Avadh Behari, J.
1. This is a petition under s. 33 of the Arbitration Act (the Act). The object of the petition is to seek a declaration that the dispute between the parties is not referable to arbitration now and that the arbitration agreement has expired by 'efflux of time.'
2. These are the facts. One Prof. Kanwar Lal, hereinafter referred to as 'the borrower', approached the respondent Balram Kappor, hereinafter called 'the lender', in 1966 and 1972, to lend him two sums, one Rs. 30,000 and another Rs. 25,000 which he needed for publication of his books. The lender agreed to do so on condition that the borrower will take two insurance policies guaranteeing repayment of the amounts to him. The borrower agreed to this condition. He asked Sterling General Insurance Company to issue two guarantee policies, one for Rs. 30,000 and the other for Rs. 25,000, in favor of the lender in respect of the loans agreed to be advanced to him. The insurance company in receipt of the premium issued two policies, one dated November 12, 1968, for Rs. 30,000 and the other dated April 5, 1972, for Rs. 25, 000. After the nationalisation of the general insurance business, Sterling General Insurance company vested in the Central Government and was subsequently merged with the petitioner, Oriental Fire & General Insurance Company Limited (hereinafter called 'the insurers').
3. By the concerned policies of insurance, the insurers agreed and guaranteed 'to indemnify the lender against the net pecuniary loss (as hereinafter defined) which the lender may sustain by reason of the borrower failing to repay the lender the full amount of the said loan and the interest thereon or party thereof.' The expression 'net pecuniary loss' is defined as follows :
'Net pecuniary loss mean and be defined as the residual amount, if any, which may become due to the lender by the borrower in respect of the said loan after the lender having made all recoveries from the borrower out of all and every security held by the lender from the borrower under the said agreement between the borrower and the lender.'
4. The borrower executed by way of collateral securities, two promissory notes - one for Rs. 30,000 and the other for Rs. 25,000 - in favor of the lender. The lender accordingly advanced him those two sums. It was agreed that the borrower will repay these two amounts with interest at the rate of Re. 1 per mensum.
5. The two loan transactions were embodied in two agreements dated October 16, 1966, and March 9, 1972, between the borrower and the lender. The two promissory notes were collateral securities. Two policies of insurance were taken to indemnify the lender against loss. The insurers, in their turn, required the borrower to furnish counter- guarantees which he did. This, in short, is the real nature of the transaction between the borrower and the lender which is the subject- matter of this litigation.
6. The borrower defaulted. He did not repay the loans. On October 11, 1972, the lender wrote to the insurers that the borrower had failed to repay the amount borrowed. He lodged a claim and required the insurers to pay him the amounts which, he said, were his 'net pecuniary loss'. The insurers on 26th October, 1972, wrote to him that the policies were issued on a 'net pecuniary loss' basis and that he was obliged to exhaust all sources of recovery from the borrower and that the company's liability is limited to the 'net pecuniary loss' which he, might, sustain. The lender insisted upon payment of the guaranteed amount to him. The insurers reiterated their stand in their letter dated 3rd November, 1972, and said :
As advised earlier, it is your primary responsibility to liquidate all the securities you hold and also to explore all the sources through which your debt could be recovered from your borrower. The company's liability can be established only after all your sources are exhausted and then also only to the extent of the 'net pecuniary loss' you suffer.'
7. On 14th June, 1973, it appeared to the lender that the insurers had no intention of paying the claim. He, thereforee, invoked the arbitration clause contained in the policies of insurance. That clause says :
'All disputes and differences arising out of this guarantee shall be referred to the decision of an arbitrator to be appointed in writing by the parties in difference, or if they cannot agree upon a single arbitrator, to the decision of the two arbitrators of whom one shall be appointed in writing by each of the parties within 2 calendar months after having been required to do so in writing by the other party. In case, either party shall refuse or fail to appoint an arbitrator within two calendar, months after receipt of notice in writing requiring the appointment, the other party shall be at liberty to appoint a sole arbitrator and in case of disagreement between the arbitrators, the difference shall be referred to the decision of an umpire who shall have been appointed by them in writing before entering on the reference and who shall sit with the arbitrators and preside at their meetings ...... It being hereby expressly stipulated and declared that it shall be a condition precedent to any right of action or suit upon this guarantee that the award by such arbitrator, arbitrators or umpire be first obtained. It is hereby further expressly stipulated and declared that all and every reference hereunder to the arbitrators shall be subject to the Indian Arbitration Act, 1940, and any statutory modification or re-enactment thereof and award there under shall be a condition precedent to any liability of or right of action against the company.'
