HIGH COURT OF HIMACHAL PRADESH AT SHIMLA Arb.C. No. : 42 of 2004. With Arb.C.No. : 48 of 2004. Reserved on: 6.11.2009 Decided on: 4.12.2009 Arb.C. No.42 of 2004: Oriental Insurance Company ……… Petitioner. Versus M/s Auto Comps India Limited ………Respondent. For the petitioner: Mr.Ashwani Talwar and Mr.Deepak Bhasin, Advocates. For the respondent: Mr.Bhupender Gupta, Senior Advocate, with Mr.Raman Sethi, Advocate. Arb.C. No.48 of 2004: M/s Auto Comps India Limited ……… Petitioner. Versus Oriental Insurance Company ………Respondent. For the petitioner: Mr.Bhupender Gupta, Senior Advocate, with Mr.Raman Sethi, Advocate. For the respondent: Mr.Ashwani Talwar and Mr.Deepak Bhasin, Advocates. Coram: The Hon’ble Mr.Justice V.K. Ahuja, Judge. Whether approved for reporting? Yes. __________________ Whether reporters of local newspapers may be allowed to see the judgment? Yes. - 2 - V.K. Ahuja, J.: This judgment shall dispose of an objection petition filed by the petitioner/Insurance Company under Section 34 of the Arbitration and Conciliation Act (hereinafter referred to as ‘the Act’) for setting aside the arbitral award, dated 5.6.2004, passed by Hon’ble Mr.Justice R.K. Mahajan (Retd.), who was appointed as an Arbitrator in the case. This judgment shall also dispose of another application filed under Section 34 of ‘the Act’ by the applicant/Auto Comps India Limited for setting aside the above-mentioned arbitral award in so far as it is against the applicant. Briefly stated the facts of the case are that Hon’ble Mr.Justice R.K. Mahajan (retired), hereinafter referred to as the Arbitrator, was appointed as an Arbitrator by this Court vide order, dated 16.9.2002, in arbitration case No.25 of 2002, to decide the dispute in between the claimant Company and the respondent/Insurance Company for the damages. The claimant Company had filed the claim before the arbitral Tribunal for an amount of Rs.9,31,61,415/- payable by the respondent, with interest at the rate of 18% per annum from 10.7.1998 till the payment of the amount. The claimant had also claimed a sum of Rs.30.00 lacs as cost of litigation. The claim preferred by the claimant may be summarized as under: (a) Exemplary damages - Rs.3.00 crore (b) Repair of building, plant and machinery etc. – more than Rs.1.00 crore. - 3 - (c) On account of loss suffered by the claimant company due to flood to the machinery, plant, building etc. - Rs.4,18,84,615/- (d) Rental expenses incurred by the claimant till date @ Rs.26,000/- per month for storing scrap/salvage till 31-12-2002 – Rs.12,76,800/- (e) Production loss incurred by the claimant till 31.12.2002 - Rs.2 crores (f) On account of loss of reputation occasioned to the claimant company including its promoters - Rs.3 crores The plea put up by the respondent was that the claim was inflated and offered a sum of Rs.18,93,082/- which was granted by the Tribunal as an interim award. The claimant had purchased three fire policies as under: i) All kinds of stocks - Rs.5,00,000/- ii) Properties located in the premises of the Company – (a) Building: Rs.68.00 lacs (b) Furniture and fixtures: Rs.11,43,000/- (c) Plant and machinery: Rs.7,34,00,000/- (d) Work in progress: Rs.70,00,000/- iii) Covering lying and/or stored, and/or kept in trust in the factory buildings all kinds of raw material worth Rs.80,00,000/-. Finished products Rs.40,00,000/-. The insurance policies covered the risk of earthquake, flood and allied perils. There was a flood in the drain (Nallah) near the factory of the claimant on 10.7.1998. The respondent Company, in pursuance of the - 4 - letter written by the claimant, deputed one Shri N.S. Sidhu of M/s Consolidated Surveyors Pvt. Ltd., Chandigarh as spot surveyor. He visited the premises of the claimant Company and after taking stock of the situation, he asked the claimant to submit the list of loss occurred, which was supplied to the surveyor within a period of one week. Meanwhile, M/s A.K. Govil & Associates of Delhi were appointed by the respondents to assess the loss and damage caused to the claimant’s factory. The factory was visited by the said M/s A.K. Govil & Associates and after carrying out the preliminary inspection and considering the documents, they submitted preliminary report of the damage caused to the factory, plant, machinery, stocks vide their letter, dated 27.7.1998 and approximate damage was assessed at Rs.2.5 crore/Rs.3 crore in the preliminary report and they recommended a sum of Rs.1.00 crore as temporary measure. No final report was submitted by the M/s A.K. Govil & Associates and their services were dispensed with accordingly on 26.4.1999 by the respondent and they were asked to hand over the papers to the second