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The New Great Insurance Company of India Ltd. Vs. United Equipments and Stores (Pvt.) Ltd. - Court Judgment

LegalCrystal Citation
SubjectContract
CourtKolkata High Court
Decided On
Case NumberCivil Rule No. 3958 of 1966
Judge
Reported inAIR1970Cal221
ActsContract Act, 1872 - Section 28; ;Arbitration Act - Section 34
AppellantThe New Great Insurance Company of India Ltd.
RespondentUnited Equipments and Stores (Pvt.) Ltd.
Appellant AdvocateSubrata Roy Chowdhury, ;Biswarup Gupta and ;Jatin Ghosh, Advs.
Respondent AdvocateAmarendra Mohan Mitra, ;Haripada Mitra and ;Arunendranath Basu, Advs.
Cases ReferredScott v. Avery
Excerpt:
- .....be referred to arbitration and that the making of an award shall be a condition precedent to any right of action against the company.2. the broad facts of this case are admitted. the opposite party's motor car was insured with the petitioner company and it was involved in an accident on the 8th of march, 1963. the opposite party sent the claim form duly filled in and signed, together with detailed estimate of repairs done by barman and company in respect of the damage to whom it had paid a sum of rs. 1113.35 on this account. the petitioner company by its letter dated the 24th august, 1964 (exhibit 2) contended that the opposite party had taken away the motor car from the garage and did not give any opportunity to the surveyor appointed by the petitioner company to inspect the car, and.....
Judgment:
ORDER

S.K. Chakravarti, J.

1. This case raises a very important and interesting point as to the right of the party to a contract of insurance to file a suit where under the contract it is provided for that all differences arising out of the policy are to be referred to arbitration and that the making of an award shall be a condition precedent to any right of action against the company.

2. The broad facts of this case are admitted. The opposite party's motor car was insured with the petitioner company and it was involved in an accident on the 8th of March, 1963. The opposite party sent the claim form duly filled in and signed, together with detailed estimate of repairs done by Barman and Company in respect of the damage to whom it had paid a sum of Rs. 1113.35 on this account. The petitioner company by its letter dated the 24th August, 1964 (Exhibit 2) contended that the opposite party had taken away the motor car from the garage and did not give any opportunity to the surveyor appointed by the petitioner company to inspect the car, and as such, the petitioner company repudiated the claim. Thereafter the opposite party filed the instant suit in the court of the Small Causes, at Calcutta for recovery of the sum of Rs. 1113.35 paise. Before the learned trial Judge the petitioner raised only one point and it was to the effect that in view of clause 7 of the Contract of Insurance the dispute in question was to be referred to arbitration, and the making of an award was a condition precedent to the institution of the suit, and as arbitration had not been resorted to, the suit was a premature one and should be dismissed. The learned trial Judge did not accept this contention and decreed the suit. The petitioner filed an application under Section 38 of the Presidency Small Cause Courts Act before the Full Bench of the small causes Court at Calcutta and that Full Bench also upheld the decision of the trial Court. Hence this application.

3. Mr. Gupta, learned counsel appearing on behalf of the petitioner submits that the Courts below have taken an erroneous view of the law. He submits that where, in the contract, there is only a provision for reference to arbitration, then a suit may still lie, and the remedy of the other party would be to apply for stay under Section 34 of the Arbitration Act. He further urges that if, however, in addition there is a clause to the effect that the making of an award shall be a condition precedent to any right of action, that clause is a legal and valid one, and will have to be given effect to, and as in the present case there is such a clause, thesuit should have been dismissed, as admittedly there had been no reference to arbitration. It would be convenient at this stage to quote Clause 7 of the contract of insurance.

Clause 7:--

'All differences arising out of this party policy 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 two arbitrators one to be appointed in writing by each of the parties within one calendar month after having been required in writing so to do by either of the parties or in case the Arbitrators do not agree of an umpire appointed in writing by the Arbitrators before entering upon the reference. The Umpire shall sit with the Arbitrators and preside at their meeting and the making of an Award shall be a condition precedent to any right of action against the company. If the Company shall disclaim liability to the insured for any claim here-under and such claim shall not within twelve calendar months from the date of such disclaimer have been referred to 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 here-under.'

4. Mr. Gupta has referred to a number of decisions and also to different parts of Halsbury's Laws of England. I will refer to the same as and when it would be convenient.

5. To have recourse to a Court of lawfor redress of one's grievances or injury is a fundamental right so to say. It is a facet, of the rule of law, and is inherent in every suitor as has been pointed out in the case of Firm Jowahir Singh v. Fleming Shaw and Co. Ltd., AIR 1937 Lah 851. This right has been considered to be so very important that some countries have gone so far as to lay down, either by specific legislation, or through judicial decisions, that its citizens cannot contract themselves out of this right, or, in other words, cannot shut out the jurisdiction of the Courts absolutely by any agreement between themselves. Our country is no exception to this salutary rule, and has provided in Section 28 of the Contract Act, that every agreement by which any party thereto is restricted absolutely from enforcing his rights under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals or which limits the time within which he may thus enforce his rights, is void to that extent. But this proposition is not an absolute one. Law provides also that if the parties so desire they may settle their disputes by arbitration. Exception 1 to Section 28 of the Indian Contract Act is to that effect, and runs as follows:

Exception 1:-- 'This section shall not render illegal a contract by which two or more persons agree that any dispute which may arise between them in respect of any subject or class of subjects shall be referred to arbitration, and that only the amount awarded in such arbitration shall be recoverable in respect of the dispute so referred.'

