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M/s. Agastya Agro Ltd., Secunderabad v/s United India Insurance Company Ltd., Karimnagar

    Arbitration Application No. 127 of 2021

    Decided On, 28 June 2022

    At, High Court of for the State of Telangana

    By, THE HONOURABLE MR. JUSTICE K. LAKSHMAN

    For the Applicant: G. Ram Chandra Reddy, Advocate. For the Respondent: V. Sambasiva Rao, Advocate.



Judgment Text

The present arbitration application is filed under Section 11(5) & (6) of the Arbitration and Conciliation Act, 1996 (hereinafter ‘the Act, 1996) seeking appointment of a sole arbitrator to resolve the disputes between the parties.

2. Heard Mr. G. Ram Chandra Reddy, learned counsel for the Applicant and Mr. V. Sambasiva Rao, learned counsel for the Respondent.

3. The Applicant took the Standard Fire and Special Perils Policy on 17.08.20216 from the Respondent company. The said policy was valid for a period from 28.08.2016 to 27.08.2016. On 06.07.2017, a fire accident occurred in the Applicant company’s factory. The same was intimated to the Respondent and a surveyor was appointed to asses the loss caused to the Applicant. The Applicant submitted a claim of Rs. 12,45,00,000/- towards loss caused by the fire accident.

4. According to the Applicant, after negotiations it restricted its claim to Rs. 7,54,38,689/- and the surveyor only allowed a claim of Rs. 4,20,08,497/- According to the Applicant, the surveyor wrongfully disallowed the claim of Rs. 3,44,30,192/- The Applicant alleged that the surveyor has not assessed the damage properly and on its protest the Respondent company appointed a Chartered Accountant to reassess the loss. The Chartered Accountant reassessed the damage caused to the stocks as Rs. 6,96,64,516/-.

5. Noticing a huge disparity between the assessment made by the surveyor and the Chartered Accountant, the Applicant sought for a meeting to sort out the disparity in assessment of damages. However, the same was not accepted.

6. According to the Applicant, on several occasions it requested the Respondent to settle the claim based on the assessment of the Chartered Accountant and the same was not accepted. The Applicant further states that the Respondent authorities suggested it to accept the amount i.e., Rs. 3,94,00,622/- as assessed by the surveyor till the finalization of the claim.

7. The Applicant accepted the alleged suggestion of the Respondent authorities as it was financially weak and broken. According to the Applicant, they accepted the amount of Rs. 3,94,00,622/- under distress. The Applicant issued a discharge voucher on 06.11.2020 and accepted an amount of Rs. 3,94,00,622/- towards full and final settlement.

8. On 17.06.2021, the Applicant invoked Clause 13 of the Standard Fire and Special Perils Policy and issued an arbitration notice dated 17.06.2021 to the Respondent. The Applicant in the said notice stated that how the assessment of damage by the surveyor was incorrect and how it is entitled to an amount Rs. 3,44,30,192/- The said arbitration clause is extracted below:

“If any dispute or difference shall arise as to the quantum to be paid under this policy (liability being otherwise admitted) such difference shall independent of all other questions be referred to the decision of a sole arbitrator to be appointed in writing by the parties to or if they cannot agree upon a single arbitrator within 30 days of any party invoking arbitration, the same shall be referred to a panel of three arbitrators, comprising of two arbitrators, one to be appointed by each of the parties to the dispute / difference and the third arbitrator to be appointed by such two arbitrators and arbitration shall be conducted under and in accordance with the provisions of the Arbitration and Conciliation Act 1996.

It is clearly agreed and understood that no difference or dispute shall be referable to arbitration as hereinabove 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 the policy that the award by such arbitrator/arbitrators of the amount of the loss or damage shall be first obtained.”

9. The Respondent replied to the said arbitration notice on 06.07.2021 disputing the claims of the Applicant and stated that there exists no arbitrable dispute as the Applicant had issued a discharge voucher on 06.11.2020. The same was reiterated by the Respondent in its counter affidavit. The Respondent contended that the surveyor was a competent and a licensed person authorised by the IRDAI. Relying on the decision of United India Insurance Company Ltd. v. Antique Art Exports Pvt. Ltd. (2019) 5 SCC 362) and ONGC Mangalore Petrochemicals v. ANS Constructions Ltd. (2018) 3 SCC 373) theRespondent contended that an arbitrator cannot be appointed when there is a full and final settlement.

