Decided on September 09,1954



Bhandari, C.J. - (1.) THIS appeal raises the question whether a party to an arbitration agreement should be compelled to resort to arbitration even though the matters in the controversy between the parties fall outside the scope of the arbitration clause.
(2.) THE facts of the case are simple. On 11-2-194 the Nagpal Hosiery Factory at Amritsar took out a fire insurance policy with the Newzealand in surance Company Limited in respect of the building, machinery and stock-in-trade belonging to the ' said factory for a sum of Rs. 20.000/- which was subsequently- extended to Rs. 50,000/-, THE risk was covered upto 11-12-1946 in the first instance but was later extended to 11-12-1948. Clause 7(h) of the conditions declared that the insurance was. not to cover any loss or damage occasioned by, or through or in consequence of explosion. Clause 18 of the conditions was in the following terms: "And it is hereby expreesly 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, if disputed shall be first obtained." On 6-7-1948 the premises of the factory and goods thereon are alleged to have been destroyed by fire and notice of the loss was given forthwith to the Company. On 31-8-1948 the Company informed the assured that the loss of the building, machinery and stock-in-trade was the result of an explosion, that there was no fire either before or after the explosion, and that the loss or damage caused by an explosion was an excepted peril under the policy. THE Company repudiated liability on the abovementioned grounds and expressed its inability to entertain the claim. On 29-11-1948 the assured presented an application under Section 20, Arbitration Act in which he prayed that the agreement to refer the dispute to arbitration contained in the policy be filed in Court. On 3-8-1949 the learned Senior Subordinate Judge, in exercise of the discretion vested in him by the said section directed that the question of loss or damage arising out of the policy should be referred to an arbitrator in accordance with the terms of the policy and this decision was upheld by a learned Single Judge of this Court. The Company has come to this Court under Clause 10, Letters Patent and the question for this court is whether the discretion exercised by the Courts below has been exercised in accordance with recognised judicial principles. It is an accepted principle of law that it is open to the parties to a contract to agree in advance that no right of action shall arise thereon until the matters in controversy have been referred to and ascertained by an arbitrator appointed in accordance with the terms of the contract. It is equally clear that when the parties agree to submit their disputes to a domestic tribunal of their own choice, and when arbitration is made a condition precedent to an action being brought on the policy, it is prima facie the duty of the Court to give effect to the agreement unless the condition precedent has been removed under the powers conferred on the Court by the Arbitration Act or unless the Court comes to the conclusion that the right to arbitration has been waived. Now the right to arbitration like a right conferred by contract, may be waived by a party either by express agreement to do so, or by an express refusal to exercise it, or by a failure or neglect to arbitrate, or by participating without objection in a trial of the controversy on its merits, or by omitting to demand arbitration within a reasonable time, or by obstructing or delaying the arbitration proceedings, or by repudiating liability under the principal contract.
(3.) NOW an insurance Company may repudiate its liability under a policy in two different ways. It may, for example, deny all liability under the policy by declaring that no binding contract is in existence. If the liability is repudiated on grounds which go to the root of the contract and it is contended that the agreement is void the Company cannot insist on the observance of the arbitration clause, for as pointed out by Lord Sumner in-Macaura v. Northern Assurnace Co., 1925 AC 619 at p. 631 (A), "the defendants could not both repudiate the contract 'in toto' and require the performance of a part of it which only became performable when liability was admitted or esta-' blished". The case -- 'Jureidini v. National British and. Irish Millers insurance Co. Ltd.', 1915 AC 499 (B), is a classic example of this Kind of repudiation. In this case a claim was made for indemnity for the loss of goods by fire under a policy the conditions of Which provided (1) that if the claim were fraudulent or If the loss were occasioned by the wilful act or with the connivance of the assured all benefits under the policy should be forfeited and (2) that if any difference should arise as to the amount of any loss or damage such difference should, independently of all other questions, be referred to arbitration and that it should be a condition precedent to any right of action upon the policy that the award of the arbitrator or umpire of the amount of the loss, if disputed, should be first obtained. The Insurance Company repudiated the claim 'in toto' on the ground of fraud and arson. The House of Lords held that the repudiation of the claim on a ground going to the root of the contract precluded the Company from pleading the arbitration clause as a bar to an action to enforce the claim. In delivering the judgment in this case Lord Dunedin observed as follows: "When the attitude was taken up by these parties ....that they repudiated the claim altogether and said that there was no liability under the policy, that necessarily cut out the effect of clause 17 as creating a condition precedent." This case came up for consideration in --'Heyman v. Darwins Ltd.', 1942 AC 356 (C). Lord Wright considered it unfortunate that the exact grounds on which the House of Lords had come to the conclusion that the condition precedent was binding on the assured were not definitely expressed. It appears probable, however, that the order was made in favour of the assured on the ground that the arbitration clause", which was confined to differences touching the amount of loss or damage, could not be regarded as a bar to an action brought to determine whether the company was liable at all.;

Click here to view full judgement.
Copyright © Regent Computronics Pvt.Ltd.