6. The leading case in England in this respect is that of Scott v. A very, (1843-60) All ER 1 - ((1856) 10 ER 1121). In this case Lord Campbell has observed as follows:

'But what pretence can there be for saying that there is anything contrary to public policy in allowing parties to contract that they shall not be liable to any action until their liability has been ascertained by a domestic and private tribunal upon which they themselves agree? Can the public be injured by it? It seems to me that it would be a most inexpedient encroachment upon the liberty of the subject, if he were not allowed to enter into such a contract.'

'An agreement to refer a dispute to arbitration couched in such language as entirely to oust the jurisdiction of the Courts is invalid; but there is no legal objection to an agreement which makes it a condition precedent to the enforcement of a claim that the liability and the amount shall first be determined by arbitration.'

(Halsbury's Laws of England, Third edition, volume 1, pages 17 and 18).

'As a general rule, however, the arbitration clause provides that the award of an arbitrator is to be a condition precedent to any action on the policy, and that no action is to be brought except for the amount of the award. In this case the cause of action is not complete until an arbitration has taken place in accordance with the clause and an award has been made by an arbitrator.' (Halsbury's Laws of England, third edition, volume 22, page 257).

'So long as the arbitration agreement only requires certain condition precedent or subsequent in order to constitute the right of action, it does not oust the jurisdiction of the Court and a provision in an arbitration agreement, known as a Scott v. Avery, (1843-60) All ER 1 = (1856) 10 ER 1121 clause whereby the making of the award is to be considered a condition precedent to any right of action in respect of any of the matters agreed to be referred, is valid.' (Halsbury's Laws of England, 3rd Edition, volume 2, page 19).

7. Even in our country the principles laid down in Scott v. Avery have been followed. The first case of this kind is the Coringa Oil Co., Ltd. v. Koegler, (1876) ILR 1 Cal 466. In this case the contract was to the effect that in case of any dispute the same is to be decided by two competent London brokers--one to be appointed by the buyers and the other by the seller's agents; such broker's decision is to be final. The contract did not provide that no action should be brought till such decision was pronounced. The Court on a consideration of Section 28 of the Contract Act came to the conclusion that such clause is legal and valid. This Court observed as follows:

'That section does not apply to contracts which merely contain a provision for referring disputes to arbitration but to those which wholly or partially prohibit the parties from having recourse to a Court of law. If, for instance, a contract were to contain a stipulation that no action should be brought upon it, that stipulation would, under the first part of Section 21, be void, because it would restrict both parties from enforcing their rights under the contract in the ordinary legal tribunal, and so, if a contract were to contain a double stipulation, that any dispute between the parties should be settled by arbitration and that neither party should enforce their rights under it in a Court of law, that would be a valid stipulation, so far as regards its first branch, viz. that all disputes between the parties should be referred to arbitration, because that by itself would not have the effect of ousting the jurisdiction of the Courts; but the latter branch of the stipulation would be void; because by that, the jurisdiction of the Court would be necessarily excluded. Then the first exception in the 28th section applies only to a class of contracts where (as in the cases of Scott v. Avery, (1843-60) All ER 1 - (1856) 10 ER 1121) and Tredwen v. Hclmon, ((1862) 7 LT 127 cited by Phear, J.) the parties have agreed that no action shall be brought until some question of amount has first been decided by a reference, as for instance, the amount of damage which the assured has sustained in a marine or fire policy. Such an agreement does not exclude the jurisdiction of the Courts; it only stays the plaintiff's hand till some particular amount of money has been first ascertained by reference.'

8. The other important case in this respect is the case of M. D'cruz v. Secretary of State for India in Council (1936) 40 Cal WN 865. In that case Rule 28 of the Provident Fund Rules came up for consideration and it was provided therein that in cases of dispute the matter in dispute was to be referred in writing to the Advocate General or Standing Counsel in Calcutta and an award, order or decision of the said referee shall be a condition precedent to any right of action of any party in difference in respect of any of the matters by the rules provided or in any way arising thereout or connected there-with and whatever award, order or decision shall be made by the said referee shall be binding and conclusive on all parties and shall be final to all intents and purposes without any appeal. No reference contemplated by the rule was made in that case. The Court observed as follows: 'The legality of a clause in a contract to the effect that no cause of action can accrue until a third person has decided on any difference that may arise between the contracting parties was recognised long ago in Scott v. Avery, (1843-60) All ER 1 = ((1856) 10 ER 1121). In Aghore Nath Banerjee v. Calcutta Tramways Co. Ltd., ( (1885) ILR 11 Cal 232) this Court held that there is nothing in the Contract Act which prevents the principle from being applicable from Trainor v. Phoenix Fire Assurance Co., (1891-65 LT 825) that the principle holds good when the referee has power to determine liability and his decision is not limited to quantum. It follows, therefore, that the plaintiffs have no cause of action, in respect of the Provident Fund.'

