SCA/12231/2005 /50 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION No. 12231 of 2005 For Approval and Signature: HONOURABLE MR.JUSTICE M.R. SHAH ============================================================== 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ============================================================== ESSAR OIL LIMITED - Petitioner(s) Versus UNITED INDIA INSURANCE COMPANY LTD & 2 - Respondent(s) ============================================================== Appearance : MR KS NANAVATI SENIOR ADVOCATE FOR M/S NANAVATI ASSOCIATES for Petitioner(s) : 1, MR RAJNI H MEHTA for Respondent(s) : 1 - 2. None for Respondent(s) : 3, ================================================================== CORAM : HONOURABLE MR.JUSTICE M.R. SHAH Date : 29/12/2005 CAV JUDGMENT 1. By way of this petition under Article-226 of the Constitution of India, the petitioner has challenged SCA/12231/2005 2/50 JUDGMENT the legality and validity of the order dated 10.2.2005 passed in IAAP No.32 of 2003 by the learned Nominee of the Hon'ble the Chief Justice in dismissing the said application filed under Section- 11(6) of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the “Act” for short and brevity) and in refusing to appoint the Arbitrator. 2. It is the case on behalf of the petitioner that in pursuance of the licence granted by the Government of India for setting up an oil refinery at Vadinar, District Jamnagar, the petitioner commenced construction and related activities in relation to the oil refinery in the year 1996. In order to cover various risks associated with the refinery project, the petitioner had availed an insurance from the respondents covering all risks of physical loss or damange or third party liability and Advance Loss of Profit (`ALOP' for short) on the terms and conditions contained in an Insurance Policy dated 23.8.1996 issued by the respondents in favour of the petitioner. According to the petitioner, the sum insured under the above ALOP cover was Rs.1072 crores SCA/12231/2005 3/50 JUDGMENT and the aforesaid policy was valid upto 24.9.1999. It is the case on behalf of the petitioner that due to a severe cyclone that hit the coastal area of Gujarat State on 9.6.1998, the petitioner suffered physical loss or damage in respect of the project works and the assets connected therewith and the petitioner also suffered loss of profit etc. which was determined to the tune of Rs.886.30 crores which fell under ALOP. It is the case on behalf of the petitioner that on 29.6.1998 the petitioner claimed from the respondents a sum of Rs.205 crores with respect to the loss or damage caused to the projected related assets / works and the respondents paid an aggregate sum of Rs.30.00 crores towards the aforesaid loss or damage caused to the project related assets / works to the petitioner. It is further case of the petitioner that on 27.9.1999 the petitioner had claimed from the respondents a total sum of Rs.886.30 crores towards ALOP. It is also case on behalf of the petitioner that after several meetings and rounds of discussions, a settlement was arrived at whereunder the respondents agreed to pay a sum of Rs.269 crores over and above the sum of Rs.30 SCA/12231/2005 4/50 JUDGMENT crores already paid as aforesaid to the petitioner in satisfaction of all claims of the petitioner under all sections of the aforesaid insurance policy. It is the case on behalf of the petitioner that as many as eight drafts of settlement deeds were exchanged between the parties to record the terms of settlement for making payment of the settled sum to the petitioner. According to the petitioner, the respondents, however, postponed formal signing of the deed of settlement and at last, by their letter dated 20.2.2003, i.e. after a lapse of 42 months from the date of claim made by the petitioner for ALOP, repudiated th claim of the petitioner for payment of ALOP. As per the petitioner, since the aforesaid insurance policy contained a clause for arbitration, the petitioner through its Advocate's letter dated 19.5.2003 addressed to the respondents invoked the arbitration clause and called upon the respondents to nominate their arbitrator and also filed a protective suit thereafter before the learned Civil Judge (S.D.) at Vadodara for the recovery of money due under the policy considering the fact that the policy contained a clause for forfeiture of benefits under the policy SCA/12231/2005 5/50 JUDGMENT if no action was taken by the petitioner within the period specified therein. It appears that the respondent replied to the petitioner's aforesaid notice invoking the arbitration clause by submitting that the claim under the policy having already been repudiated by them, there was no dispute as regards the amount to be paid under the policy and accordingly, the arbitration clause is legally not enforceable. It is the case on