Ruby General Insurance Co. Ltd vs Pearey Lal Kumar And Another

Rewritten Version Notice: This is a rewritten version of the original judgment.

Court: Supreme Court of India

Case Number: Civil Appeal No. 163 of 1951

Decision Date: 25 February 1952

Coram: Saiyid Fazal Ali, Vivian Bose

In this matter the parties were Ruby General Insurance Co. Ltd as the petitioner and Pearey Lal Kumar together with another individual as respondents. The case was decided by the Supreme Court of India on the twenty-fifth day of February, 1952. The judgment was authored by Justice Saiyid Fazal Ali and was delivered by a bench comprising Justices Saiyid Fazal Ali, Vivian Bose and Justice Fazal Ali. The official citation of the decision appears as 1952 AIR 119 and 1952 S.C.R. 501. The judgment is also referenced in several later reports, including the 1962 and 1969 Supreme Court reports and the 1984 and 1985 reports. The legal issue arising in the case concerned the operation of section thirty-three of the Indian Arbitration Act of 1940. Specifically, the Court was asked to determine whether an arbitration clause contained in an insurance contract gave the arbitrator jurisdiction to decide a dispute that the parties claimed arose out of the agreement, and whether the question of the existence and validity of that arbitration agreement could be decided by the court under the same statutory provision. The primary point of contention involved a plea that the arbitration agreement was no longer applicable or had ceased to subsist, and whether such a plea could remove the arbitrator’s jurisdiction. The case also examined the maintainability of an application under section thirty-three of the Arbitration Act.

The facts that gave rise to the dispute were as follows: the petitioner, an insurance company, issued a motor-vehicle policy covering a car owned by the first respondent. The policy expressly provided that “All differences arising out of this policy shall be referred to the decision of an arbitrator to be appointed by the parties,” and further stipulated that if the insurer disclaimed liability for any claim and the claimant failed to refer the claim to arbitration within twelve calendar months of such disclaimer, the claim would be deemed abandoned and unrecoverable. The insured vehicle was subsequently lost, and the insurer, through its Branch Manager, issued three separate notices of disclaimer of liability on three different dates. The insured, however, did not initiate any steps to appoint an arbitrator or refer the claim to arbitration until more than twelve months had elapsed after the last disclaimer. The insurer therefore argued that under the terms of the insurance contract the insured had abandoned his claim, and that the arbitration clause could no longer be invoked. The respondent countered that the Branch Manager lacked authority to waive the company’s liability and that any such disclaimer could have been effected only by a formal resolution of the insurer’s board. Consequently, the respondent asserted that no valid disclaimer existed. The insurer brought an application under section thirty-three of the Arbitration Act, seeking a declaration that the reference to arbitration was illegal and that any award rendered by an arbitrator would not be binding upon the company. The insurer further contended that the arbitration clause had become inoperative and that the question of the existence and validity of the arbitration agreement should be determined by the court, not by an arbitrator. The Court held that the dispute between the parties was indeed a “difference arising out of the policy” because resolution of the matter required reference to the contract that bound both parties. No party had argued that the contract was non-existent or void ab initio, and therefore the arbitrator retained jurisdiction to decide the issue. A claim that the arbitration agreement had ceased to be applicable did not, on the facts, oust the arbitrator’s jurisdiction.

In the present case the Court explained that even if a party argues that the arbitration agreement was never valid, was void from the beginning, or that it did not apply to the dispute, such a contention does not deprive the arbitrator of the authority to determine the issues that have been referred to him. The Court further held that a claim that the arbitration agreement has ceased to exist or is no longer in force does not remove the arbitrator’s jurisdiction. Moreover, the Court observed that there was no need to interpret the effect of the arbitration under section thirty-three of the Arbitration Act, because the parties did not dispute the meaning of the agreement itself. In support of this reasoning the Court referred to several earlier authorities, namely A.M. Mair and Co. v. Gordhandas Sagarmull [1950] (S.C.R. 792), Heyman v. Darwins Ltd. [1941] 1 A.E.R. 337, Mecaura v. Northern Assurance Co. [1925] A.C. 619, and Stebbing v. Liverpool, London and Globe Insurance Co. Ltd. [1917] 2 K.B. 433.

