi High Court

The High Court of Delhi has ruled that there can be no arbitration when the arbitration clause's scope is restricted to the number of damages solely if the insurance company's duty to pay is acknowledged.

The Justice V. Kameshwar Rao bench ruled that the insurance company is not bound by the Surveyor's recommendations, even though they are deemed to have significant evidential value.

The Court further found that under the IRDA (Protection of Policyholders' Interests) Regulations, 2017, the appointment of the surveyor is a statutory obligation and cannot be interpreted as the insurance company admitting liability to pay.

Facts

The respondent's insurance policy for professional indemnity, dated 5/12/2015, was made available to the petitioner, who took advantage of it. This insurance covers acts of libel and slander, fraud, dishonesty, negligence, fraud, omissions and errors, loss of documents, and client confidentiality breaches by its employees, including its own, contractual, casual, and outsourced employees, against its clients' businesses, which include banking organizations.

The petitioner received notices from its clients in August 2017 regarding wrongdoings carried out by its staff and demanded around several Rs. 25 Crores. As a result, the petitioner periodically informed the respondent of all such claims.

By its order dated 18.05.2018, the respondent, however, revoked the insurance policy on the grounds of misrepresentation and concealing of facts. The petitioner, who was offended by the cancellation order, filed a writ suit with the Delhi High Court asking for the judgment to be reversed. The HC overturned the cancellation decision, instructed the respondent to regard it as a show-cause notice, and permitted the petitioner to respond to the aforementioned notice.

After then, the respondent hired a surveyor to evaluate the damage done to the petitioner. The surveyor's report was prepared with an excessive amount of delay. The surveyor had proposed a price of Rs. 13.50 crores in its preliminary report.

Invoking the arbitration provision in protest at the delay in damage assessment, the petitioner asked the respondent to offer names for the only arbitrator who would be chosen by both parties. The petitioner requested the High Court under Section 11 of the A&C Act after the parties were unable to agree upon an arbitrator. Regarding the respondent's right to object to non-arbitrability if the claims are ultimately rejected, the Court granted the application in an order dated 24.05.2021 and assigned a lone arbitrator.

On June 17, 2021, the responder issued a letter of repudiation citing a breach of the insurance policy's terms. Following that, it applied for the termination of the arbitral proceedings under Section 32(2) of the Act. The arbitrator granted the application and dismissed the proceedings because, following the respondent's repudiation of the claims, the dispute had become non-arbitrable, as the clause provided for arbitration only if liability was admitted and only quantum was to be determined by the tribunal.

The petitioner, who was dissatisfied with the termination of the proceedings, contested the award under Section 34 of the Act.

Grounds of Challenge

The order was challenged by the petitioner on the following grounds:

• The arbitrator could not have ended the proceedings simply because the respondent had sent a letter of repudiation because the parties were free to bring any claims about the non-applicability of the arbitration clause and repudiation letter before the arbitral tribunal.
• The respondent has disregarded the requirements outlined in the 2017 IRDA Regulations. After waiting for almost two years, the Surveyor was finally appointed. It took another 1.5 years to finish the survey when the Surveyor's appointment was delayed. This excessive delay brought on by the respondent smacks of arbitrary decision-making and misuse of power. The survey ought to have been finished by February 12, 2020, had the Surveyor proceeded with the legislation.
• According to the arbitration clause's terms, arbitration can only be excluded when culpability is denied. The respondent sought to deny responsibility in its cancellation letter of May 18, 2018. This Court has invalidated the respondent's act of denying culpability and has set aside the letter of cancellation.The respondent then selected the Surveyor to evaluate the claim after accepting the petitioner's representation. As a result, it has admitted responsibility, and the hiring of a surveyor further confirms this.
• The amount of damages is the sole remaining issue, and a tribunal was only established to address it.
• Since none of the circumstances outlined in Section 32 of the Act have materialized in this instance, the order of termination has been made with complete disregard for that section.
• The prior letter of repudiation was withdrawn, which put an end to the issue of repudiation. It is not permissible to subject the petitioner to two rounds of court proceedings for the same issue.

The following arguments were advanced by the respondent

• The scope of an arbitration clause is very limited because it allows the tribunal to determine the quantum of damages only when the insurance company has not denied its liability to pay.
• The respondent has repudiated the petitioner's claims for material suppression of facts and for violating the terms of the policy, so there is an express denial of liability, making the continuation of arbitral proceedings impossible.
• The arbitration was invoked before the surveyor could finish the examination and assessment of documents, therefore, much before the respondents could take any decision on its liability.
• The order of this court in canceling the first order of termination cannot be read to mean that the court had finally settled the issue of repudiation but the court had merely directed that an opportunity be given to the petitioner. The subsequent notice of repudiation has been issued after complying with that requirement.
• The arbitration clause is similar to the one addressed by the Supreme Court in the matter of United India Insurance, which concluded that arbitration was conditional on admitting liability.
• The conditional arbitration provision would only become active once the precondition was met.

Analysis by the Court

The Court ruled that there can be no arbitration when the scope of the arbitration clause is restricted to the number of damages solely if the insurance company's duty to pay is admitted. It was decided that a conditional arbitration clause would only take effect if the prerequisite was met.

Since the court found that the surveyor's suggestions, which were thought to have important evidential value, are not binding on the insurance company, the petitioner cannot rely on them to assert that the respondent admitted liability.

The Court further held that the appointment of the surveyor is a mandatory requirement under the IRDA (Protection of Policyholders' Interests) Regulations, 2017 and that it cannot be argued that doing so constitutes the respondent's admission of liability. As a result, the petitioner cannot argue that the respondent's agreement to name the surveyor does not constitute an admission of liability.

The Court further found that the cancellation of the initial termination order was not a resolution of the repudiation issue because the Court had only stated that the petitioner should be allowed to defend the claims before the issue of repudiation could be decided.

The Court further held that because the issues relating to non-arbitrability were also reserved for the tribunal, the order appointing the arbitrator could not have meant that only the amount of damages was to be decided by the tribunal. Accordingly, the tribunal's decision to end the proceedings cannot be faulted.

As a result, the Court dismissed the petition.