set of surveyors. The second set of surveyors was appointed, who visited the claimant’s factory on 4.5.1999. They asked the claimant to supply documents. The Tribunal passed an interim award of Rs.18,93,082/- in favour of the claimant, which was accepted by the claimant Company under protest subject to adjustment at the time of final award. - 5 - The Arbitrator entered into reference, considered the documents and the evidence led by the parties and awarded a sum of Rs.1,29,24,096/- to the claimant alongwith simple interest at the rate of 9% on the sum of Rs.1.00 crore from 1.5.1999 till the date of award. The Arbitrator has further awarded interest at the rate of 18% on the unpaid amount of Rs.1,10,31,014/- from the date of award till the realization in favour of the claimant. The objection petition has been filed by the objector/Insurance Company that the award has been passed in a most arbitrary manner, is contrary to the principles of natural justice and is in conflict with the Public Policy of India. The award has been challenged mainly on the following grounds: i) That the loss has been assessed by the Arbitrator ignoring the evidence of the bills produced but it has just been estimated and the Tribunal has granted 1/3rd of the amount claimed against the total claim of Rs.3,37,65,679/- and has awarded a sum of Rs.1,12,45,226/- to the claimant. ii) That this amount was awarded without any rationality and without bills having been produced by the claimant Company, which produced only the bills for the repairs of machinery and other damages to the extent of Rs.18.00 lacs. iii) That no proper opportunity was given to the Insurance Company to lead evidence, the records were not made available for inspection and the - 6 - procedure followed for recording the evidence was against the principles of natural justice. iv) That the Tribunal had refused to consider the report of the second surveyor appointed by the Insurance Company and has only considered the interim report submitted by the first surveyor and as such the award in question was against the Public Policy of India. The objections filed by the claimant Company were to the effect that the Arbitrator had erred in making estimation of the loss at 1/3rd of the amount claimed by the claimant for the loss of plant and machinery without any reasoning. It was alleged that once the Arbitrator accepted the report of the first surveyor, there was no reason to disagree with the findings of the first surveyor that the loss could be higher that Rs.2.5 – 3.00 crores. It was further alleged that the Arbitrator had erred in not granting the claim for renting the premises to store the salvage and had not considered the claim of the claimant for grant of exemplary damages and for loss of business and the interest at the rate of 9% for the first period was granted wrongly, which should have been granted at the rate of 18% on the entire amount. The claimant also claimed that he was entitled to the sum paid as fees of the Arbitrator, secretarial expenses etc. On the pleadings of the parties, the following issues we framed in both the cases as under: - 7 - 1. Whether the amount awarded is in conflict with the Public Policy of India, as alleged? OPO 2. Relief. I have heard the learned counsel for the parties and have gone through the record of the case. The main submission on which much stress was laid by the learned counsel for the Objector/Insurance Company was that the report of the first surveyor was interim and no final report was ever given by the first surveyor who was replaced by the second surveyor since the surveyor was not submitting the final report in spite of sufficient time having elapsed. It was also submitted that the award of the Arbitrator is against the Public Policy since the final report submitted by the second surveyor appointed by the Insurance Company was not at all considered by the Arbitrator since it was observed that the appointment of the second surveyor was against the Rules and the powers conferred upon the Insurance Company. It was submitted that the approach of the Arbitrator was wrong since he considered the interim report only and not the final report submitted by the second surveyor. It was also submitted that the Insurance Company was within their right to appoint another surveyor if the first surveyor had failed to submit the report well within time and as such there was no material before the Tribunal to assess the damages and thus damages have been assessed by approximation only without referring to the evidence oral as well as documentary, since no bills were produced and as such the award can be termed as against the Public Policy. - 8 - Some submissions