Ruby General Insurance Co. Ltd v. Pearey Lal Kumar and Another

lt1Jian Arbitration Act (X of 1940), s. 33-Arbitration clause-· Wht'ther" disputt' "arises out of agrt't'ment"-Tests-Plea that agree• 1flt'11t is not applicable and does not subsist-No dispute about the· existence or validity or meaning-Jurisdiction of arbitrator-Appli;

cation under s. 33-Maintainability.

The appellant company insured a car belonging to respondent'

No. 1 and issued a policy which contained, inter alia, the following_ tcrms:-"All differences arising out of this policy shall be referred to the decision of an arbitrator to be appointed by the parties • . . . . . . 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 then the claim shall have been deemed to have been abandoned and shall not be recoverable." The car was lost, and the company through its Branch Manager dis-claimed liability on· three different dates. The insured did not take any action in regard to the appointment of an arbitrator un-til more than twelve months after the last disclaimer by the com-pany. The case of the company was that the insured must be deemed to have abandoned his claim by virtue of the contract ef insurance policy while the respondent averred that there was never any valid disclaimer by the company of its liability as the Branch Manager had no authority to disclaim the liability and it could have been disclaimed only by the resolution of the com-pany. The company presented the present application under sec. 33 of the Indian Arbitration Act praying for a declaration that the reference to arbitration was illegal and the award if made by the arbitrator would not bind the company. It was contend-ed on its behalf that the arbitration clause had ceased to be 1952 operative and the question as to the existence and validity of the

Arbitration agreement was triable by the court under sec. 33 of 1Ruby General the Arbitration Act and not by the arbitrator.

Insurance Co. Ltd. Held, (i) that the point on which the parties were in dispute

v. was a difference "arising out of the policy", because recourse to Pearey Lal the contract by which both the parties were bound was necessary

Kumar for the purpose of determining the matter in dispute between 'llnd Anoth<r. them as there was no contention raised in the present case by

either of the parties that there was no contract entered into at all or that it was void ab initio, and therefore the arbitrator had jurisdiction to decide the matter referred to him. A contention 'that the arbitration agreement has ceaseG to be applicable or that it no longer subsists will not oust the jurisdiction of the ·arbitrator.

(ii) No question of determining the effect of the arbitration :within the n1eaning of sec. 33 arose because there was no dispute between the parties as to what it meant.

A. M. Mair and Co. v. Gordhandas Sagarmul/ [1950] (S.C.R. '792), Heyman v. Darwins Ltd. ([1941] 1 ·A.E.R. 337), Mecaura v. Northern Assurance Co. ([1925] A.G. 619), Stebbing v. Liverpool, London and Globe Insurance Co. Ltd. ([1917], 2 K. B. 433) referred to.

CIVIL APPELLATE JuRISDICTION : Civil Appeal No. 163 of 1951. Appeal by special leave from the Judgment dated the 10th April, 1951, of the High Court of Judicature for the State of Punjab at Simla (Kapur J.) in Civil Revision No. 286 of 1950 arising out of Order dated the 24th March, 1950, of the Court of Subordinate Judge, 1st Class, Delhi, in an Applica-tion under Section 33 of Indian Arbitration Act, X of 1940.

Rattan Lal Chawla (K. N. Agarwal, with him) for the appellant.

Som Nath Chopra for the respondent.

1952. February 25. The Judgment of the court was delivered by FAZL Au J .-This is an appeal by special leave against the i"udgment of the Punjab High Court up-holding the decision of a Subordinate Judge of Delhi relating to a petition filed by th~ 3:ppellant-comp~ny under section 33 of the Indian Arb1trat10n Act against the respondents.