The appeal was filed under civil appellate jurisdiction as Civil Appeal No. 163 of 1951, seeking special leave to challenge a judgment dated ten April 1951 of the Punjab High Court at Simla, rendered by Justice Kapur, which itself affirmed a decision of the Subordinate Judge, First Class, Delhi in Civil Revision No. 286 of 1950. The underlying order had arisen from an application filed on twenty-four March 1950 under section thirty-three of the Indian Arbitration Act, 1940. The appellant, represented by counsel accompanied by a junior, was the insurance company; the respondent was represented by counsel named Som Nath Chopra. The judgment was delivered by Justice Fazl Ali on twenty-five February 1952. The factual background disclosed that on twenty-second April 1947 the insurer issued a motor-vehicle policy covering a car owned by the first respondent. The car was left in a Lahore garage, and the owner travelled to India on thirty-first July 1947. After learning of the car’s loss, the owner sent a legal notice on eighteenth March 1948, through his advocate, to the insurer’s head office in Calcutta, demanding a sum of Rs 7,000. The insurer’s branch manager in Amritsar wrote to the owner on ten April 1948 requesting further information, which the owner supplied on thirtieth April 1948. Subsequently, on twenty-sixth May 1948, the branch manager repudiated the insurer’s liability, alleging that the loss resulted from communal riots affecting the whole of Punjab and therefore fell outside the policy coverage. A similar repudiation letter was issued on third July 1948.

On 1 August 1948, a letter was sent by Mr Rattan Lal Chawla, who claimed to act as counsel for the insurance company, addressed to Mr A.R. Kapur. Later, on 21 November 1949, the first respondent wrote to the Branch Secretary of the company’s Calcutta office, asserting that his claim was legitimate, naming Mr T.C. Chopra, Assistant Manager of Lakshmi Insurance Company Ltd., Delhi, as the arbitrator he wished to appoint, and asking the company to designate another individual to serve as its arbitrator. Subsequently, the company filed an application on 29 December 1949 in the Court of the Senior Sub-judge of Delhi, invoking section 33 of the Indian Arbitration Act against both the first respondent and Mr T.C. Chopra, who was the second respondent in the present appeal, and prayed for three orders: (1) a declaration that the reference to arbitration and the appointment of the second respondent as sole arbitrator were illegal; (2) a declaration that any award rendered by the second respondent would not bind the company; and (3) an injunction restraining both respondents from advancing any proceedings in the matter and prohibiting the second respondent from making any award. Following the filing, notice was served on the respondents and an injunction was granted, directing them not to file any award until the next hearing, which was scheduled for 31 January 1950. On 4 February 1930, the first respondent wrote to the second respondent, informing him that because the company had failed to appoint an arbitrator and had refused to do so, Mr Chopra should act as the sole arbitrator. On 6 February 1950, Mr Chopra replied, confirming his appointment as sole arbitrator and requesting the company to furnish its statement of case and produce all evidence by 14 February 1950. On 10 February 1950, the insurance company lodged a petition before the Subordinate Judge of Delhi, seeking to restrain the respondents from further action so that its section 33 application would not become ineffective. The Subordinate Judge, on 11 February, issued notice to the respondents, fixed 17 February as the hearing date, and ordered that, pending determination of the application, the arbitrator should not render or pronounce any award but should continue the proceedings. Despite this order, on 14 February 1950 the second respondent issued his award, noting in his record that Mr G.R. Chopra, counsel for the defendants, called at midnight requesting an extension to 1 p.m.; that the arbitrator agreed, waited with the plaintiff and his counsel until 1 p.m., that no representatives of the defendants appeared, and that the arbitrator then proceeded to take the plaintiff’s statement and the documents he produced.