were also made in regard to the plea that the witnesses did not turn up or no proper opportunity was given to produce the evidence. On the other hand, the learned counsel for the claimant/respondent had supported the impugned awarded passed by the learned Arbitrator and had also submitted that he was entitled to interest etc., as alleged in the petition and as mentioned above. It was submitted that the award was not against the Public Policy and since there were no serious charges as against the first surveyor, who was not permitted to submit the final report, therefore, the report of the second surveyor, illegally appointed, was rightly ignored by the learned Arbitrator. From the above discussion of the submissions made by the learned counsel for the parties, it is clear that the main point in dispute to be considered by this Court is as to whether the appointment of the second surveyor was within the competence of the Insurance Company and as to whether the arbitral award is against the Public Policy since the Arbitrator ignored the report of the second surveyor appointed by the Insurance Company. Before I refer to the case law, the material dates may be summarized. The first surveyor was appointed by the Insurance Company in July 1998 after the loss was caused on 10.7.1998 and the first surveyor also visited the spot on 28.7.1998. The said surveyor also submitted his preliminary report qua the damage caused vide their letter, dated 27.7.1998. The services of the first - 9 - surveyor were dispensed with on 26.4.1999 by the Insurance Company and they were asked to hand over papers to the second set of surveyors. It has to be considered as to whether the Insurance Company was within their rights to appoint a second set of surveyors. To substantiate his submissions that the second surveyor could be appointed by the Insurance Company or that the award was against the Public Policy, the learned counsel for the Insurance Company had relied upon the following decisions. The decision in McDermott International Inc. versus Burn Standard Co.Ltd. and others, (2006) 11 Supreme Court Cases 181, shows that the provisions of Section 34 of the Act were compared with the provisions of Sections 30 and 33 of the Arbitration Act, 1940. It was observed that the 1996 Act makes provision for supervisory role of the Courts and for the review of the arbitral award only to ensure fairness. This supervisory role has to be kept at a minimum level and interference is envisaged only in cases of fraud or bias, violation of natural justice etc. It was held that interference on the ground of “patent illegality” is permissible if the same goes to the root of the matter and the Public Policy violation should be so unfair and unreasonable as to shock the conscience of the court. What would constitute public policy is a matter dependant upon the nature of the transaction and the statute. - 10 - The next decision relied upon is in Rajendra Construction Co. versus Maharashtra Housing & Area Development Authority and others, (2005) 6 Supreme Court Cases 678, which shows that the award made could not be set aside on the ground that the same was not supported by reasons. The interest at the rate of 18% was modified to be payable at the rate of 10% per annum. The other decision relied upon was in Rajasthan State Road Transport Corpn. versus Indag Rubber Ltd., (2006) 7 Supreme Court Cases 700, which shows that it was observed that the court cannot sit as a court of appeal and disturb the finding of fact recorded by the arbitrator after considering all the materials on record. The decision in P.R. Catering Co. and Anr. Versus Oil and Natural Gas Corporation Ltd. and Ors., 2008(2) Arb. LR 118 (SC) shows that in that case the Apex Court observed that the High Court had observed that the award given by the Arbitrator was reasoned and speaking one but concluded that material documents had not been considered by the Arbitrator and the case was remitted to the Arbitrator for fresh decision. The decision in M.B. Patel & Co. versus Oil & Natural Gas Commission, 2008 (2) Arb.LR 451 (SC), shows that the Arbitrator had awarded interest at the rate of 12% and had not considered Clause 14 of the arbitration agreement providing that no interest will be payable on the security deposit or any amount payable to the contractor - 11 - under the contract and therefore, the matter was remanded to the Arbitrator to consider the matter afresh. The next decision relied upon is in Sri Venkateswara Syndicate versus Oriental Insurance Company Limited and another, (2009) 8 Supreme Court Cases 507, wherein the following observations were made in paras 33 and 35, which are reproduced below: “There is no prohibition in the Insurance Act, 1938 for appointment of second surveyor by the insurance company, but while doing so, the insurance company has to give satisfactory reasons for not accepting the report of the first surveyor and the need to appoint second surveyor. Scheme of Section 64-UM particularly, of sub-sections (2), (3) and (4) show that the insurer cannot appoint a second surveyor just as a matter of course. If for any valid reason the report of the surveyor is not acceptable to the insurer may be for the reason if there are inherent defects, if it is not found to be arbitrary, excessive, exaggerated, etc., it must specify cogent reasons, without which it is not free to appoint the second surveyor or surveyors till it gets a report which would satisfy its interest. There must be sufficient ground to disagree with the findings of surveyor/surveyors. The Insurance Act only mandates that while settling a claim, assistance of a surveyor should be taken but it does not go further and say that the insurer would be bound by whatever the surveyor has assessed or quantified; if for any reason, the insurer is of the view that certain material facts ought to have been taken into consideration while framing a report by the surveyor and if it is not done, it can certainly depute another surveyor for the purpose of conducting a fresh survey to estimate the loss suffered by the insured.” - 12 - It is clear from a perusal of Section 64- UM of Insurance Act, 1938 considered by their Lordships in the above case that the proviso to sub section (2) retains the right of the insurer to settle a claim for an amount different from that assessed by the surveyor. It was further observed that this proviso impliedly permits an insurer to obtain a second or further report where considered appropriate or expedient in the circumstance was a case, based upon which the claim could be settled for a different amount than as assessed earlier. It was also observed that the Insurance Company cannot go on appointing one surveyor after another so as to get a tailor-made report to the satisfaction of the Insurance Company. However, if, for any reason, the report of the surveyors is not acceptable, the insurer has to give valid reason for not accepting the report. The option to accept or not to accept the report is with the insurer. However, if the rejection of the report is arbitrary and based on no acceptable reasons, the courts or other forums can definitely step in and correct the error committed by the insurer while repudiating the claim of the insured. It follows from the above decision, which was under the Consumer Protection Act, that the second surveyor can be appointed, but there has to be valid reasons for appointing a second surveyor. On the other hand, the learned counsel for the respondent/claimant had relied upon the decision in Sri Venkateswara Syndicate (supra). The other decision - 13 - relied upon was in M/s Avinash Bawa & Co. versus State of H.P. and another, 2002 (2) Shim.L.C. 333, wherein the claim was in regard to the refund of excess amount paid to the Government as royalty. This decision is based upon the facts of the said case and is not attracted to the present facts. The other decision relied upon by the learned counsel for the claimant was in HPSIDC versus R.P. Verma, 2003(1) Shim.L.C. 144, of a learned Single Judge of this Court, wherein it was held that onus rests heavily on the party who seeks setting aside of arbitral award to satisfy the court on the grounds contemplated under Section 34(2) of the Act. It is clear from the above discussion that the learned counsel for both the parties have relied upon the same decision of the Apex Court in which it was clearly observed that the second surveyor can be appointed and there is no bar on appointment of second surveyor if there are valid reasons with the Insurance Company to appoint another surveyor. In my view, this observation of the Apex Court is further substantiated from the fact that once the power is vested in the Insurance Company to either disagree or agree with the report of the surveyor before exercising the said power, they can have some other material, namely, the report of the another surveyor if they are not satisfied with the report of the first surveyor. When the power is vested in the Insurance Company to disagree with the report of the surveyor and decide the amount, they can ask for the opinion or expert - 14 - evidence of another surveyor if there are valid reasons for the same. A question arises as to when it is to be considered as to whether there were valid reasons or not to appoint a surveyor or seek another report. The same has to be considered