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Conditionality present in arbitration clause must be interpreted strictly

In United India Insurance Co. Ltd. vs Hyundai Engineering and Construction, the insurance policy in clause 7 stipulated arbitration in case of dispute but subject to acceptance of the liability by the insurer. When the claim was filed, the surveyor appointed by the insurer found the accident to be entirely due to the fault of the insured and under such circumstances the loss not being payable under the policy, the insurer by letter categorically repudiated the claim in its entirety.

Subsequently the insured went to the High Court for appointment of arbitrator claiming dispute which was resisted by the insurer that the matter cannot be arbitrated. The High Court agreeing with allowed the application while referring to judgments in Duro Felguera, S.A. Vs. Gangavaram Port Limited, and  Jumbo Bags Ltd. Vs. New India Assurance Co. Ltd.

On appeal the Supreme Court found that the judgements referred to by the High Court are 2 judge benches while the more relevant judgments being very similar to the present case is the 3 judges bench in Oriental Insurance Company Limited Vs. Narbheram Power and Steel Private Limited which in turn refers to another 3 judges bench in Vulcan Insurance Co. Ltd. Vs. Maharaj Singh and Anr. The Supreme Court held that it has been clearly decided through the said judgments that arbitration clause has to be interpreted strictly. Clause 7 has a clear conditionality. Th arbitration clause in Clause 7 will get activated or kindled only if the dispute between the parties is limited to the quantum to be paid under the policy. The liability should be unequivocally admitted by the insurer.  To put it differently, an arbitration clause would enliven or invigorate only if the insurer admits or accepts its liability under or in respect of the concerned policy.
As the appellants completely denied their liability and repudiated the claim of the JV (respondent Nos.1 & 2) for the reasons mentioned in the communication. The reasons are specific. No plea was raised by the respondents that the policy or the said clause 7 was void. It must be held that the dispute in question is non-arbitrable and respondent Nos.1 & 2 ought to have resorted to the remedy of a suit.

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