8. The lender nominated Ch. Behari Lal as his arbitrator. On 9th July, 1973, the insurers appointed Mr. Y. K. Mathur, advocate, as their arbitrator. On August 22, 1973, Behari Lal wrote to Mathur to fix a date, time and place of meeting of the arbitrators. Mathur did not fix any meeting. On 22nd of October, 1973, he wrote to Behari Lal that as they did not meet within one month from the latest date of their respective appointments and did not appoint an umpire in terms of condition No. 2 of Sch. I to the Act, the arbitration proceedings cannot be held. The only course of the parties, he suggested, was 'to follow the procedure laid down in s. 8 of the Arbitration Act.'
9. So nothing happended. The arbitrators did not meet. In 1973, the lender embarked on a new course of action. He now started proceedings against the borrower. The lender and the borrower referred the disputes to arbitration. They appointed a sole arbitrator, one Mr. P. N. Sharma. On January 18, 1974, he gave an award for Rs. 48,844.44 on account of principal and Rs. 6,954 as interest in favor of the lender against the borrower. This award was filed in court. The borrower raised objections to the award. M. S. Joshi J. on 30th October, 1978, dismissed the objections and made the award a rule of the court. He passed a decree in accordance with the award.
10. The lender on 7th December, 1978, sent a copy of the award to the insurers and required them to pay the amount of his claim. The insurers did not pay. The lender again invoked the arbitration clause. By letter dated 18th May, 1979, he appointed Sohan Nayyar, respondent No. 2, as his arbitrator the required the insurers to appoint their arbitrator in terms of the clause.
11. By their latter dated December 11, 1979, the insurers disclaimed their liability under the policies in question mainly on two grounds. One was that the lender had earlier invoked the arbitration clause on 14th June, 1973, when he appointed Behari Las as his arbitrator and, thereforee, the dispute 'is not referable to arbitration afresh and you are barred from invoking again the arbitration clause for settling the dispute. 'The second ground was that despite 'our letter dated October 26, 1972, you failed to initiate legal action against Prof. Kanwar Lal on the basis of collateral security by way of promissory note held by you. The result has been that the action on that security became barred by time.'
12. The insures did not appoint their arbitrators. Sohan Nayyar proceeded to act as the sole arbitrator. He issued, notice to the insurers on 27th July, 1979, to appear before him and answer the claim. It is in these circumstances that the present petition was filed in this court on 20th August, 1979.
13. One single question which arises for decision in this case is : Is the lender entitled to call for arbitration Three things have been said against him by the insurers. One is that he was allowed the collateral securities to become barred by time. The second is that he did no proceed with the arbitration in 1973 after the appointment of Behari Lal and Y. K. Mathur as arbitrators and, thereforee, he was barred from invoking the arbitration clause again. Thirdly, it is said that the claim for arbitration is barred by time. In my opinion, all the three defenses of the insurers are without substances and must be rejected.
14. As regards the first ground it is not correct that the lender allowed the securities to become barred by time. He took legal proceedings against the borrower and those proceedings ended in a decree against him. The proceedings continued right from 1973 till 1978. The lender referred the matter to arbitration. The arbitrator gave an award on the disputed amounts. The award was made a rule of the court on 30th October, 1978. A decree was passed against the borrower. This is exactly what the lender was required to do by the terms of the policy. He was to exhaust all sources of recovery. In execution of the decree he recovered Rs. 12,356 by attaching the salary of the borrower. He also recovered Rs. 3,655.56 from the LIC as the surrender value of the borrower's life policy. He gave credit for these two amounts to the insurers and required them to pay the balance of his claim in terms of the policy.
15. It was the case of the insurers throughout and they repeated it in their letter after latter to the lender that 'he was bound to make all recovered from the borrower out of all and every security held by him in terms of the policy and that they were liable to pay to him only the 'net pecuniary loss.' As late as March 15, 1977, the insurers wrote to the lender
'In view of the fact that the policies were issued on net pecuniary loss basis, it is incumbent upon you to exhaust all sources of recovery before making any claim on the insurance company.'
16. The lender did all that what in his power. He went to arbitration. He went to court. He went to the execution department. He went to the LIC. He recovered as much as he could. After this, a claim for Rs. 54, 729.32 was his 'net pecuniary loss' as stated by him in his letter of November 18,1978.
