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Arbitration Clause in Insurance Policy to be Strictly Interpreted, says Supreme Court
Arbitration is a process of Alternate Dispute Resolution by which the arbitrator, a neutral third party, must listen to the issues faced by parties to a dispute, assess the evidence and then make a decision for a parties and in this way the arbitrator has the power similar to that of a judge in a trial – this is reflected by the arbitration process itself[1]. The use of arbitration as opposed to a regular trial is attributed to the terms present in a contract between the parties, i.e., if an arbitration clause is present in the contract the parties will have no option but to refer the matter to arbitration in case a dispute arises. The arbitration process in India, much like the process in other countries as put forth by the Geneva Protocol on Arbitration Clauses, begins with an arbitration clause or arbitration agreement. The arbitration agreement is a clause in a contract or an agreement between parties stating that any dispute will be referred to arbitration proceedings[2] and it must contain the following information: subject matter of dispute, timing of dispute (past/present/future), number of arbitrators, qualifications of arbitrators, jurisdiction and composition of tribunal[3]. Once the parties have referred their dispute to arbitration and the arbitrator makes an arbitral award, the decision is final, binding and enforceable and there is no appeal that lies from the award. Arbitration is a preferred method of dispute resolution as opposed to the traditional system of litigation, but parties can only opt for arbitration voluntarily if the agreement between them incorporated in it an arbitration agreement or arbitration clause.
Under International Conventions and even under the Arbitration and Conciliation Act, 1996, an arbitration agreement or arbitration clause is essential to a dispute being settled by arbitration as it reflects the intention of the parties to resolve the matter through arbitration and it specifies the agreed procedure to be used in resolution as well. In light of this, the Supreme Court in the case of Oriental Insurance Company Limited v. M/s Narbheram Power and Steel Pvt. Ltd[4]. opined that an arbitration clause is to be strictly interpreted and any expression in the clause must unequivocally express the intent of the parties to refer the dispute to arbitration. In this case the respondent suffered damage caused by a cyclone in Odisha in 2013 and to recover lost money, the respondent intimated his insurance company about the situation and requested that the claim be settled. However, the claim was not settled, and the respondent invoked the arbitration clause in the contract between the two companies and sent a notice to the Insurance Company regarding the same. Even though there was a clear arbitration agreement between the parties, the insurance company did not wish to refer the dispute to arbitration and in doing so they relied on invoking a provision in the agreement which stated that once the claim had been rejected by the insurer, no dispute could be referred to arbitration[5]. The case reached the Supreme Court and a three-judge bench headed by the then Chief Justice Deepak Misra which agreed with the insurance company and observed that the parties are bound by the specific provisions of the arbitration agreement or arbitration clause and the court is not empowered to change the interpretation or rewrite the clause[6]. The Bench held that the courts can intervene and interpret an arbitration clause only if the dispute is regarding a commercial matter and there is no equal bargaining power, and this is only to ensure that the terms and conditions are not unconscionable. The Court went on to say that an arbitration clause must be strictly interpreted and since it can even lay down conditions in which arbitration cannot be invoked, it must reflect the intention of both parties to enter into an arbitration proceeding. With reference to the facts of this case in particular, the Supreme Court analysed the arbitration clause focussing on the provision being challenged and decided that the clause was very specific in laying down that in the case that the insurer does not accept the claim and denies any liability the matter cannot be referred to arbitration, and that the clause reflected the intention of the insurance company to reject arbitration in certain cases[7]. Therefore, strictly interpreting the clause, the Supreme Court upheld the validity of the argument made by the Insurance Company and refused to refer the matter to arbitration.
This judgement reflects the importance of a well-drafted arbitration agreement and also shows that arbitration proceedings cannot be conducted unless and until both parties contractually agree to refer any dispute to arbitration.
[1] Caruso, Arbitration v. Mediation, Pepperdine, (Apr. 9, 2020, 12:23 PM), https://onlinelaw.pepperdine.edu/mdr/arbitration-vs-mediation/.
[2] Editor, What is the Difference Between Mediation and Arbitration, JaburgWilk, (Apr. 9, 2020, 12:13 PM), http://www.jaburgwilk.com/news-publications/what-is-the-difference-between-mediation-and-arbitration.
[3] Editor, What is the Difference Between Arbitration and Mediation?, Singapore International Arbitration Centre, (Apr. 9, 2020, 12:16 PM), https://www.siac.org.sg/71-resources/frequently-asked-questions/174-what-is-the-difference-between-arbitration-and-mediation.
[4] Oriental Insurance Company Limited v. M/s Narbheram Power and Steel Pvt. Ltd, (2018), Civil Appeal No. 2268 of 2018.
[5] Editor, Recent Cases on Arbitration Law in India, Vakilno1, (May 29, 2018, 9:11 PM), https://www.vakilno1.com/legal-news/recent-cases-arbitration-law-in-india.html.
[6] Oriental Insurance Company Limited v. M/s Narbheram Power and Steel Pvt. Ltd, (2018), Civil Appeal No. 2268 of 2018.
[7] Supra note 5.
- Alternate Dispute Resolution
- Arbitration
- Arbitration Agreement
