Gujarat High Court Sets Aside Polymech's ₹40.53 Lakh Majority Award, Upholds ₹4.25 Lakh Minority Award

The Gujarat High Court set aside majority awards granting Rs. 40.53 lakh to Polymech Plast Machines Limited in its insurance dispute with National Insurance Company Limited and upheld the minority award granting Rs. 4.25 lakh.

A Division Bench comprising Chief Justice Sunita Agarwal and Justice D.N. Ray held that an arbitral award is vitiated by perversity where arbitrators rely on an office note as the governing insurance policy while excluding the policy containing the arbitration clause. The judges observed:

“To our mind, the greatest perversity which is apparent in the award in question is that the policy sought to be excluded by the learned Arbitrator contains the arbitration clause whereas, the policy sought to be relied upon by the said learned Arbitrators do not contain any arbitration clause. For this reason alone, the reliance upon the so-called policy to the exclusion of Fire Policy -'C' vitiate the awards.”

National Insurance issued a policy to Polymech on 10 July 1997 covering its machinery, raw material and stock until 9 July 1998.

On 23 August 1997, heavy rainfall in Vadodara caused rainwater to enter Polymech's factory sheds the following day, submerging machinery, spare parts and finished goods. Polymech initially estimated the loss at Rs. 36 lakh and later quantified it at around Rs. 42 lakh.

National Insurance appointed M. Sharma & Co. as surveyor and sanctioned Rs. 3,98,387. Polymech disputed the amount and invoked arbitration, claiming Rs. 53,89,180.45 with 18% interest and costs.

The three-member arbitral tribunal delivered separate awards. Arbitrator B.S. Bajaria awarded Rs. 40,53,289 with 15% annual interest from 1 October 1997 to 31 March 2002 on 7 February 2002. Presiding Arbitrator G.A. Bhojani concurred with the award on 22 February 2002. Arbitrator Ramesh M. Mehta delivered a minority award on 20 February 2002, granting Rs. 4.25 lakh based on the surveyor's calculations and holding that Fire Policy “C” applied.

National Insurance challenged the majority awards under Section 34 of the Arbitration and Conciliation Act, 1996. The 10th Additional District Judge, Vadodara, partly allowed the challenge on 11 September 2014, modifying the award to Rs. 40,28,289 while maintaining the interest.

National Insurance then approached the High Court under Section 37, arguing that Fire Policy “C” was the governing policy and contained the arbitration clause under which the tribunal derived its jurisdiction. Polymech argued that the tribunal had found its claim covered and that interfering with the quantum would amount to re-appreciation of evidence.

The High Court found that the “so-called insurance policy” relied upon by the majority arbitrators was merely an office note containing an “agreed bank clause”. It observed that “the aforesaid document is not in the format of any insurance policy, as will be evident from a bare perusal of the same”

The Bench noted that the arbitration clause appeared only in Fire Policy “C”, which the majority arbitrators had excluded while relying on the office note. It held that the arbitrators had therefore relied on a document wholly extraneous to the dispute while excluding the relevant contractual document. It observed:

“It is apparent on the face of the impugned awards that the learned Arbitrators who have relied upon the office-note and have excluded the Fire Policy -“C” have clearly taken into account documents which are wholly extraneous to the subject matter of the dispute and have excluded the relevant documents which should otherwise have formed the subject matter of the dispute.”

The judges clarified that it was not interfering with the awards on merits but on the ground of “Wednesbury unreasonableness and sheer perversity”. They held that the majority awards “shock the conscience of the Court”.

Accordingly, the High Court set aside the awards dated 7 February and 22 February 2002 and upheld Mehta's minority award dated 20 February 2002. It also quashed the District Court's order dated 11 September 2014 and disposed of the connected cross-objection.

Appearances for petitioner (National Insurance Company Ltd.): Advocate Lilu K. Bhaya.

Appearances for respondent (Polymech Plast Machines Ltd.): Advocate Paras K. Sukhwani.