behalf of the petitioner that due to failure by the respondents to appoint their arbitrator as per the appointment procedure prescribed in the clause for arbitration contained in the aforesaid insurance policy, the petitioner filed Arbitration Petition No.32 of 2003 for appointment of an arbitrator / arbitrators under Section-11(6) of the Act to adjudicate upon the disputes arisen under the aforesaid insurance policy, before this Court and the same came to be heard by the learned Nominee / Designated Judge of the Hon'ble the Chief Justice of this Court, who by her order dated 10.2.2005 rejected the said petition for appointment of arbitrator or arbitral tribunal holding that : SCA/12231/2005 6/50 JUDGMENT “[i] While exercising the powers conferred by Section-11(6) of the Act, the Hon'ble the Chief Justice or his nominee is exercising the administrative powers and contentious issues are not required to be gone into. [ii] That the petition does not involve the contentious issues. [iii] There was no admission of liability to pay insurance money under the head of “Advance Loss of Profit” and the arbitration clause clearly stipulates that the said clause can be invoked only in case where the insurance company admits its liability to pay the insurance money under the said head. [iv] The petitioner company has availed of the remedy before the Civil Court and therefore also, the question of invoking arbitration clause does not arise.” 3. Being aggrieved by and dissatisfied with SCA/12231/2005 7/50 JUDGMENT aforesaid order dated 10.2.2005 passed in Arbitration Application No.32 of 2003 in rejecting the same and refusing to appoint arbitrator / arbitral tribunal, the petitioner has preferred the present Special Civil Application under Article 226 of the Constitution of India. 4. Shri Rajani H. Mehta, learned advocate appearing on behalf of the respondents relying upon the judgment of the Hon'ble Supreme Court in case of M/S S.B.P. & CO. V. M/S PATEL ENGINEERING LTD (2005) 8 SCC 618 : (2005) AIR SC WEEKLY 5931 (hereinafter referred to as the “PATEL ENGINEERING CASE” ) has raised preliminary objection with regard to maintainability of this petition under Article 226 of the Constitution of India against the impugned order passed by the learned Nominee of the Hon'ble Chief Justice passed under Section-11(6) of the Act refusing to appoint arbitrator or arbitral tribunal. 5. Shri K.S.Nanavati, learned senior advocate appearing on behalf of the petitioner has also strongly relied upon the latest decision of the SCA/12231/2005 8/50 JUDGMENT Hon'ble Supreme Court in case of M/S S.B.P. & CO. V. M/S PATEL ENGINEERING LTD (2005) 8 SCC 618. Shri Nanavati, learned senior advocate for the petitioner has relied upon Paragraph-38 and 46 of the aforesaid judgment. He has submitted that as held by the Hon'ble Supreme Court in the aforesaid judgment, the function of the Hon'ble the Chief Justice or his designated Judge of that Court in considering the application under Section-11 of the Arbitration Act for appointment of arbitrator or arbitral tribunal, is not an administrative power but judicial power and appeal will lie against the order under Section-11 of the Act only under Article 136 of the Constitution of India before the Hon'ble Supreme Court. According to Shri Nanavati, the judgment in the case of PATEL ENGINEERING LTD is prospective in nature as held in para-46(x). That being so, maintainability of a petition to be decided in light of the observations made in the said judgment, more particularly, paras- 25 and 31. Shri Nanavati has submitted that assuming without admitting that by reasons of the observations made in paras-25 and 31,the order passed under Section-11 is not open to challenge under Article 136 SCA/12231/2005 9/50 JUDGMENT by way of an appeal to the Hon'ble Supreme Court, and these observations would apply to only those cases where judicial orders are passed in exercise of the power under Section-11 and in the instant case, admittedly, the Hon'ble Designated Judge has not passed the judicial order, but an administrative order against which, no appeal under Article 136 of the Constitution of India would lie and therefore, the petitioner would be without any remedy. Learned Advocate Shri Nanavati has further submitted that in any case, as held by the Hon'ble Supreme Court in the said judgment, neither the Hon'ble Chief Justice, nor the designated Judge has jurisdiction to decide whether a claim made is one which comes within the purview of the arbitration clause and it will be appropriate to link that question to be decided by the Arbitral Tribunal on taking evidence along with merits of the claims involved in the arbitration. In support of his submission, he has relied upon paragraph-38 of the aforesaid judgment read with final conclusion in Paragraph-46(iv). However, it is submission of Shri Rajani H. Mehta that as