IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE K.BALAKRISHNAN NAIR & THE HONOURABLE MR. JUSTICE M.L.JOSEPH FRANCIS TUESDAY, THE 24TH FEBRUARY 2009 / 5TH PHALGUNA 1930 Arb.A.No. 14 of 2004(E) ----------------------- OP.67/1994 of III ADDL.SUB COURT, ERNAKULAM .................... APPELLANT/PETITIONER ------------------- NATIONAL INSURANCE COMPANY LIMITED, ERNAKULAM, REPRESENTED BY ITS MANAGER, REGIONAL OFFICE, M.G.ROAD, ERNAKULAM. BY ADV. SRI.GEORGE CHERIAN (THIRUVALLA) SRI.ALEXY AUGUSTINE RESPONDENT/ RESPONDENT ------------------------- LORD KRISHNA BANK LIMITED, HEAD OFFICE, KODUNGALLUR, REPRESENTED BY ITS GENERAL MANAGER. ADV. SRI.V.V.ASOKAN SMT.S.AMINA THIS ARBITRATION APPEALS HAVING BEEN FINALLY HEARD ON 24/02/2009, THE COURT ON THE SAME DAY PASSED THE FOLLOWING: K. BALAKRISHNAN NAIR & M.L. JOSEPH FRANCIS, JJ. ------------------------------- ARBA.No. 14 of 2004 ------------------------------- Dated this the 24th day of February, 2009 J U D G M E N T ~~~~~~~~~~~~ Balakrishnan Nair, J. The appellant, Insurance Company, was the petitioner in O.P.No.67 of 1994 before the Sub Court, Ernakulam and the respondent in the Arbitration Proceedings before the Arbitrators. The respondent herein, Lord Krishna Bank Ltd., was the respondent in the arbitration O.P. and claimant before the Arbitrators. The said Bank, during the pendency of the proceedings, was amalgamated with Centurion Bank Ltd, which in turn, was amalgamated with H.D.F.C. Bank Ltd. with effect from 23.5.2008. The dispute between the parties relates to a claim under the Bankers Indemnity Policy issued to the respondent Bank for the period covering from 1.1.1988 to 31.12.1988. The respondent had taken Banker's Indemnity Policy from 1983 onwards and the validity of the last policy expired on 31.12.1988. Thereafter, it appears that the respondent took insurance policy from some other company. ARBA.NO.14/2004 2 2. The respondent Bank on 25.4.1989 discovered fraud and misappropriation committed by its employees attached to its Padanilam branch and thereby the resultant monetary loss sustained by the Bank also came to light. As per the terms of the policy, any fraud detected within six months from 31.12.1988 is liable to be indemnified, provided the incident happened within two years prior to the date of such discovery that is, 25.4.1989. The Bank raised a claim for Rs.9,83,720/- Though the appellant admitted the liability, it disputed the amount claimed by the Bank. The dispute was finally referred for arbitration. So, as per the terms of the policy, both sides nominated one Arbitrator each. The said Arbitrators entered upon arbitration and after hearing both sides, passed an award directing the appellant to pay an amount of Rs.4,06,488/- with 18% interest from 27.3.1990 to the respondent. Before the Arbitrators, the appellant Insurance Company contended that their liability is limited to Rs.2 lakhs. But, ignoring the said contention of the appellant, the award was passed. The appellant is, mainly, aggrieved by the amount awarded in excess of Rs.2 lakhs. It is also aggrieved by the grant of interest for the ARBA.NO.14/2004 3 amount awarded. According to the appellant, no interest could be awarded and even assuming that it could be awarded, the quantum should be as provided in Section 34 of the Code of Civil Procedure. 3. Though the Arbitrators passed the award, it was not filed in court, even after producing necessary stamp papers by the claimant. So, Arbitration O.P. 38 of 1994 was filed by the Bank praying, inter alia, for filing the award in court. Thereafter, the award was filed in court. 4. Aggrieved by the award dated 29.4.1994 the appellant filed Arbitration O.P. 67 of 1994 under Section 30 of the Arbitration Act, 1940, to set aside the same. It was contended before the court below that the Arbitrators passed the award against the express terms of the policy concerning the limit of liability. Thus, the award was passed without jurisdiction. So, it is a mis-conduct in terms of Section 30(1) of the Act and therefore the award is liable to be set aside, it was contended. The claimant Bank filed its objections, resisting the prayers in ARBA.NO.14/2004 4 the Arbitration O.P. After hearing both sides, the Sub Court found that the award is a non-speaking award. It was also held that since it is a non-speaking award and the policy is not annexed to the award, it is not permissible to the court to refer to the terms of the policy, to find out whether the award is in conformity with the contract or not. Based on the said finding, the grievance voiced by the appellant regarding the limit of its liability was rejected. The contention regarding the award of interest was also repelled. 5. Yet another point canvassed before the court below was that the appellant was entitled to get the amounts received by the Bank from the employees, who were involved in the misappropriation. That claim was specifically rejected by the Arbitrators and it was affirmed by the court below also. So, the petition filed by the appellant to set aside the award was rejected and a decree was passed in favour of the respondent, in terms of the award. ARBA.NO.14/2004 5 6. The aggrieved appellant attacks the order of the court below, declining to set aside the award, on various grounds. The learned counsel for the appellant Mr. George Cherian took us through the materials on record. The learned counsel pointed out that the loss was assessed, by appointing a Chartered Accountant as Commissioner. While assessing the total damage, a supplementary claim made by the respondent Bank in 1992, during the pendency of the arbitration proceedings, was also taken into account. The said claim was barred by limitation. Any loss discovered within six months from the expiry of the policy alone is covered by the policy, it is submitted. 