The material facts are these. On the 22nd April, 1952 1947, the appellant company insured a car belonging Ruby General' to the first respondent and issued a policy which fully Insurance sets out the terms and conditions of the agreement Co. Ltd. relating to the insurance. The first respondent left his v. car in a garage at Lahore and came away to India on Pearey Lal Kumar the 31st July, 1947. Subsequently, he learned about and Another~ the loss of his car, and sent a legal notice dated the 18th March, 1948, through his advocate Mr. A. R. Fazl Ali Kapur to the Head Office of the company at Calcutta, claiming a sum of Rs. 7,000 for the loss of the car. On the 10th April, 1948, Mr. Kapur received a letter from the Branch Manager of the Company's office at Amritsar asking for information regarding certain matters stated in the letter. This information appears to have been supplied on the 30th April, 1948. On the 26th May, 1948, the company's Branch Manager at Amritsar wrote to the first respondent repudiating the liability of the company for the loss of the car on the.

ground that the loss was "due to communal riots.

which were going on in the whole of Punjab" and was not covered by the agreement of insurance. A similar letter was written again by the Branch Manager on the 3rd July, 1948, to the first respondent, and another letter was written by one Mr. Rattan Lal Chawla representing himself to be counsel for the company, to, Mr. A. R. Kapur, on the 1st August, 1948. On the.

21st November, 1949, the first respondent wrote a letter to the Branch Secretary of the Company's office at Calcutta, stating that his claim was valid and nominating Mr. T. C. Chopra, Assistant Manager,.

Lakshmi Insurance Company Ltd., Delhi, as arbitrator on his behalf and requesting the company to appoint another person as arbitrator on its behalf. Thereafter,, the company presented an application on the 29th December, 1949, in the court of the Senior Sub-judge,.

Delhi, under section 33 of the Indian Arbitration Act,.

against the first respondent and Mr. T. C. Chopra, the-arhitrator, who is the second respondent in tliis appeal,.

praying for-

1952 ( 1) a declaration to the effect that the reference to

arbitration 1md the appointment of respondent No. 2 ;Ruby Generol as sole arbitrator was illegal;

Insurance Co. Ltti. (2) a declaration to the effect that if the respond-

v. ent No. 2 made any award it would not be binding Pear<y Lal . on the company; and

Kumllf'

.-nJ Another. (3) an injunction restraining the respondents Nos .

1 and 2 from taking any proceeding in the matter and the respondent No. 2 from making any award.

Upon this petition, notice was issued to the res-pondents, and an injunction was issued directing them not to file any award till the date of the next hearing, which was fixed for 31st January, 1950. On the 4th February, 1950, the first respondent wrote to the second respondent (the arbitrator) that since no arbitrator had been appointed by the company and since the company had refused to appoint any arbitra-ator, he (Mr. Chopra) was to act as the sole arbitrator. On the 6th February, 1950, Mr. Chopra wrote to inform the insurance company that he had been appointed sole arbitrator and asked the company to send the • statement of its case and to produce all the evidence ·!>ll the 14th February, 1950. On the 10th February, 1950, the insurance company filed a petition before the Subordinate Judge, Delhi, praying that the responden~ be stopped from proceeding further in the matter so .that its application under section 33 may not become infructuous. On the 11th February, the Subordinate Judge issued notice to the respondents fixing the 17th }'ebruary as the date of hearing and passed the fol- 'lowing order:

"Moreover (till) the decision of this application ·the arbitrator should not give or pronounce his award ·bur should continue the proceedings."

On. the 14th February, 1950, the second respondent pronounced his award after making a note to the following effect:- "Mr. G. R. Chopra, the counsel of the defendants, ,sent a telephonic message at 12 A.M. requesting exten- ~on till ;! P.M. I agreed and accordingly I waited for him and the plaintiff with his counsel also waited up 19)2 to 1 P.M. Nobody turned up on behalf of the defend-Ruby Gent:ral ants. I commenced the proceedings and took the lnsuranct: statement of the plaintiff and the documents that he Co. Lttl. had produced." T. Pe11rt:y lAl He made a further note at the end of the award to Kumar this effect:- ani A.notht:r.