In the award, the arbitrator recorded that after the parties had been present, he took the plaintiff’s statement and the documents that the plaintiff had produced. He added a further remark at the conclusion of the award stating that, because a notice had been served on him after the award was given directing him not to award, he had not sent any formal letter to the parties informing them of the award and its costs. On 24 March 1950, the Subordinate Judge ruled on the insurance company’s application filed under section 33 of the Arbitration Act. The judge dismissed the application and held that the provisions of clause 7 of the insurance policy were sufficiently comprehensive to cover the disputed points between the parties, and therefore those points were to be decided by the arbitrator and not by the court. The judge concluded his order by observing that the reference to arbitration of the differences was perfectly valid and that the issues raised by the parties concerning abandonment of the claim and its becoming irrecoverable were matters for the arbitrator to determine. The Subordinate Judge’s decision was affirmed on revision by the Punjab High Court. The insurance company now appealed to this Court by way of special leave, raising two principal submissions: first, that the arbitration clause had ceased to operate and that the existence and validity of the arbitration agreement ought to be examined by the court under section 33 of the Arbitration Act rather than by the arbitrator; and second, that the award was invalid and not binding on the insurance company because it had been pronounced despite the court’s order dated 11 February 1950 directing the arbitrator not to make an award.

Clause 7 of the insurance policy reads as follows: “All differences arising out of this policy shall be referred to the decision of an arbitrator to be appointed in writing by the parties in difference or if they cannot agree upon a single arbitrator to the decision of two arbitrators, one to be appointed in writing by each of the parties within one calendar month after having been required in writing so to do by either of the parties, or, in case the arbitrators do not agree, of an umpire appointed in writing by the arbitrators before entering upon the reference. The umpire shall sit with the arbitrators and preside at their meeting and the making of an award shall be a condition precedent to any right of action against the company. If the company shall disclaim liability to the insured for any claim hereunder and such claim shall not within twelve calendar months from the date of such disclaimer have been referred to arbitration under the provisions herein contained, then the claim shall for all purposes be deemed to have been abandoned and shall not thereafter be recoverable hereunder.” It will be noticed that this clause provides, among other things, that if the insurer disclaims liability and the claim is not referred to arbitration within twelve months, the claim is treated as abandoned and cannot be recovered.

The Court observed that the insurance company had disclaimed liability to the insured for any claim under the policy, and that the policy stipulated that if such a disclaimer was not referred to arbitration within twelve calendar months from the date of the disclaimer, the claim would be deemed abandoned and therefore unrecoverable. The company asserted that it had disclaimed liability for the loss of the automobile on three separate occasions, namely on 26 May 1948, on 3 July 1948, and on 1 August 1948. The first respondent, however, did not take any step to appoint an arbitrator until 21 November 1949, which was more than twelve months after the last disclaimer issued by the company. Consequently, the Court held that the respondent’s claim must be treated as abandoned and that he could not recover any amount from the insurer. The respondent, by contrast, contended, as set out in his affidavit dated 17 February 1950, that the company had never made a valid disclaimer of liability because the Branch Manager who issued the disclaimer lacked the authority to do so; such a disclaimer could have been effected only by a resolution of the company’s board. These opposing positions raised the question of whether the dispute was to be decided by the arbitrator or by the court under section 33 of the Arbitration Act. Section 33 provides: “Any party to an arbitration agreement or any person claiming under him desiring to challenge the existence or validity of an arbitration agreement or an award or to have the effect of either determined shall apply to the Court and the Court shall decide the question on affidavits: Provided that where the Court deems it just and expedient, it may set down the application for hearing on other evidence also, and it may pass such orders for discovery and particulars as it may do in a suit.” The Court then examined whether the matter in dispute fell within the meaning of a difference “arising out of the policy” under clause 7 of the insurance contract. The test, as laid down in earlier authorities, is whether reference to the contract is necessary to determine the issue between the parties. If such reference is necessary, the dispute lies within the arbitrator’s jurisdiction. In the present case, both parties acknowledged the existence of the insurance contract and that they were bound by it. The insurer, to support its case, relied upon the portion of clause 7 stating that a claim not referred to arbitration within twelve months of a disclaimer would be deemed abandoned. The respondent did not deny the applicability of the clause but asserted that the arbitration was referred before any valid disclaimer could have been made. Thus, each party leaned on the same contractual clause but interpreted its effect differently—one claiming a breach of the clause, the other asserting compliance with its requirements. Accordingly, the dispute concerned the interpretation and operation of a term of the insurance policy, which is a matter that, under the established test, must be decided by the arbitrator, who had jurisdiction to resolve the difference arising out of the policy.

