Mahabir Prosad Sharma vs Esso Standard Eastern Inc.

Masud, J.—This is an application on behalf of the Defendant No. 2, M/s New India Assurance Company Ltd. (hereinafter described as the ''insurer''), u/s 34 of the Arbitration Act for stay of further proceedings in suit No. 404 of 1969 Mahabir. Prosad Sharma v. Esso Standard Eastern Inc. and Anr. The said suit was instituted on January 31, 1969, for a decree for a sum of Rs. 58,850 on account of loss, suffered by the Plaintiff Mahabir Prosad Sharma, caused to his truck No. ASZ 446 as a result of the alleged negligent handling of the petrol tanker No. MHO-2227 belonging to the Defendant No. 1, M/s Esso Standard Eastern Inc. (hereinafter described as the, ''insured''). At the time when the alleged loss of the truck took place the said petrol tanker belonging to the insured was insured by the latter under its motor insurance policy with the said insurer. The said insurance policy contains an arbitration clause which reads as follows:

All differences arising out of this 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 to 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 meetings 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 hereunder 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 claims shall for all purpose be deemed to have been abandoned and shall not thereafter be recoverable hereunder.

The Plaintiff has impleaded both the insurer and the insured in his said suit for damages.

Mr. N. Majumdar, counsel for the insurer, has moved the present application for stay of the said suit. He has submitted that u/s 96(1) of the Motor Vehicles Act, 1939, read with Section 96(4), the Petitioner is bound to satisfy the judgment that may be passed against the insured. According to him, the liability of the insurer with respect to third party claim is fixed by the statute on the Petitioner and taking advantage of the said contract of insurance between the insurer and the insured, the. Plaintiff has made the Petitioner a party in the said suit. The arbitration clause contains a clause of the nature of Scott v. Avery (1856) 5 H.L. Cas. 811, that is to say, the making of an award shall be a condition precedent to any right of action against the Petitioner company. In the premises, Mr. Majumdar has asked me to hold that the Plaintiff is really claiming under the insured, the latter being a party to the arbitration agreement. He has, therefore, submitted that the Petitioner is entitled to make an application for stay of the suit u/s 34 of the Arbitration Act.

Mrs. P. Banerjee, counsel for Mahabir Prosad Sharma, the Plaintiff-Respondent has raised a preliminary objection challenging the maintainability of the present application. The present application, according to her, has been made in the said suit No. 404 of 1969 and on the first page of the petition the cause title of the said suit stating the names and the addresses of the Plaintiff and the Defendants have been mentioned and as such, the Petitioner having made as application in the said suit has taken steps ''within the meaning of Section 34 of the Act''. Accordingly, the Petitioner is debarred from making the present application. It is true that the Petitioner should not have set out the names and addresses of the parties at the top of the first page of the petition, giving an impression that the application has been made in the said suit. But I am, however, not inclined to dismiss the present application on the ground of such procedural irregularity. The objection is more of a form than of a substance. At the bottom of the first page of the said petition, the Petitioner has also added the following:

In the matter of

An application u/s 34 of the Arbitration Act, 1940, for stay of further proceedings in the suit.

It is urged that on the notice of motion even the aforesaid description has not been mentioned at all. The notice of motion, however, refers to the present petition verified by an affidavit of Arun Chandra Mukherjee affirmed on March 21, 1969, as a ground for the said notice of motion. As there is no allegation that apart from the Petitioner''s reference to suit in the cause title of the petition the Petitioner has taken any step in this suit and as the petition itself contains the statement that the present application has been made u/s 34 of the Arbitration Act, 1940, it cannot be said that the Petitioner has taken any step in this suit, disentitling him to make the present application.

The next contention of Mrs. Banerjee is that this is a misconceived application inasmuch as the Plaintiff is not a party to the arbitration clause nor can he be said to be claiming under any party to the contract of insurance within the meaning of Section 34 of the Arbitration Act. In my view, there are good reasons for accepting this contention.

An application u/s 34 of the Indian Arbitration Act can only be made by ''any party to an arbitration agreement or any person claiming under him''. Admittedly, in the present case, the Plaintiff is not a party to the contract of insurance which contains the arbitration clause. The counsel for the Petitioner has submitted that the Plaintiff is a person claiming under the insured and as such, the application is maintainable. The first objection to such a plea is that the Plaintiff in his plaint is not claiming under the insured but has claimed against the insured. Secondly, ''any person claiming under him'' in Section 34 of the Act ordinarily refers to an heir, legal representatives or successor-in-interest to a party to an arbitration agreement. Thirdly, a claim under an insurance policy is not the same thing as a claim under the insured.

