The Bombay High Court has clarified that under an insurance policy clause permitting arbitration only where the dispute is as to quantum and liability is otherwise admitted, once the insurer entertains a singular claim arising from one incident and sanctions it in part, the dispute regarding the unpaid part is a dispute relating to “how much” is payable and not “whether” any amount is payable, unless the entire claim is repudiated in toto. The Court also clarified that a later attempt by the insurer to artificially split the same claim into separate components of admitted and denied liability does not render the unpaid component non-arbitrable.
The High Court held that where the arbitral tribunal’s finding on proximate cause is supported by material on record, including technical correspondence, survey evidence, and expert testimony, the Section 34 court cannot re-appreciate such evidence as an appellate court and will not interfere unless the finding is so perverse that no fair-minded person could have arrived at it.
A Single Judge Bench of Justice Sandeep V. Marne observed that the core issue was whether the claim for overhaul costs was a dispute as to quantum or a dispute as to liability under Clause 12. The Bench accepted the arbitral tribunal’s view that the respondent had raised one singular and indivisible claim arising from the same incident, and that the insurer’s attempt to bifurcate it into an “incident claim” and an “overhauling claim” was misconceived.
The Bench found significance in the insurer’s own letters of 5 December 2001 and 18 December 2001, which had strongly advised complete overhauling. It held that there was no reason for the insurer to insist on overhaul if such costs were wholly outside policy coverage. These letters supported the tribunal’s conclusion that the later letters of 27 December 2001 and 25 January 2002 did not conclusively take the dispute outside the arbitration clause.
The Bench further observed that the letters dated 27 December 2001 and 25 January 2002 were tentative and qualified, used expressions such as “at this juncture” and “in the meanwhile,” and were issued before submission of the actual claim bill. Even after the claim bill was submitted, the insurer never expressly repudiated that bill and did not, while sanctioning part payment, state that it was segregating the claim and rejecting liability for overhaul. The distinction between the two heads was sought to be raised only later in the statement of defence.
The Bench also relied on the joint surveyors’ reports and the insurer’s earlier stand in the first round of proceedings, where it had itself stated that the dispute was with regard to quantum. The Bench held that the insurer could not now take a volte-face and contend that the dispute was one of liability.
On merits, the Bench held that the tribunal’s finding that the accident was the proximate cause for overhauling was a finding of fact supported by material on record. It referred in particular to GE’s letter dated 15 January 2002 stating that the damage to other parts might also be the result of the accident of 16 September 2001, to the expert evidence led by the respondent, and to the survey material indicating that the engine had been operating smoothly prior to the accident and was not otherwise due for overhaul at that time.
The Bench emphasized the narrow scope of interference under Section 34 and held that the award disclosed no patent illegality, gross perversity, conflict with public policy, or violation of natural justice. It therefore upheld the award and dismissed the commercial arbitration petition.
Briefly, petitioner-insurer challenged under Section 34 of the Arbitration and Conciliation Act, 1996 an arbitral award dated 8 December 2023, by which the sole arbitrator treated the insured’s claim as a single indivisible claim, held the dispute to be one of quantum and not liability, found that the accident was the proximate cause for overhauling of the gas turbine engine, and awarded Rs. 41.98 crores with post-award interest at 12% p.a. and arbitration costs of Rs.2 crores in favour of the respondent. This was the second round of arbitration after the earlier majority award had been set aside by the High Court on 15 February 2019.
The respondent’s predecessor had obtained an Industrial All Risk Policy for its captive power plant at Jhagadia, Gujarat, covering material damage and business interruption. Clause 12 of the policy provided for arbitration only where the difference was as to the quantum to be paid under the policy and liability was otherwise admitted, and expressly excluded arbitration where the insurer had disputed or not accepted liability under or in respect of the policy.
After an earlier repair episode in April 2001, the gas turbine engine suffered another incident on 16 September 2001 when the metal chip detector alarmed, resistance fluctuated, and the engine tripped. Borescope inspection showed that Sump-B was not in good order and the 4B bearing cage was broken. The engine was sent to GE’s facility in Houston, where GE observed additional conditions such as corrosion and rusting and recommended complete overhaul. The insurer’s US surveyor, McLarens Toplis, also reported that GE had recommended overhaul of the entire engine.
Later, the insurer, by letters dated 5 December 2001 and 18 December 2001, advised that complete overhauling of the engine ought to be carried out and warned of future claims and underwriting issues if that was not done. However, after the respondent informed the insurer on 24 December 2001 that it would proceed with complete overhaul and claim the full repair and incidental costs, the insurer, by letters dated 27 December 2001 and 25 January 2002, stated that its liability would be restricted to repair costs in respect of actual damage directly caused by the incident and that overhauling costs would not fall within the purview of the policy.
The respondent submitted its claim bill, and the insurer eventually offered Rs. 7.69 crores under a settlement intimation voucher towards material damage and business interruption. The respondent accepted the amount under protest. In the second arbitration, the insurer raised a Section 16 objection that the dispute over overhaul costs was not arbitrable because it concerned liability and not quantum, but the arbitrator rejected that objection and proceeded to partly allow the claim.
Appearances:
Senior Advocate Sharan Jagtiani, along with Advocates Surbhi Agarwal and Netra Haldankar, for the Petitioner
Senior Advocate Shiraz Rustomjee, along with Advocates Shreya Parikh, Archit Jayakar, Pooja Yadav, Mihir Kakade and Kshitij Abbhi, for the Respondent
