Conditional Intention of Arbitration

“If any difference shall arise as to the quantum to be paid under this Policy (liability being otherwise admitted) such difference shall independently of all other questions 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 disinterested persons as Arbitrators of whom one shall be appointed in writing by each of the parties within two calendar months after having been required so to do in writing by the other party in accordance with the provisions of The Arbitration Act, 1940, as amended from time to time, and for the time being in force in case either party shall refuse or fail to appoint Arbitrator within two calendar months after receipt of notice in writing requiring an appointment the other party shall be at liberty to appoint Sole Arbitrator and in case of disagreement between the Arbitrators, the difference shall be referred to the decision of an Umpire who shall have been appointed by them in writing before entering on the reference and who shall sit with the Arbitrators and preside at their meetings.

It is clearly agreed and understood that no difference or dispute shall be referable to Arbitration as herein before provided, if the Company has disputed or not accepted liability under or in respect of this Policy.

It is hereby expressly stipulated and declared that it shall be a condition precedent to any right of action or suit upon this Policy that the award by such Arbitrator, Arbitrators or Umpire of the amount of the loss or damage shall be first obtained.

It is also hereby further expressly agreed and declared that if the Company shall disclaim liability to the insured for any claim hereunder and such claim shall not within 3 calendar months from the date of such disclaimer have been made the subject matter of a suit in a Court of Law, then the claim shall for all purpose be deemed to have been abandoned and shall not thereafter be recoverable hereunder.


A similar Clause came up for consideration before a 3-Judge Bench [Hon’ble Justice Dipak Misra] in Oriental Insurance Company Limited, (2018) 6 SCC 534. The Court had opined: “It does not need special emphasis that an Arbitration Clause is required to be strictly construed. Any expression in the Clause must unequivocally express the intent of Arbitration. It can also lay the postulate in which situations the Arbitration Clause cannot be given effect to. If a Clause stipulates that under certain circumstances there can be no Arbitration, and they are demonstrably clear then the controversy pertaining to the appointment of Arbitrator has to be put to rest.”

It is clear that a Arbitration Clause has to be interpreted strictly. Thus, in United India Insurance Company Ltd. v. Hyundai Engineering and Construction Company Ltd., [Civil Appeal No. 8146 of 2018] a 3-Judge Bench [Hon’ble Justice Dipak Misra] has interpreted the emboldened Clause as a ‘conditional expression of intent’.

Such an Arbitration Clause 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. That is the pre-condition and sine qua non for triggering the Arbitration Clause. 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. That has been expressly predicated in the opening part of the Clause as well as the second paragraph of the same Clause… Thus understood, there can be no Arbitration in cases where the Insurance Company disputes or does not accept the liability under or in respect of the Policy.”