The insurer’s policy stipulates that if a disclaimer is issued and the claim is referred to arbitration within twelve months of that disclaimer, the claim shall be deemed abandoned. Consequently, the insurer cannot succeed in the present proceedings without invoking and relying upon this specific clause. The first respondent, however, does not deny that he is bound by the arbitration clause; instead, he asserts that the matter was referred to arbitration before any valid disclaimer had been made. Thus, the factual matrix is that one party, invoking the arbitration clause, contends that a breach of the clause’s terms has occurred, while the other party, also invoking the same clause, maintains that no breach has occurred and that the procedural requirements of the clause have been satisfied. The dispute therefore centers on an issue that the appellant must resolve by relying on a term of the insurance contract itself. It follows that the disagreement between the parties is a difference arising out of the policy, and the arbitrator possessed jurisdiction to determine it because the parties had designated the arbitrator as the sole judge of all differences arising under the policy. Although counsel for both sides cited a large number of authorities, the Court found it unnecessary to discuss those citations in detail, as the question presented in the appeal is straightforward and is governed by established legal principles articulated in the Court’s earlier decision in A.M. Mair & Co. v. Gordhandass Sagarmull C and by certain English authorities. In Heyman v. Darwins, Ltd. (2) the law was succinctly expressed as follows: “An arbitration clause is a written submission, agreed to by the parties to the contract, and, like other written submissions to arbitration, must be construed according to its language and in the light of the circumstances in which it is made. If the dispute is as to whether the contract which contains the clause has ever been entered into at all, that issue cannot go to arbitration under the clause, for the party who denies that he has ever entered into the contract is thereby denying that he has ever joined in the submission. Similarly, if one party to the alleged contract is contending that it is void ab initio (because, for example, the making of such a contract is illegal) the arbitration clause cannot operate, for on this view the clause itself is also void. If, however, the parties agree that they entered into a binding contract, but a difference has arisen as to whether there has been a breach by one side or the other, or as to whether circumstances have discharged one or both parties from further performance, such differences should be regarded as differences which have arisen ‘in respect of’ or ‘with regard to’ or ‘under’ the contract, and an arbitration clause employing these expressions should be construed accordingly.” (1) [1950] S.C.R. 792. (2) [1941] 1 A.E.R. 337, 343.

In interpreting the language of a contract, the Court explained that expressions such as “of,” “with regard to,” or “under” the contract, and any arbitration clause that employs those or similar terms, must be given a meaning that is consistent with the contract as a whole. The Court illustrated this principle by referring to the decision in Macaura v. Northern Assurance Co. (1). In that case the appellant had taken out an insurance policy covering a large quantity of timber against fire. When the majority of the timber was destroyed by fire, the appellant sued the insurer to recover the loss. The suit was stayed and the dispute was referred to arbitration in accordance with the conditions contained in the policy. The arbitrator held that the claimant did not possess an insurable interest in the goods that were insured and therefore dismissed the claim. A contention was raised that the arbitrator lacked jurisdiction to decide the matter. Lord Sumner rejected that contention, stating that “The defendants do not repudiate the policy or dispute its validity as a contract; on the contrary, they rely on it and say that according to its terms, express and implied, they are, relieved from liability: see Stebbing’s case(2), Woodall v. Pearl Assurance Co.(3)…… It is a Fallacy to say that they assert the policy to be null and void.” This passage reinforces the view that when the parties do not deny the existence or validity of the contract, the arbitration clause remains effective and the arbitrator retains authority to determine the issues raised under the policy.

To further illustrate the scope of arbitration clauses, the Court referred to Stebbing v. Liverpool and London and Globe Insurance Company Limited (2). The insurance policy in that case contained a clause that directed “all differences arising out of this policy” to an arbitrator. The policy also included a recital that the assured had made a proposal and declaration as the basis of the contract, together with a provision that compliance with the conditions endorsed upon the policy should be a condition precedent to any liability of the insurer. One of those conditions stipulated that if any false declaration were made or used in support of a claim, all benefits under the policy would be forfeited. When the assured submitted a claim, the insurers alleged that the statements contained in the proposal and declaration were false. The assured objected before the arbitrator, arguing that the dispute was not a difference within the scope of arbitration and that the arbitrator lacked the power to determine the truth of the statements or any issue that called into question the validity of the policy. Viscount Reading C.J., addressing the objection, held that the arbitrator possessed jurisdiction to resolve the matter. He observed that “If the company were seeking to avoid the contract in the true sense they would have to rely upon some matter outside the contract, such as a misrepresentation of some material fact inducing the contract, of which the force and effect are not declared by the contract itself. In that case the materiality of the fact and its effect in inducing the contract would have to be tried. In the present case the company are claiming the benefit of a clause in the…”. This reasoning demonstrated that challenges to the truth of statements made in the policy are questions that arise out of the policy itself and therefore fall within the arbitrator’s competence to decide.

