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Friday, June 6, 2014

Will 'Arbitration" out-survive the named 'arbitrators' - Supreme Court judgment

I had earlier posted on the general condition of Standard Fire and Special Perils Policy – ‘arbitration clause’, which primarily is a mechanism of dispute resolution.  Insurance is primarily a contract of indemnity – there can be difference of opinion, variance of interpretations and disputes.  In any commercial transaction, the traders undertaking such business transactions sure would have only good intentions of carrying out their trade deals, still there would arise disputes during performance of contracts; disputes on small to larger issues – much to annoyance of all the parties concerned. Unresolved disputes not only upset smooth continuance but also involve litigation at costs, time and efforts. Everyone would like to have such dispute areas narrowed thinner and have a mechanism for faster and efficient resolution.  


General condition no. 13 of Standard Fire Policy is – ‘arbitration clause’, which is present in most insurance contracts. Arbitration, a form of alternative dispute resolution, is a legal technique for the resolution of disputes outside the courts, where the parties to a dispute refer it to one or more persons.  An arbitration clause is a commonly used clause in a contract that requires the parties to resolve their disputes through a process of arbitration.  The clause may not incorporate  a specific jurisdiction, but sure would bind  the parties to a type of resolution outside of the courts, and is therefore considered a kind of forum selection clause. The clear advantage of arbitration would the speedy disposal, lesser legal technicalities and formalities, flexibility and lower costs.

In India, an Act  to consolidate and amend the law relating to domestic arbitration, international commercial arbitration and enforcement of  foreign arbitral awards as also to define the law relating to conciliation and for matters connected therewith or incidental thereto – came into being in Aug 1996 and is known as “The Arbitration and Conciliation Act, 1996’.

One important aspect in Insurance Policy is that ‘arbitration’ can be invoked only when the liability is admitted and dispute is on the amount.  The condition mentions of appointment of arbitrator and if a single arbitrator cannot be agreed upon, it will be a team of 3 – one  appointed by the Insured; one by the Company and the other appointed by the two selected arbitrators. (earlier policies contained reference to Umpire as third arbitrator !)  

Here is something understood from an interesting case  (SLP of 2012) – it was a case between two Cement companies wherein the reference was on – ‘whether  on the death of a named arbitrator, the arbitration agreement survives or not ?’


The relevant arbitration clause in the agreement dated 16.12.1989, mentioned that ‘If any question or difference or dispute shall arise between  the parties’ …………  with respect to the rights and liabilities of the parties hereto  then such question or dispute shall be referred  either  to  Mr.  N.A. Palkhivala or Mr. D.S. Seth, whose decision in the  matter  shall be final and binding on both the parties.”  (emphasis added).

It was contended by the petitioner that since both the persons referred in the agreement were not alive, the arbitration clause in the agreement would not survive.  Incidentally, one of the arbitrator was named as he was the Chairman of one company and the other was a director of the other company.  Both  of  them had been  nominated  as  arbitrators  since  they  were  closely associated with the company and also due  to  their  eminence,  impartiality
and familiarity in all commercial transactions and the corporate laws.  

The respondent, (applicant  before  the  High  Court),  refuted  those contentions and submitted before the High Court that the arbitration  clause in  the  agreement  would  survive  even  after  the  death  of  the   named arbitrators and the parties can still resolve their  difference  or  dispute by referring them to another arbitrator or move the court for  appointing  a substitute arbitrator whose decision would be final and binding on both  the parties.

Bombay  High  Court  entertained  the  application  preferred  by  the respondent under Section 11 of the  Act. The court took  the  view  unless  the  parties have expressly precluded such a course being followed, give  effect  to  the policy of the law, which is to promote the efficacy of arbitration  and  the efficacy of commercial arbitration must be preserved - particularly  when  business  dealings  are  based  on  an  agreement  which provides recourse to arbitration.  

The petitioners argued that because  of  the  special  nature   of   the appointment of  named arbitrators, the parties to the contract had wanted their difference or dispute  to  be  resolved  only  by  those  named arbitrators and on their death, the  arbitration  clause  in  the  agreement would not survive.

The agreement in question pertained to transferred lands in Gujarat, which later, the Collector, Porbander as well  as
Secretary (Appeals), Revenue Department, State  of  Gujarat  held  that  the petitioner had committed breach of condition by transferring them without the permission of the Collector and
resumed possession of the aforesaid lands.  The arbitration clause was provoked.     

The Court upon examination of the arbitration clause held that Clause 21 of the Agreement indisputably is  an  arbitration  agreement which falls under Section 7 of the Act.  The intention  of  the  parties  to enter into an arbitration agreement can therefore clearly be  gathered  from the same and it  clearly  indicates  an  agreement  on the part of the parties to refer the disputes to the  named  arbitrators  in the Agreement. It clarified that arbitration clause has no nexus with the life time  of  the  named  arbitrator.   The expression “at any time” used in the arbitration clause has  nexus  only  to the time frame within which the question or  dispute  or  difference  arises between the parties be resolved.  Those disputes and  differences  could  be resolved during the life time of the named arbitrators or beyond their  life time. 

The Apex Court held that the High Court in their view  was  justified  in  entertaining  such  an application and appointing a former Judge of this Court as a sole  arbitrator  under  the  Arbitration  and  Conciliation  Act,  1996  to adjudicate the dispute and difference between the parties.  So, irrespective of the survival of the persons named as arbitration agreement, the arbitration clause would survive, unless there is clear intent of debarring the same.

An interesting case with clear interpretation indeed.

With regards – S. Sampathkumar
29th May 2014.


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