10. On the other hand, the Applicant contended that the discharge voucher was issued under distress and it never agreed to a full and final settlement. Relying on Mayavati Trading Pvt. Ltd. v. Pradyuat Deb Burman (2019) 8 SCC 714), it was contended by the Applicant that post 2015 amendment to the Act, 1996, the High Courts while appointing an arbitrator shall confine themselves to the examination of existence of an arbitration agreement. The Courts shall leave all the preliminary issues to be decided by the arbitrator. Therefore, according to the Applicant, the issue whether the discharge vouchers were issued under distress or coercion are to be decided by the arbitrator.

11. On a perusal of the facts and pleadings, the question before this Court is whether under a Section 11(5) application can the court decide whether discharge vouchers were accepted under distress/coercion/duress. As stated above, the Applicant contends that the question of distress/coercion is factual and the same has tobe decided by the arbitrator in light of the decision in Mayavati (Supra).

12. In Mayavati (Supra), a full bench of the Supreme Court overruled the decision in Antique Arts (Supra) on the ground that the insertion of Section 11(6A) restricts the jurisdiction of the High Courts while appointing the arbitrator to only consider the existence of arbitration agreement. The Supreme Court explained the object and purpose of the 2015 Amendment Act and stated the reasons behind restricting the interference of courts during the stage of appointment. The Court therein held that the question of accord and satisfaction cannot be decided at the stage of the appointment of arbitrator. The relevant paragraphs are extracted below:

“10. This being the position, it is clear that the law prior to the 2015 Amendment that has been laid down by this Court, which would have included going into whether accord and satisfaction has taken place, has now been legislatively overruled. This being the position, it is difficult to agree with the reasoning contained in the aforesaid judgment [United India Insurance Co. Ltd. v. Antique Art Exports (P) Ltd., (2019) 5 SCC 362 : (2019) 2 SCC (Civ) 785] , as Section 11(6-A) is confined to the examination of the existence of an arbitration agreement and is to be understood in the narrow sense as has been laid down in the judgment in DuroFelguera, SA [DuroFelguera, SA v. Gangavaram Port Ltd., (2017) 9 SCC 729 : (2017) 4 SCC (Civ) 764] — see paras 48 & 59

11. We, therefore, overrule the judgment in Antique Art Exports (P) Ltd. [United India Insurance Co. Ltd. v. Antique Art Exports (P) Ltd., (2019) 5 SCC 362 : (2019) 2 SCC (Civ) 785] as not having laid down the correct law but dismiss this appeal for the reason given in para 3 above.”

13. It is also relevant to note that the decision in Mayavati (Supra) was considered in a subsequent full bench decision of Vidya Drolia v. Durga Trading Corporation (2021) 2 SCC 1). The Court therein explaining the scope of Section 11 laid down a prima facie test to determine whether an arbitrator is to be appointed. The Supreme Court held that the High Court shall appoint an arbitrator if an arbitration agreement exists. The Court held that if there are disputed facts which go to the maintainability of the arbitral proceedings the same has to be decided by the arbitrator. In hisconcurring opinion, Hon’ble Justice N.V. Ramana has held as follows:

“244. Before we part, the conclusions reached, with respect to Question 1, are:

244.1. Sections 8 and 11 of the Act have the same ambit with respect to judicial interference.

244.2. Usually, subject-matter arbitrability cannot be decided at the stage of Section 8 or 11 of the Act, unless it is a clear case of deadwood.

244.3. The court, under Sections 8 and 11, has to refer a matter to arbitration or to appoint an arbitrator, as the case may be, unless a party has established a prima facie (summary findings) case of non-existence of valid arbitration agreement, by summarily portraying a strong case that he is entitled to such a finding.

244.4. The court should refer a matter if the validity of the arbitration agreement cannot be determined on a prima facie basis, as laid down above i.e. “when in doubt, do refer”.