9. From the above discussions the following principles may be laid down. An agreement between the parties by which recourse to a Court of law is absolutely prohibited would be against Section 28 of the Contract Act and would be void, but it is still open, to the parties to stipulate by a valid agreement between themselves that any dispute between them will be referred to arbitration and that the making of an award shall be the condition precedent to any right of action. Even our Courts in India have held such a clause to be valid. Such a clause does not close the final door to a Court of law. If it so does, it would be void but it does not do so. The approach to the Court may be not by the straight path, but by the byelanes or in other words, the approach may be a staggered one and that would not be a contravention of Section 28. If there is only a clause to the effect that the parties are to refer the matter to arbitration, then a suit would still lie, and the remedy of the other party would be to apply under Section 34 of the Arbitration Act for a stay of the suit. If, however, the making of an award is made a condition precedent to a right of action, the suit would not lie and if such a suit is brought, it would be dismissed as a premature one and the party cannot be referred to a prayer for a stay in the suit under Section 34 as Section 34 would not apply, the right of the party to file a suit being staggered.

10. Mr. Amarendra Mohan Mitra, learned advocate appearing on behalf of the opposite party, submits that the principles of Scott v. Avery, (1843-60) All ER 1 = (1856) 10 ER 1121 do not apply to cases in India and that if there is any clause in any contract under which themaking of an award is made a condition precedent to a right of action, that would be offending Section 28 and would be void. I am not in a position to accept the proposition of Mr. Mitra in view of the fact of independent decisions referred to above.

11. Mr. Mitra has relied on the case of AIR 1937 Lah 851 which has been referred to above, but that case does not lay down such a proposition of law. In that case there was no clause to the effect that the making of an award shall be a condition precedent to any right of action, and that decision does not refer to any such clause. Moreover the cases I have referred to above will show that this contention is not correct.

12. Mr. Mitra submits further that the last sentence in clause 7 of the contract of Insurance is to be read independently and separately, and that this clause is void, inasmuch as, it limits the right of the party to have recourse to any Court of law, and as such, contravenes Section 28 of the Contract Act Let us examine this proposition of Mr. Mitra carefully. In the first place, I do not think that this last sentence in Clause 7 can be read divorced from the previous portion of the same clause. The use of the term 'If' at the beginning of this last sentence would also show that it is to be construed with reference to the foregoing provision in the same clause. In my view, the only reasonable construction of this portion would be that under the earlier portion of Clause 7 all differences are to be referred to the decision of the Arbitrator within one calendar month after having been received in writing so to do, but if the differences relate to the disclaimer of liability to the insured, then this time is extended in favour of the insured to a period of 12 calendar months from the date of such disclaimer. Or in other words, such an arbitration is to be resorted to within twelve months from the date of disclaimer instead of one month as in the earlier portion of the same clause.

13. Even assuming Mr. Mitra's contention in this respect to be correct and this portion to be read separately and independently, still I do not think that it ousts the jurisdiction of the Court at all. It is perfectly open to the parties to a contract to stipulate that the other party would lose his right to enforce it on the lapse of a particular time, or in other words, to have a time limit for the purpose of the contract, and to provide that if it is not performed within the time stipulated by parties concerned, the other party would lose his right. That is not a case of ouster of jurisdiction of Courts. In this view of the matter this clause cannot be held to have contravened the provision of Section 28 of the Contract Act.

14. Mr. Mitra next submits that this portion is to be read separately and independently and as this clause does not refer to the making of an award as a condition precedent to a right of action, the suit would lie and the only remedy of the other party would be to apply for a stay of the suit under Section 34 of the Arbitration Act. If this portion is read independently and separately, then I will have to uphold the contention of Mr. Mitra. But as I have already pointed out, this later portion also forms an integral part of Clause 7, and cannot be read divorced from the rest of the clause. In the circumstances, this contention of Mr. Mitra also fails. Clause 7, in my opinion, clearly indicates that all differences between the parties arising out of the policy including the differences based upon disclaimer of liability by the Insurance Company, will have to be referred to arbitration, and that the making of an award was to be a condition precedent to any right of action against the company. In this particular case, as I have pointed out in the earlier portion of my judgment, the insurance company had disclaimed its liability in toto, and it was therefore, necessary for the opposite party to have referred the matter to arbitration before it could file the instant suit. As that has not been done, the suit is premature and must be dismissed.

15. The result, therefore, is that this Rule succeeds and is made absolute. The judgments and decrees passed by the Courts below are set aside and the suit be dismissed. Each party will bear its own costs all through.

16. I must place on record the help and assistance I have received from Counsel on both sides in deciding this case, which does not appear to be covered strictly by any reported decisions in our country.


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