"As after the giving of the award a notice was Pal Ali 1erved upon me not to give the award, I have not sent any formal letter to the parties informing them of the award and its costs."

On the 24th March, 1950, the Subordinate Judge pa$sed an order on the company's application under section 33, dismissing it and holding that the terms.

of clause 7 of the agreement "were comprehensive enough to include the points of disputes between the parties now and as such are triable by the arbitrator and not by the court". The Subordinate Judge con-cluded his order by observing:

"I, therefore, hold that the reference to the arbit-ration of the differences is perfectly valid and the points raised by the parties to this application with regard to the abandonment of claim . and its becoming irrecoverable are to be decided by the arbitrator."

The judgment of the Subordinate Judge was upheld in revision by the Punjab High Court and the com-pany has now preferred an .appeal to this court by special le~ve.

The points that were . urged on behalf of the appel-lant in this appeal are these:-

(1) that the arbitration clause had ceased to be operative and the question as to the existence and validity of the arbitration agreement was triable by the court under section 33 of the Arbiration Act and not by the arbitrator; and

(2) that the award was invalid and not binding on the appellant, because it was pronounced in spite of the order of the court dated the 11th February, 1950, directing the arbitrator not to pronounce his award.

1952 Clause 7 of the policy of insurance runs as

follows:- Ruby Genn-111

Insurance "All differences arising out of this policy shall Co. Ltd. be . rderred to the decision of an arbitrator to be·

v. appointed in writing by the parties in difference Pearey Ltil

Kumar or if they cannot agree upon a single arbitrator to the· 11nd A nothn-decision of two arbitrators one to be appointed in

J. writing by each of the parties within one calendar F11zl Ali 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 calender 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 aban- . cloned and shall not thereafter be recoverable here-under."

It will be noticed that this clause provides among· other things that if the company disclaimed liability to the insured for any claim under the policy and such· claim was not within twelve calendar months from the date of such disclaimer . referred to arbitration, then the claim should be deemed to have been abandoned and was not recoverable. The case of the company is that it disclaimed liability for the loss of the car on three successive occasions, namely, on the 26th May, 1948, the 3rd July, 1948, and the 1st August, 1948. The first respondent however did not take any action in regard to the appointroent of an arbitrator until the 21st November, 1949, i.e., until more than 12 months after even the last disclairoer by the company. For this reason, the claim put forward by the first respondent must be deemed to have been abandoned and he cannot recover anything from the company. On the other hand, the case of the first respondent, which is set out m 'his affidavit dated the 17th February, 1952 1950, is that there was never any valid disclaimer by Ruby General the company of its liability. The position that he took Insurance up was that the Branch Manager of the company had Co. Ltd. no authority to disclaim the liability, and it could have v •. been disclaimed only by a resolution of the company. Pearcy Lal Now these being the respective contentions of the Kumar and-Another. parties, the question is whether the point in dispute fell to be decided by the arbitrator or by the court under Fazl - Ali. J. section 33 of the Arbitration Act. Section 33 is to the following effect:-

"Any party to an arbitration agreement or any per-son claiming under him desiring to challenge the exist-ence 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 ex-pedient, 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 question to be decided is whether the point ori which the parties are in dispute is a difference "arising out of the policy" in terms of clause 7 of the policy.

The test for determining such a question has been laid down in a series of cases and is a simple one. The test is whether recourse to the contract by which the parties are bound is necessary for the purpose of deter-mining the matter in dispute between them. If such recourse to the contract is necessary, then the matter must come within the scope of the arbitrator's jurisdic-tion. In the present case; both thP. p;iries admit the contract and state that they are bound by it. Indeed, the appellant-company, in order to mak-ie good its con-tention, is obliged to rely and does rely on that part of clause 7 of the policy which states that if the company should disclaim liability and the claim be not refered to arbitration within 12 months of such disclaimer, the claim shall be deemed to have been abandoned. Evidently, the company cannot succeed without calling m aid this clause and