244.5. The scope of the court to examine the prima facie validity of an arbitration agreement includes only:

244.5.1. Whether the arbitration agreement was in writing? or

244.5.2. Whether the arbitration agreement was contained in exchange of letters, telecommunication, etc.?

244.5.3. Whether the core contractual ingredients qua the arbitration agreement were fulfilled?

244.5.4. On rare occasions, whether the subject-matter of dispute is arbitrable?”

14. In the same judgment, Hon’ble Justice Sanjiv Khanna is his separate opinion summed up the scope of Section 11 of the Act, 1996 as follows:

“154. Discussion under the heading “Who Decides Arbitrability?” can be crystallised as under:

154.1. Ratio of the decision in Patel Engg. Ltd. [SBP & Co. v. Patel Engg. Ltd., (2005) 8 SCC 618] on the scope of judicial review by the court while deciding an application under Sections 8 or 11 of the Arbitration Act, post the amendments by Act 3 of 2016 (with retrospective effect from 23-10-2015) and even post the amendments vide Act 33 of 2019 (with effect from 9-8-2019), is no longer applicable.

154.2. Scope of judicial review and jurisdiction of the court under Sections 8 and 11 of the Arbitration Act is identical but extremely limited and restricted.

154.3. The general rule and principle, in view of the legislative mandate clear from Act 3 of 2016 and Act 33 of 2019, and the principle of severability and competence-competence, is that the Arbitral Tribunal is the preferred first authority to determine and decide all questions of non-arbitrability. The court has been conferred power of “second look” on aspects of non-arbitrability post the award in terms of sub-clauses (i), (ii) or (iv) of Section 34(2)(a) or sub-clause (i) of Section 34(2)(b) of the Arbitration Act.

154.4. Rarely as a demurrer the court may interfere at Section 8 or 11 stage when it is manifestly and ex facie certain that the arbitration agreement is non-existent, invalid or the disputes are non-arbitrable, though the nature and facet of non-arbitrability would, to some extent, determine the level and nature of judicial scrutiny. The restricted and limited review is to check and protect parties from being forced to arbitrate when the matter is demonstrably “non-arbitrable” and to cut off the deadwood. The court by default would refer the matter when contentions relating to nonarbitrability are plainly arguable; when consideration in summary proceedings would be insufficient and inconclusive; when facts are contested; when the party opposing arbitration adopts delaying tactics or impairs conduct of arbitration proceedings. This is not the stage for the court to enter into a mini trial or elaborate review so as to usurp the jurisdiction of the Arbitral Tribunal but to affirm and uphold integrity and efficacy of arbitration as an alternative dispute resolution mechanism.

15. Therefore, the decision of Vidya Drolia (Supra) makes it clear the scope of the High Court’s power under Section 11 is extremely limited. The courts shall tilt in favour of arbitration if prima facie an arbitration agreement exists. However, if the claims are ex facie invalid or non-existent or are dead-wood then the courts may refuse to appoint an arbitrator. In other words, the Court in Vidya Drolia (Supra) allows review of the alleged arbitral dispute to see if the same is prima facie arbitrable. The object behind such limited interference is to protect the parties from unnecessary arbitral proceedings.

16. The Applicant heavily relied on the decision of Mayavati (Supra) to contend that post the 2015 amendment, the High Courts have no option but to appoint an arbitrator if he finds that an arbitration agreement exists. This Court cannot accept the contention advanced on behalf of the Applicant.

17. As stated above, the decision of Mayavati (Supra) was considered by the Apex Court in Vidya Drolia (Supra). The Court in Vidya Drolia (Supra) provided that the courts can refuse to appoint an arbitrator in limited and rare cases. While it is true that after the 2015 amendment came into force, the Court’s jurisdiction is restricted to determine only the prima facie existence of arbitration agreement, however in rare cases the courts can interfere and refuse to appoint arbitrators if the disputes are ex facie non-arbitrable or are barred by limitation. This Court hastens to add that such interference is permissible only in exceptional cases. Therefore, the interpretation given by the learned counsel for the Applicant to the decision in Mayavati (Supra) cannot be accepted.

18. Further, the argument of the Applicant that the existence of duress and fraud is to be decided by the arbitrator only cannot be accepted. If such an argument is accepted then any party seeking appointment of an arbitrator can allege existence of fraud/ duress/ distress/coercion and initiate the arbitral process. At this stage, it is apt to refer to the decision of the Supreme Court in Oriental Insurance Co. Ltd. v. Dicitex Furnishing Ltd. (2020) 4 SCC 621).