7. It is also submitted that the Arbitrators have travelled beyond the terms of the contract under the policy and awarded amounts exceeding the limit of the liability provided therein. There was no provision for award of interest in the contract. Even then interest at unconscionable rate has been awarded. It is also submitted that even if the policy is not annexed to the award, since the terms of the policy have been referred to by ARBA.NO.14/2004 6 the Arbitrators, it must be taken that the policy is annexed to the award or deemed to be annexed to the award. At any rate, the clauses with reference to which the claims were decided, should be treated as part of the award and they can be adverted to by the court. But the court below misread the decision of the Full Bench of this Court in State v. Jolly (1992 (1) KLT 240). Going by the principles laid down in the said decision, the relevant terms of the policy could have been adverted to by the court below for the purpose of examining whether the Arbitrators have travelled beyond the terms of the policy in making the award. If it is found that the Arbitrators travelled beyond the terms of the policy, it is an action without jurisdiction, as held by the Apex Court in Associated Engineering Company v. Government of Andhra Pradesh (AIR 1992 SC 232). So, the court below should have interfered with the same, it is submitted. 8. We heard the learned counsel appearing for the respondent. He fully supported the award of the Arbitrators and also the decision of the court below. According to him, since the ARBA.NO.14/2004 7 policy is not annexed to the award, the court below has rightly refused to look into the same. Since the policy was taken for the first time in 1983 and it was renewed from time to time upto 1988, the coverage will come to Rs. 8 lakhs, that is, the coverage per year should be taken as Rs. 2 lakhs and since the policy was renewed for four years, the total amount covered will come to Rs. 8 lakhs. So, the Arbitrators should have awarded the entire amount of loss assessed by the Commissioner appointed by the Arbitrators. It is also submitted that since the entire loss is not indemnified by the Insurance Company, they have no right to receive any amount the Bank may get from the employees. The learned counsel also submitted that even in the absence of any clause for award of interest in the contract, still the Arbitrators can issue direction to pay interest, in view of the decision of the Apex Court in The Board of Trustees for the post of Calcutta v. Engineers-De-Space-Age (AIR 1996 SC 2853). It is also pointed out that the loss discovered in 1992 is not awarded by the Arbitrators. ARBA.NO.14/2004 8 9. We considered the rival submissions made at the Bar. We perused the materials on record. The award is a non- speaking award. The terms of the main contract between the parties are not annexed to the award. Therefore, normally, this Court cannot go into the terms of the contract, while considering the attack against the award, on the ground that the Arbitrators mis-conducted the proceedings. But, in certain circumstances, this Court may look into the award, even if, the terms of the contract are not annexed to it. Those circumstances have been dealt with by the Apex Court in Associated Engineering Company. v. Govt. of Andhra Pradesh [AIR 1992 SC 232]. The said point has been considered in detail by this Court in State v. Jolly [1992(1)KLT 240], In this case, the main grievance of the appellant is that the Arbitrators mis-construed the terms of the contract, concerning liability. The appellant has already admitted the liability. So, the dispute is only regarding the extent of liability. The appellant claimed that the liability should have been restricted to two lakhs alone. Per contra, the other side contended that the Insurance Company was liable to compensate the entire loss suffered by the Bank. ARBA.NO.14/2004 9 10. In fact, the contention of the appellant is that the Arbitrators have committed an error in the construction of the terms of the contract. Going by the decision of the Apex Court in Associated Engineering Co., it is an error within jurisdiction. The relevant portion of the judgment reads as follows: “29. If the arbitrator commits an error in the construction of the contract, that is an error within his jurisdiction. But, if he wanders outside the contract and deals with matters not allotted to him, he commits a jurisdictional error. Such error going to his jurisdiction can be established by looking into material outside the award. Extrinsic evidence is admissible in such cases because the dispute is not something which arises under or in relation to the contract or dependent on the construction of the contract or to be determined within the award. The dispute as to jurisdiction is a matter which is outside the award or outside whatever may be said about it in the award. The ambiguity of the award can, in such cases, be resolved by admitting extrinsic evidence. The rationale of this rule is that the nature of the dispute is something which has to be determined outside and independent of what appears in the award. Such jurisdictional error need to be proved by evidence extrinsic to the award.” (emphasis supplied) ARBA.NO.14/2004 10 11. If the error is one, within jurisdiction and the award is a non-speaking award, this Court has no power to look into the terms of the contract not annexed to the award, to interfere with it. So, this Court cannot look into the contract to find out whether the liability has been fixed rightly or not. There is nothing apparent on the record to show that the time barred claim made in 1992 also formed part of the amount awarded. In view of the decision of the Apex Court in Board of Trustees for the post of Calcutta (supra), the Arbitrators have jurisdiction to award interest. The rate of interest is a matter within the discretion of the Arbitrators, with which this Court cannot interfere. Since the entire loss of the Bank is not covered by the award, the claim of the appellant for the amount, which the Bank may recover from its employees is also unsustainable. In the result, the appeal fails and it is dismissed. (K.BALAKRISHNAN NAIR, JUDGE) (M.L.JOSEPH FRANCIS, JUDGE) ps