3-6 S. C. India/71 1952 rely.ing on it. Agajn, the first respondent does not say Ruby General that he is not bound by the clause but states that the

Insurance matter was referred to arbitration before any valid Co. Ltd. disclaimer was made. The position therefore is that

v. one party relying upon the arbitration clause says that Peuey Lal there has been a breach of its terms and the other

Kumar party, also relying on that cla11Se, says that there has •ntl Another.

been no breach but on the other hand the requirements F•d Ali f. of that clause have been fulfilled. Thus, the point in

dispute between the parties is one for the decision of which the appellant is compelled to invoke to his aid one of the terms of the insurance agreement. it is thus clear that the difference between the parties is a difference arising out of the policy and the arbitrator had jurisdiction to decide it, the parties having made him the sole judge of all differences arising out of the policy. , A large number of cases were cited before us on behalf of the parties, but it is unnecessary to refer to them, since the question which arises in this appeal is a simple one and is covered by the statement of law which is to be found in the decision of this Court in A. M. Mair & Co. v. Gordhandas; Sagarmull('), and in a series of English authorities, some of which only may be referred to. In Heyman v. Darwin;, Ltd. (t) the law on the subject has been very clearly stated in the following passage :- «An arbitration clause is a written submission, agreed to by the parties to the contract, and, like otha written submissions to arbitration, must be construed according to its language and in the light of the cir-cumstances in which it is made. If the dispute is :u to whether the contract which contains the clause has (!ver 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 con-tending that it is void ab initi"o (because, for example, the making of such a contract is illegal) the arbitration dause cannot operate, for on this view the clause itself 1952 is also void.

Ruby General If, however, the parties are at one in asserting that Insurance Co. Ltd. they entered into a binding contract, but a difference v. has arisen between them as to whether there has been Pearey Lal a breach by one side or the other, or as to whether Kumar -circumstances have arisen which have discharged one ond Another. o0r both parties from further performance, such differ-Fazl Ali f. ~nces should be regarded as differences which have arisen 'in respect of', or 'with regard to,' or 'under'

.... the contract, and an arbitration clause which uses

these, or similar expressions, should be construed .accordingly.''

In Macaura v. Northern Assurance Co.(1), the :41ppellant had insured a large quantity of timber against fire and the greater part of the timber having been destroyed by fire, he sued the insurance company to recover the loss but the action was stayed and the matter was referred to arbitration in pursuance of the conditions contained in the policy. The arbitrator held that the claimant had no insurable interest in the -goods insured and disallowed .the claim. One of the points raised in the case was that the arbitrator had no jurisdiction to decide the matter, but that conten-tion was rejected by Lord Sumner in these words :-

"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 :

!CC Stebbing's case(2}, Woodall v. Pearl Assurance c~.e> .... It is a fallacy to say that they assert the policy to be null and void."

In Stebbing v. Liverpool. and London and Globe In-surance Company Limited(2), to which reference was made by Lord Sumner, the policy of insurance con-tained a clause referring to the decision of an arbitrator "all differences arising out of this policy". It also

contained· a recital that the assured had made a pro-posal and declaration as the basis of the contract, and Ruby General a clause to the effect that compliance with the condi-

lnsuranc~ Co. Ltd. tions indorsed upon the policy should be a condition

. v. precedent to any liability on the part of the insurers • Pearey Lal One of the conditions provided that if any false

Kumar declaration should be made or used in support of a and Another. claim all benefit under the policy should be forfeited. Fazl Ali f. In answer to a claim by the assured, the insurers

alleged that statements in the proposal and declaration were false. When the matter came before the arbitrator, the assured objected that this was not a difference in ·the arbitration· and that the arbitrator had no power to determine whether the answers were true or not, or to determine any matters which called in question the validity of the policy. In holding that the arbitrator had jurisdiction to decide the matter,