“26. An overall reading of Dicitex's application [under Section 11(6)] clearly shows that its grievance with respect to the involuntary nature of the discharge voucher was articulated. It cannot be disputed that several letters - spanning over two years - stating that it was facing financial crisis on account of the delay in settling the claim, were addressed to the appellant. This Court is conscious of the fact that an application under Section 11(6) is in the form of a pleading which merely seeks an order of the court, for appointment of an arbitrator. Itcannot be conclusive of the pleas or contentions that the claimant or the party concerned can take in the arbitral proceedings. At this stage, therefore, the court which is required to ensure that an arbitrable dispute exists, has to be prima facie convinced about the genuineness or credibility of the plea of coercion; it cannot be too particular about the nature of the plea, which necessarily has to be made and established in the substantive (read : arbitration) proceeding. If the court were to take a contrary approach and minutely examine the plea and judge its credibility or reasonableness, there would be a danger of its denying a forum to the applicant altogether, because rejection of the application would render the finding (about the finality of the discharge and its effect as satisfaction) final, thus, precluding the applicant of its right event to approach a civil court. There are decisions of this Court (Associated Construction v. Pawanhans Helicopters Ltd. [Associated Construction v. Pawanhans Helicopters Ltd., (2008) 16 SCC 128] and BogharaPolyfab [National Insurance Co. Ltd. v. BogharaPolyfab (P) Ltd., (2009) 1 SCC 267 : (2009) 1 SCC (Civ) 117] which upheld the concept of economic duress. Having regard to the facts and circumstances, this Court is of the opinion that the reasoning in the impugned judgment [Dicitex Furnishing Ltd. v. Oriental Insurance Co. Ltd., 2015 SCC OnLine Bom 5055] cannot be faulted.”

19. Therefore, the Applicant cannot make bald allegations regarding fraud and coercion just to get an arbitrator appointed. If duress/coercion are alleged the Applicant seeking appointment of an arbitrator has to prima facie satisfy the court regarding the existence of such facts constituting duress/coercion. In the absence of any prima facie proof regarding duress/coercion, the court can refuse to appoint an arbitrator. According to this Court, the requirement of such prima facie satisfaction regarding the allegations of fraud/coercion/duress/distress is in line with the prima facie review test laid down in Vidya Drolia (Supra).

20. Now coming to the facts of the case, the Applicant alleges that it had issued the discharge voucher dated 06.11.2020. A perusal of the discharge voucher indicates that it was issued towards a full and final settlement of claims. The discharge voucher is extracted below:

“Date: 06 November, 2020

To

The Dy. General Manager

United India Insurance Co Ltd

Basheerbagh

Hyderabad

SUB: SETTLEMENT OF OUR FIRE CLAIM OUR POLICY NO. 0573011116P106517658

As discussed, we are here with our concern towards full & final settlement amount

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of Rs.3,94,00,692/ (Rupees Three Crore Ninety Four Lacs Six Hundred Ninety Two only), less deduction of re-instatement premium towards above claim, Kindly release the amount at the earliest. Thanking You, Yours faithfully, for AGASTYA AGRO LIMITED (M MURALY) MANAGING DIRECTOR” 21. It is relevant to note that it was only on 01.04.2021 that a letter was addressed disputing the full and final settlement. The Applicant in the said letter stated it agreed for the settlement on the assurances that their claim will be settled. However, it is relevant to note that the said letter was issued after a lapse of almost five months from the date of issuance of discharge voucher. The Applicant has not explained the cause of delay in disputing the alleged coercion/duress and it has not taken any legal steps against the Respondent for the same. 22. Further, nothing has been placed on record by the Applicant to suggest that it was in distress and had to accept the discharge voucher based on the assurances of the Respondent. The Applicant also has failed to place any correspondences to suggest that Respondent had given assurances regarding the payment of the remaining amounts after issuance of the discharge voucher. Therefore, the Applicant has failed to prove prima facie existence of coercion. This Court cannot accept the contention of the Applicant that the discharge voucher was issued towards full and final settlement out of distress and coercion. 23. According to this Court, the issuance of discharge voucher dated 06.11.2020 fully settled the claims between the parties. Therefore, no arbitral disputes exist between them. 24. In light of the aforesaid discussion, the present arbitration application is dismissed. As a sequel, the miscellaneous applications, if any, pending in the Arbitration Application shall stand closed.
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