17. On the second objection that the arbitration clause cannot be invoked again after the first arbitration was abandoned in 1973, it is argued that between 22nd October, 1973, when Y. K. Mathur refused to meet his co-arbitrator and 18th May, 1979, when the lender appointed Sohan Nayyar as his arbitrator, there is a long lapse of time which, in the very nature of things, ought to disentitle the lender from invoking the arbitration clause. I do not agree with this contention. It is contrary to all justice and fair play. According to the clause the award is a 'condition precedent' to the 'liability of the company.' The policy clearly says that the award must be first obtained and it is 'a condition precedent to any right of action or suit upon this guarantee.' That the lender asked for arbitration in 1973 and abandoned it after Behari Lal and Mathur were appointed by the respective parties ought not to stand in his was in demanding arbitration for a second time in 1979. The lender was ill-advised in going to arbitration for a second time in 1973 because by then he had not exhausted all sources of recovery and the net pecuniary loss had not been ascertained. If he had proceeded with the arbitration, the arbitrators would naturally asked him : 'what steps have you taken to recover the amount from the borrower ?' To this he had no answer. He realised his mistake when the insurers told him that first he must proceed against the borrower and then come to them for the reimbursement of the 'net pecuniary loss'. This advice he accepted. Throughout, the stand of the insurers was that the policies were issued on the 'net pecuniary loss' basis and, without exhausting all sources of recovery from the borrower, he was not entitled to ask for the payment of his claim. It will be sheer injustice to deny to the lender his right to call for arbitration, now that he has exhausted his sources of recovery.
18. The bone of contention between the parties is : What is the 'net pecuniary loss' of the assured There is a serious difference between the parties on this. The matter must go to arbitration. The arbitrators will ascertain the 'net pecuniary loss.' They will address themselves to these questions : Has there been a loss What is the loss Has that loss been in substances reduced by anything that has happened Is it the duty of the assured under the policy to reduce the lass
19. The guarantee policy is essentially a policy of indemnity. Though a contract of insurance in essence is a contract of indemnity, in which the amount recoverable is determined by the pecuniary loss sustained by the assured, whatever is recovered from the borrower will go towards diminishing the loss. The benefits of this diminution will also go to the insurers. The assured cannot take with both hands. He can recover no more than the amount of his loss. He cannot recover more than he has lost. He can ask for the reimbursement of the 'net pecuniary loss' only. And the 'net pecuniary loss' has been defined as the 'residual amount.' This is the measure of the insurer's liability. It is a method of measuring loss. It is the basis of the insurance cover. If a debt is guaranteed, the assured may enforce the guarantee. The contract of insurance relates to the debt and will, if duly performed, place the assured in the same position as if the loss had not happended. After the insurers replenish the loss of the assured the law gives them the right to stand in the assured's shoes and recover from the borrower what has been paid by them for the loss. In a word, they are subrogated to the rights of the assured. This is the fundamental principle of the insurance.
20. The policy says to us : 'Apply the board principle of indemnity, and you have the answer.' The assured cannot recover a loss greater than he suffers. In order to ascertain what that loss is, everything must be taken into account which is received and comes to the hand of the assured, and which diminishes that loss. And anything which reduces or diminishes that loss reduce or diminishes the amount which the indemnifier is bound to pay. This is the basis and foundation of all insurance law. thereforee, it is an ocular illusion to suppose that with the passage of time the lender's right vanished into thin air. From 1973 to 1979, the lender was vigorously pursuing his remedy against the borrower. If it took him six years to obtain a decree and to execute it, that is no fault of the lender. If anything, it is a tribute to law's delay. The lender was dead wrong in going to arbitration in 1973. He was dead right in asking for arbitration in 1979.
21. It was said that so long as the appointment of Behari Lal and Y. K. Mathur was not revoked by the court under s. 5 of the Act, there can be no appointment of a new arbitrator as was sought to be done by the lender when he appointed Sohan Nayyar on 18th May, 1979. Section 5 says that the authority of an appointed arbitrator cannot be revoked except with the leave of the court. It is said that the proper course for the lender was to call in aid s. 8 of the Act and ask the court, to appoint an arbitrator or arbitrators or umpire, as the case may be. I am not impressed by this argument. The arbitration clause remains in full force. It can be invoked again and again so long as the dispute remains. If the appointment of Ch. Behari Lal and Mr. Y. K. Mathur stands in the way of the lender, I will not hesitate to revoke their authority here and now. The reference of 1973 is a 'dead or a stale reference' (see Hari Shankar Lal v. Shambhu Nath, : 2SCR720 ). The reference was abandoned. The arbitrators did not meet. They did not appoint an umpire. They did not enter upon the reference. They did nothing in terms of the arbitration clause. Without the appointment of umpire they could not act. They were functus offcio.
22. Mr. Mathur was responsible for this abortive arbitration. He refused to act under the mistaken notion that the umpire was to be appointed within one month of the latest appointment of the arbitrators in terms of clause 2 of Sch. I to the Act. The arbitration clause does not say this. It says :
'In case of disagreement between the arbitrators, the difference shall be referred to the decision of an umpire who shall have been appointed by them in writing before entering on the reference and who shall sit with the arbitrators and preside at their meetings.'