per the judgment of the Hon'ble Supreme Court in the SCA/12231/2005 10/50 JUDGMENT aforesaid case, the Hon'ble the Chief Justice or the Designated Judge will have the right to decide the preliminary aspect as indicated in the paragraph-38 and these will be, his own jurisdiction to entertain the request, the existence of a valid arbitration agreement, the existence or otherwise of a live claim, the existence of the condition for the exercise of his power and on the qualifications of the arbitrator or arbitrators. Shri Nanavati has therefore submitted that whether the dispute is covered by arbitration clause or not is not to be gone into while considering the application under Section-11 and reference is to be made without adjudicating this issue. Shri Nanavati, learned senior advocate has further submitted that since the learned Designated Judge has held that function exercised by the learned Judge is administrative in nature which is now contrary to the decision of the Hon'ble Supreme Court, this Court in exercise of writ jurisdiction can make proper order after considering the facts and circumstances of the case. On merits, Shri Nanavati has submitted that it is a matter of record that after the claim was made by the SCA/12231/2005 11/50 JUDGMENT petitioner, the respondent did not dispute or repudiate the liability, but held negotiations for almost 42 months on the question of quantum and as many as eight draft of settlements were exchanged between the parties and according to him, in the course of these negotiations, the Insurance Company has admitted its liability of the disputed amount claimed by the petitioner as damages / compensation, particularly when an amount of Rs.30.00 crores has been paid during the course of negotiation and the Insurance Company is therefore estooped from disputing the liability and strategic repudiation of its liability by letter dated 26.5.2003 cannot defeat the arbitration agreement. According to him, in any case, this is a serious dispute which we will have to be gone into as and when the evidence is laid before the Arbitral Tribunal which will have to be gone into as and when the evidence is laid before the Arbitral Tribunal and therefore, this is a fit case where the arbitrator ought to be appointed under Section-11 of the Act. 6. Shri Nanavati, learned senior advocate has SCA/12231/2005 12/50 JUDGMENT further submitted that the learned Designated Judge has clearly and categorically stated in the impugned order that she has passed the order in exercise of her administrative function and therefore, the present writ petition is maintainable. The contention of the respondents that against the impugned order only an appeal under Article 136 of the Constitution of India would lie to the Hon'ble Supreme Court and therefore, present petition is filed by the petitioner is not maintainable and therefore, deserves to be dismissed by this Court, is totally misconceived and untenable, both in law and on facts. According to him, as a matter of fact, the impugned order being admittedly an administrative order, the petitioner cannot file an appeal against the same under Article 136 of the Constitution of India to the Hon'ble Supreme Court. As held by the Hon'ble Supreme Court in the aforesaid judgment, it is only and only against the judicial order an appeal will lie under Article 136 of the Constitution of India to the Supreme Court and therefore, the respondents' objection to the maintainability of the present petition, is devoid of any merits. Shri Nanavati, SCA/12231/2005 13/50 JUDGMENT learned senior advocate has further submitted that as held by the Hon'ble Supreme Court in the aforesaid judgment, more particularly, para-38 of the judgment, the Hon'ble Chief Justice of the High Court or his designated Judge of that Court has the jurisdiction to decide his own jurisdiction having regard to certain preliminary aspects only as indicated in para-38 and as observed by the Hon'ble Supreme Court in para-38 “it may not be possible at that stage, to decide whether a live claim made, is one which comes within the purview of the arbitration clause, it will be appropriate to leave that question to be decided by the arbitral tribunal on taking evidence, along with the merits of the claims involved in the petition”. 