The Court observed that the insurer’s argument rested on the premise that the parties had agreed that the statements in question were material and that those statements had induced the contract. The Court noted that if the insurer succeeded in escaping liability, it would be by reliance on one of the clauses contained in the policy rather than by avoiding the policy altogether. Consequently, the Court held that the issue of whether the statement was true was a question that arose out of the terms of the policy itself.

The principal submission advanced on behalf of the appellant was that the matters in dispute lay beyond the jurisdiction of the arbitrator. The appellant argued first that the existence of the arbitration agreement was challenged, and second that the sole purpose of the application filed under section 33 of the Arbitration Act was to have the effect of the arbitration agreement determined. The Court rejected both contentions as untenable. It questioned how the existence of the arbitration agreement could be said to be challenged when both parties expressly acknowledged that the clause in the policy containing the agreement bound them. Neither party contended that there was no arbitration agreement in the policy; on the contrary, each party relied on that agreement to support its respective case. While the appellant maintained that the arbitration agreement had ceased to be applicable, the Court observed that such a contention could not be sustained without referring to the arbitration agreement itself. The appellant’s claim that the agreement no longer subsists was distinguished from a claim that the agreement had never existed or was void ab initio and therefore non-existent. The Court further found that there was no need to determine the effect of the arbitration agreement because the parties did not dispute its meaning. The language of the arbitration clause was clear, and both parties interpreted it alike. The real dispute, according to the Court, concerned whether the first respondent had complied with the conditions of the agreement, a question that did not depend on the effect of the agreement. This approach reflected the view adopted by the High Court, which the Court endorsed as correct.

The second issue raised before the Court was the alleged invalidity of the award on the ground that it was made despite a court injunction directing the arbitrator not to pronounce any award. The Court held that this matter fell outside the scope of the present appeal. The application under section 33 of the Arbitration Act that formed the basis of the appeal had been filed before the award was pronounced, and that application made no reference to the award or to the circumstances now cited as grounds for invalidating the award, which arose after the filing. Counsel for the appellant subsequently made an application seeking to amend the petition under section 38 by introducing certain additional facts. The Court noted this request but did not entertain it within the present proceedings.

In the present proceedings the appellant sought to amend the petition filed under section 33 of the Arbitration Act by introducing additional facts and by adding a prayer that the arbitral award should be declared invalid. The Court considered this request and rejected it. It is relevant to note that, as early as 24 March 1950, the Subordinate Judge, while dismissing the appellant’s petition under section 33, observed that the arbitrator had rendered the award during the pendency of the arbitration. The Judge stated that the award had subsequently been filed in the court of S Mohinder Singh, Sub-Judge, First Class, Delhi, and that any objection to the award could be made there. He further observed that the present application contained no prayer for setting aside the award and, consequently, it would not be appropriate to decide the question of the award’s validity in the absence of such a prayer.

The Court agreed that the Subordinate Judge had correctly indicated the procedural route that was open to the appellant for challenging the award’s validity. However, the appellant neither pursued that route nor made any application in the lower courts to amend the petition under section 33. Accordingly, the Court held that it could not be asked to broaden the scope of the original petition and to examine the award’s validity at this stage. While the Court is generally inclined to shorten litigation, allowing an amendment to the section 33 petition now, and resolving a factual investigation without the benefit of the lower courts’ judgments, would be an unusual step. For these reasons, the appeal was dismissed, and costs were awarded against the appellant. The agents appearing for the parties were Ganpat Rai on behalf of the appellant and S D Sekhri on behalf of respondent No 1.