23. Schedule I applies to an arbitration agreement where a different intention is not expressed therein (see s. 3). Here the arbitration agreement expresses a different intention. So Sch. I does not apply. Before entering upon the reference, the arbitrators had to appoint an umpire and not necessarily within one month of their latest appointment. He was to sit with them and to preside at their meetings.
24. The insurers thought that with the refusal of Mr. Mathur the arbitration clause came to an end and the only remedy was to take the procedure of s. 8. I do not agree. The action taken in 1973 does not mean the death of the clause. The clause is not killed because the reference in 1973 was abandoned. I have never heard it suggested that the arbitrators by their action or inaction can destroy the arbitration agreement. Such a conclusion is to be reached rarely and with reluctance. The arbitrators appointed in 1973 are not irremovable. I, thereforee, revoke the authority of Ch. Behari Lal and Mr. Mathur and remove the impediment in the way of the lender in getting the claim from the insurers who are bound to indemnify the lender. This is the essence of the policy.
25. Closely allied with the second is the third ground of limitation. It is said that as the lender did not take any action from 22nd April, 1973, when Mr. Mathur refused to act as an arbitrator till 18th May, 1979, when Sohan Nayyar was appointed, the claim has become barred by 'efflux of time'. It is a misuse of the legal terms 'efflux of time' because there is no agreed period in the clause. Effluxion assumes an agreed period. Probably, what is meant is that the claim has become barred by time. This argument is fallacious. Article 137 of the Limitation Act of 1963 will apply. Time will start when the 'right to apply' arises. The 'right to apply' arises when the lender has taken all steps to recover the amount from the borrower. At that stage, he can say to the insurer : 'This is my net pecuniary loss. You indemnify me.' This happened after Joshi J. made the award a rule of the court on 30th October, 1978. After that, the lender was able to recover Rs. 12,456 by levying execution against the borrower of the decree passed on the basis of the award. Under s. 60, C.P.C., the salary of the borrower could not be attached any more. So the execution came to an end. The lender is entitled to go to the insurers and say 'you assured me to indemnify my loss. This is my loss. I have reduced my loss by Rs. 12,356 which I received from the borrower's salary and Rs. 3,655.66 which I received from the borrower's life policy.' If the insurers dispute the claim of the assured the matter must go to arbitration which is the 'condition precedent to the liability of the company.'
26. To refuse arbitration is to dissipate the right of the lender. In fact, that is the only remedy against the insurers when they refuse to settle the claim of the assured. It is a mistake to suppose that October 22, 1973, (when Mr. Mathur refused to act) was the starting point of limitation. In 1973, the lender had no cause of action. He had no taken any steps to reduce his loss. In 1979, he was entitled to call for arbitration. He was well advised to take this course. In all conscience the insurers cannot refuse to go to arbitration.
27. There is yet another answer. The dispute under the policy arises when the insurers disclaim the liability. Clause (j) of the policy says :
'If the 'company' shall disclaim liability to the 'lender' for any claim hereunder and such claim shall not within twelve calendar months from the date of such disclaimer have been the subject of pending action or shall have been referred to the arbitration under the provisions herein contained then the claim shall for all purposes be deemed to have been abandoned and shall not thereafter be recoverable hereunder.'
28. So disclaimer is the starting point of limitation for going to arbitration. When the insurers repudiate the claim and refuse to pay, the assured can ask for arbitration. For the first time, in their letter dated Mar 7/8, 1979, the insurers 'regretted their inability to entertain the claim.' In their letter dated June 11/12, 1979, the insurers 'disclaimed all liabilities under the policies in question.' The lender was right in saying to the insurers in his letter dated 18th May, 1979, this :
'I find that you have now disclaimed your liability although in all your pervious letter you have been asking me to exhaust all remedies for the recovery of the loss and approach you for that pecuniary loss.'
29. The doctrine of approbate and reprobate forbids the insurers to say that the assured cannot now go to arbitration even though he has exhausted his sources recovery.
30. For these reasons, I dismiss the petition with costs. I uphold the appointment of Sohan Nayyar, respondent No. 2. But I think I should not allow him to act as the sole arbitration. The insurers have prayed that they may be given an opportunity to appoint their arbitrator in case I decide the petition against them. I accede to this request. I allow the petitioner-company against them. I accede to this request. I allow the petitioner-company to appoint their arbitrator within one month. Shri Sohan Nayyar and the insurers' arbitrator shall appoint an umpire before entering upon the reference. The umpire so appointed shall sit with them and preside over the meetings. 'In case of disagreement between the arbitrators the difference shall be referred to the decision of the umpire.' as the clause says. They will make their award within 4 months from entering on the reference.