7. He has further submitted that the question whether there is an admission of liability or not on the part of the respondents – insurance company in respect of the claim of the petitioner for payment of ALOP, is a question of fact to be decided on the basis of both documentary as well as oral evidences of the parties and the same can be considered only SCA/12231/2005 14/50 JUDGMENT after leading oral as well as documentary evidences and therefore, the learned Nominee of the Hon'ble the Chief Justice has materially erred in rejecting the application and refusing to appoint arbitrator / arbitral tribunal, more particularly, admittedly the Insurance Policy contains arbitration clause. According to him, unpaid claims of the petitioner under the aforesaid insurance policy are live and not barred by time. He has further submitted that considering all these questions, whether the disputes between the parties comes witalwhin the purview of the arbitral clause is only to be decided by the arbitral tribunal on taking evidence and not by the Hon'ble Chief Justice of the High Court or his designated Judge of that Court, as the same cannot be said to be an adjudication relating to his own jurisdiction on jurisdictional facts. Shri Nanavati has further submitted that as clarified by the Hon'ble Supreme Court in para-45 of the aforesaid judgment, that the said judgment will have prospective operation and as such, the aforesaid judgment does not apply to the present case and therefore, the present petition is maintainable. SCA/12231/2005 15/50 JUDGMENT 8. The sum and substance of the arguments and submissions made on behalf of the petitioner is that the impugned order passed by the learned Designated Judge is purely an administrative order and in passing such order, the learned Designated Judge has, without jurisdiction and authority of law, decided a contentious issue i.e. whether the claim of the petitioner falls or not within the purview of the arbitration clause contained in the aforesaid insurance policy, and this Court in exercise of the powers under Article 226 of the Constitution of India can always direct to appoint a sole arbitrator or an arbitral tribunal to save time and money, without remanding the matter to the learned Designated Judge for passing the judicial order. Therefore, it is requested to allow the present Special Civil Application. 9. Per contra, Shri Rajani H. Mehta, learned advocate appearing on behalf of the respondents while supporting the order passed by the learned Designated Judge has submitted that the impugned SCA/12231/2005 16/50 JUDGMENT order passed by the learned Designated Jude is based on legal, just and valid grounds and the learned Designated Judge has dismissed the petition for an appointment of arbitrator on, inter alia, two main grounds; [a] That there had been no admission of liability by the Respondent, and therefore, there was no arbitrable dispute within the terms of the arbitration clause. [b] That the petitioner had in any case availed of the remedy before the Civil Court at Baroda (Special Civil Suit No.319 of 2003) and therefore, there was no question of invoking the arbitration clause. 10. Relying upon the judgment of the Hon'ble Supreme Court in case of PATEL ENGINEERING, Shri Mehta, learned advocate for the respondents has submitted that the present writ petition is not maintainable as the Hon'be Supreme Court has held in the aforesaid judgment that an order passed by the Hon'ble Chief Justice or his designated Judge can SCA/12231/2005 17/50 JUDGMENT only be challenged before the Hon'ble Supreme Court under Article 136 of the Constitution of India. He has relied upon para-46 (vii) of the aforesaid judgment in support of his above preliminary objection. 11. Meeting with the contention raised on behalf of the petitioner that the decision of the Hon'be Supreme Court in the case of PATEL ENGINEERING is prospective in nature and the same is not applicable in the present case, Shri Mehta, learned advocate for the respondents has heavily relied upon para- 46(x) of the said judgment and according to him, as per Para-46(x) of the said judgment, the said decision will be applicable prospectively only where the arbitrator / arbitral tribunal is already appointed, meaning thereby, where appointment of arbitrator is not made or is declined, the said judgment will be made applicable and therefore, the present petition under Article 226 of the Constitution of India against the impugned order passed by the learned Nominee is not maintainable. He has relied upon Para-43 of the decision in case of SCA/12231/2005 18/50 JUDGMENT PATEL ENGINEERING in support of his submission that the order passed by the Hon'ble Chief Justice or its Nominee under Section-11(6) of the Act is a judicial order and the same, so far as the High Court is concerned, would be final and only avenue open to a party feeling aggrieved by the order of the Hon'ble Chief Justice / or its Nominee would be to approach to the Supreme Court under Article 136 of the Constitution of India. According to him, the status of the present writ petition being pending, the judgment of the Hon'ble Supreme Court in case of PATEL ENGINEERING would be applicable and would be binding to this Court. 