Fundamental aspects of Arbitration and clause in Insurance Policies

Do you know of  General condition no. 13 of  Standard Fire and Special Perils Policy, which primarily is a mechanism of dispute resolution.  You might also be interested in knowing more about this Council of which – Advocates, Businessmen, Engineers, Chartered Accountants, Executives, Foreign Nationals, Retired Judges, Maritime Experts all act for disposing the disputes.  

Insurance is primarily a contract, a contract where upon payment of premium, the Insurers agree to indemnify loss or damage arising out of specified perils. It is a contract reduced properly in writing – still there can be difference of opinion, variance of interpretations and disputes.  In any commercial transaction, the traders undertaking such business transactions sure would have only good intentions of carrying out their trade deals, which will ensure profit. Still there would arise disputes during performance of contracts; disputes on small to larger issues – much to annoyance of all the parties concerned. Unresolved disputes not only upset smooth continuance but also involve litigation at costs, time and efforts. Everyone would like to have such dispute areas narrowed thinner and have a mechanism for faster and efficient resolution.   

Businessmen would devote time and attention at the time of drafting their contracts precisely, but not everything can be thought of and reduced in writing.  First there should exist a written contract clearly defining the scope, nature and expenses sharing as also performance obligations including the timing of them.   The contract should be comprehensive enough covering all important points, contingencies in clear and unambiguous terms.  When one encounters a dispute one might find that the standard format has nothing to state on that specific issue ! – worser would be the case of traders who do not execute any formal contract but carry on their business dealings by using order and acceptance forms.

General condition no. 13 of Standard Fire Policy is – ‘arbitration clause’, which is present in most insurance contracts.

Arbitration, a form of alternative dispute resolution, is a legal technique for the resolution of disputes outside the courts, where the parties to a dispute refer it to one or more persons.  It is a resolution technique in which a third party reviews the evidence in the case and imposes a decision that is legally binding for both sides and enforceable.  Arbitration is often used for the resolution of commercial disputes, particularly in the context of international commercial transactions. The use of arbitration is also frequently employed in consumer and employment matters, where arbitration may be mandated by the terms of employment or commercial contracts.

An arbitration clause is a commonly used clause in a contract that requires the parties to resolve their disputes through a process of arbitration.  The clause may not incorporate  a specific jurisdiction, but sure would bind  the parties to a type of resolution outside of the courts, and is therefore considered a kind of forum selection clause.

The clear advantage of arbitration would the speedy disposal, lesser legal technicalities and formalities, flexibility and lower costs.  However this form of settlement would suffer for want of power of Arbitrator to issue summons, examine witnesses, taking evidence etc.,  There is the inherent risk of a biased opinion also. 

In India, an Act  to consolidate and amend the law relating to domestic arbitration, international commercial arbitration and enforcement of  foreign arbitral awards as also to define the law relating to conciliation and for matters connected therewith or incidental thereto – came into being in Aug 1996 and is known as “The Arbitration and Conciliation Act, 1996’. 

There is also the Indian Council of Arbitration, which can bring end to business disputes methodically, which otherwise can be costly, time-consuming.  Indian Council of Arbitration has been providing users of arbitration with an unrivaled array of time-tested services that include ICA Arbitration, ICA Conciliation and ICA Maritime, as well as education and training programs.  The broad spectrum of people listed in the first para of this post are the persons who are arbitrators under the ICA.   The ICA was established in 1965.  ICA has signed cooperation agreements with 40 major arbitral centres around the world. India is a Signatory to the New York convention.

-- here is how the ‘Arbitration clause’ in Standard Fire &Special Perils Policy is worded :

13. In the event of liability having been admitted for a claim under this Policy but dispute or difference exists as to the amount to be paid the parties shall agree to obtain and abide by the decision of an arbitrator. 

Said arbitrator shall be appointed in writing and shall solely be required to decide the amount to be paid under the Policy.   No difference or dispute shall be referable to arbitration if the Company has disputed or not accepted liability under the Policy.

       If agreement on a single arbitrator cannot be reached within 30 days of arbitration being invoked the parties must refer to a team of 3 arbitrators.  This team will be  consist of two arbitrators appointed separately by the Insured and the Company  and one other appointed by the two aforementioned selected arbitrators and arbitration shall be conducted under and in accordance with the provisions of the Arbitration and Conciliation Act 1996.   

        It is clearly agreed and understood that no difference or dispute shall be referable to arbitration as hereinbefore provided, if the Company has disputed or not accepted liability under or in respect of this Policy.

It is hereby expressly stipulated and declared that is shall be a condition precedent to any right of action or suit upon this Policy that the award by such arbitrator / arbitrators of the amount of the loss or damage shall be first obtained.

By incorporating this clause, the Insurers makes it binding on the parties to the Insurance contract to resort to arbitration and not approach Court of law for resolution of disputes, which fall within the ambit of arbitration clause - which is dispute or difference as to the quantum to be paid.  Even where the contract [Insurance or otherwise] does not provide specifically for, still the parties can resort to arbitration,  but that will have to be by mutual consent.


Would post further on an interesting Apex Court on arbitration soon…………….  Look forward to your views on this article – either as comments here or e-mail me : samvijib17@gmail.com with caption – ‘something on fundamental aspects of arbitration’.

With regards – S. Sampathkumar