as to when the reasons are to be given by the Insurance Company. The decision to appoint another surveyor was taken by the Officers of the Company and while appointing the surveyor, they were not required to specify the reasons in the order of appointment but once they had some evidence, they could have appointed another surveyor as observed by the Apex Court. Once the surveyor has been appointed and the record is available on which material the second surveyor was appointed, it can be substantiated by the Insurance Company only when the matter arose in regard to the appointment of second surveyor and for that purpose, the Insurance Company was bound to submit the reasons or the facts considered by them while appointing the surveyor when the dispute arose in between the parties and the matter was brought before the Arbitrator. It has been pointed out by the learned Counsel for the appellant Insurance Company that at the very first opportunity when they filed their reply in the proceedings before the Arbitrator, they had mentioned the reasons for appointment of the second set of surveyors in the reply filed before the Arbitrator and mainly it was submitted that it was necessary for the Insurance Company to appoint surveyor since the first surveyor had failed to ascertain true facts - 15 - and details relevant to ascertain the loss and there were defects in their approach in assessing the loss. They also pleaded that they received spate of complaints suggesting that the claimants were trying to recover a highly exaggerated amount from the insurer and the surveyors were unable to report correctly on the quantum of loss and, therefore, the decision was taken to appoint another surveyor. They also referred to a complaint by one Shri S.K. Mittal, Senior Engineer, Production Department of the claimant company, which was made vide his letter, dated 27.7.1999 and another complaint of former Deputy Managing Director of the claimant company Shri Satvinder Singh and another anonymous complaint in the name of India Workers Trade Union that a complaint has been received by the CBI alleging that the claimants have lodged a claim of approximately Rs.5.00 crores, though the loss was not more than Rs.20.00 lacs. These facts have been mentioned to show that the Insurance Company furnished the detailed reasons for the appointment of the second surveyor which power vested in them from the very bare perusal of the provisions of the Act mentioned above and once the power is vested in the Insurance Company to disagree with the report of the surveyor, they could look for more material and could call for the report of another surveyor. They were not required to disclose the reasons earlier before any authority and these reasons could have been considered by the Arbitrator once the reply was filed by the Insurance - 16 - Company giving the reasons also for appointment of the second surveyor. From the above discussion, it is clear that the Arbitrator had gone in detail into the question of appointment of the second surveyor and once there was no final report of the first surveyor, for whatever reasons, may be because of his replacement, there was no material before the Arbitrator to assess the loss and he should have, therefore, considered the loss assessed in the report of the second surveyor and he could have considered the report and given his own observations in that regard. The fact that the Arbitrator ignored the report of the second surveyor and did not look at it amounts to the violation of the Public Policy of India by ignoring the material document which was necessary for coming to a just decision in assessing the loss caused to the claimant Company. In view of the above discussion, I accordingly hold that the award passed by the Arbitrator is liable to be set aside and the case has to be remitted to the Arbitrator for fresh consideration, as held by the Apex Court in the above decision. Accordingly, both the objection petitions are allowed and the case is remanded back to the Arbitrator and the Arbitrator shall rehear the parties, consider the oral and documentary evidence including the report of the second surveyor and shall give his findings afresh. The fee of the Arbitrator shall be fixed by the Arbitrator himself with the consent of both the parties at the start of the hearing. The matter be - 17 - referred back to the Arbitrator alongwith the record and a copy of this judgment, who shall hear the parties and shall give his award, as discussed above, at his earliest. A certified copy of this judgment be also placed on the record of the other connected case. In view of the final disposal of the main cases, all the pending miscellaneous