12. Relying upon Para-24 of the judgment in the case of PATEL ENGINEERING and the observations made by the Hon'ble Supreme Court that dragging a party to an arbitration when there existed no arbitration agreement or when there existed no arbitrable dispute, can certainly affect the right of that party and even on monetary terms, impose on him a serious liability for meeting the expenses of the arbitration, even if it be preliminary expenses and SCA/12231/2005 19/50 JUDGMENT his objection is upheld by the arbitral tribunal. Shri Mehta has submitted that the Designated Jude has rightly refused to appoint the arbitrator or arbitral tribunal considering the fact that no arbitral dispute existed between the parties. He has also further submitted that the learned Designated Judge has rightly refused to appoint an arbitrator by holding that the controversy raised by the petitioner does not fall within the purview of the arbitration clause at all. 13. Relying upon the Clause-7 of the Arbitration Clause of the policy, Shri Mehta has submitted that the learned Nominee and the Designated Judge has rightly refused to appoint the arbitrator / arbitral tribunal by holding that at no point of time the Insurance Company had agreed to or admitted liability and that arbitral clause clearly stipulates that the said clause can be invoked only in case where the insurance company admits its liability to pay insurance money under the said head. 14. He has also further submitted that the SCA/12231/2005 20/50 JUDGMENT learned Nominee / Designated Judge has rightly refused to appoint arbitrator / arbitral tribunal considering the fact that the petitioner company has availed of the remedy before the Civil Court. He has submitted that the contention on behalf of the petitioner that the suit came to be filed by the petitioner to save limitation and while invoking the arbitration clause, simultaneously, the suit came to be filed is factually incorrect. According to him, the suit came to be filed earlier and thereafter the arbitration clause came to be invoked. According to him, once the petitioner has filed Civil Suit for the dispute in question, the petitioner has waived its right for invoking arbitration clause and therefore, the learned Nominee has rightly refused to appoint arbitrator / arbitral tribunal by holding that as the petitioner company has already availed the remedy before the Civil Court, the question of invoking arbitration clause shall not arise. Shri Mehta, learned advocate for the respondents has also further submitted that before the learned Nominee to the Hon'ble Chief Justice, the following materials were before her. SCA/12231/2005 21/50 JUDGMENT [a] The petition with affidavit [b] Accompanying documents to the petition. [c] Reply of the Respondent dated 21.8.03. [d] The petitioners affidavit in rejoinder dated 3.10.2003 [e] The petitioner's additional affidavit of 25.10.04 with accompanying documents, in all running into approximately 295 pages. Therefore, according to Shri Mehta, the learned Designated Judge has passed the impugned order after going through the aforesaid documents and thereafter, she has come to the conclusion that the arbitral clause could not be invoked since the dispute falls outside the arbitration clause. He has further submitted that such a decision is in consonance with the judgment of the Hon'ble Supreme Court in the case of PATEL ENGINEERING, more particularly, para-37 of the said judgment. Therefore, it is requested to dismiss the present special civil application by further submitting that SCA/12231/2005 22/50 JUDGMENT the petitioner's grievance, if any, against the order of the learned Designated Judge, can only be now raised before the Hon'ble Supreme Court under Article 136 of the Constitution of India. It is also lastly submitted by Shri Mehta in the alternative that the learned Designated Judge has rightly refused to appoint arbitrator / arbitral tribunal by observing that the present dispute is not amenable to arbitration as per the relevant arbitration clause in the policy issued to the petitioner and the petitioner has waived and abandoned its right to arbitrate, if any, by invocation of a civil suit before the Civil Court at Vadodara. Therefore, it is requested to reject the present Special Civil Application. 16. Heard the learned advocates appearing on behalf of the parties at length. After considering the rival submissions made by the learned advocates on behalf of the parties, the following issues arise for consideration of this Court. [i] Whether against the impugned order passed by the SCA/12231/2005 23/50 JUDGMENT learned Nominee and the Designated Judge passed under Section-11(6) of the Arbitration and Conciliation Act, 1996 ( in the present case refusing to appoint arbitrator / arbitral tribunal ) the present petition under Article 226 of the Constitution of India is maintainable or not ? [ii] Whether the learned Nominee / Designated Judge while refusing to appoint arbitrator / arbitral tribunal has rightly observed and considered whether the dispute falls within arbitral clause or