Mr. Majumdar has strenuously argued that under the insurance policy the insured has claims against the insurer and under the Motor Vehicles Act, 1939, there is statutory liability of the insurer to satisfy the claims of a third party like the Plaintiff. In the present case the Plaintiff has claimed a sum of money both against the insured and the insurer on the basis of the contractual and statutory rights of the insured against the insurer. It is, therefore, argued that the Plaintiff may be said to be claiming under the insured. Reference has been made to Section 96(1) and (4) of the Motor Vehicles Act. In support of the said contention he has drawn my attention to Fresh Water v. Western Australia Assurance. Company Ltd. (1933) 1 K.B. 515, 522. It seems to me that there is fallacy in the contention of Mr. Majumdar. The contract of insurance between the insured and the insurer contains the arbitration clause. The arbitration clause refers to differences arising out of the policy between the insurer and insured. The Plaintiff is a third party and he cannot be bound by the said arbitration clause unless it can be established that the contractual rights of the insured against the insurer have been transferred in their entirety to the Plaintiff by operation of law. It is now necessary for me to examine Section 96 of the Motor Vehicles Act and to find out whether the Plaintiff can be said to be claiming under the insured. The heading of Section 96 reads as follows:

Duty of insurers to satisfy judgments against persons insured in respect of third party risks.

Section 96(1) provides that if after the issue of certificate of insurance by the insurer to the insured a judgment in respect of a liability covered by the terms of the policy is obtained against the insured then the insurer shall be bound to pay to the third party in favour of whom a money decree has been passed. But the said statutory liability of the insurer is subject to two limitations:

(i) The insurer will not have to pay if no sum is payable to the third party for reasons mentioned in Section 96 itself, and

(ii) The insurer is only liable to pay to the third party the sum not exceeding the sum insured under the policy.

Thus, one of the conditions precedent of the liability of the insurer to pay the third party is that a judgment has been delivered or a decree has been passed in favour of the third party against the insured in a suit where the insurer may or may not have been made a party. Even where judgment has been delivered or decree has been passed the insurer may escape the liability if other conditions in Section 96 are satisfied by them. It is, therefore, clear that the third party''s right to get the money from the insurer would only arise after the third party proves or establishes its claim against the insured. It is quite possible that the Plaintiff may fail to prove negligence or even damages against the insured. Further even if the third party has got a good case against the insured it is quite possible that the insurer may have very good defence in resisting the third party''s claims as against itself. The insurer may prove that the policy was cancelled by mutual consent or by virtue of any provision contained in the policy before the accident which gives rise to the liability. The insurer may also be able to prove that the insured has committed a breach of the conditions of the policy and as such, the liability of the insurer under the policy has been discharged. All those possible defences have been enumerated u/s 96(2)(a), (b) and (c). Section 96(2) provides for a statutory notice to the insurer if the third party desires to exercise its statutory right to get any payment from the insurer. Thus Section 96(2) imposes another limitation that is to say, that "no sum would be payable by an insurer u/s 96(1) in respect of any judgment unless before or after the commencement of the proceeding in which the judgment is given the insurer had notice through the Court of the bringing of the proceeding...." On receipt if such notice the insurer has been given a legal right to be added as a party in the third party''s suit against the insured and to defend the action on the several grounds enumerated in the said sub-clause. Such notice is also essential to avoid any fraud, collusion or conspiracy between the stranger and the insured against the insurer. It is thus common that when a party files a suit for loss or damage against a person who has been insured, the insurer gets the notice before or after the commencement of the proceeding and the judgment is delivered with the knowledge of both the insurer and the insured. In fact, very often it happens that the certificate of insurance is valid and operative between the insurer and the insured and the insured has not committed any breach of the terms of the insurance policy; in such a case, the insurer alone contests the suit and has to pay the third party if the third party can establish its claim. Thus there were many hurdles to cross before the liability of the insurer to pay the stranger arises. The statutory liability of the insurer u/s 96 is conditional upon compliance with various conditions. The third party''s claim against the insured may not be established and his suit may be dismissed against both the insurer and the insured. If the insurer chooses to be added as a party and its defence is accepted by the Court the third party''s suit may be dismissed against the insurer only. Thus the liability of the insurer is a contingent liability and the rights and liabilities of the insured are not ipso facto transferred to the third party u/s 96 of the Motor Vehicles Act. In the premises, the rights of the insurer and the insured to have their differences determined through arbitration cannot be said to have been transferred to the stranger by operation of law. It should also be remembered that the differences mentioned in the arbitration clause are differences, between the insurer and the insured which can be determined by arbitration. The Plaintiff''s cause of action against the insurer and the insured in the suit cannot be described as differences between the insurer and the insured.

Mr. Majumdar in support of this contentions has relied upon Fresh Water v. Western Australia Assurance Company Ltd. Supra. There the Plaintiff was injured while travelling on the pillion seat of Regional Thomas Cundy in consequence of a collision between Cundy''s motor cycle and the motor -cycle of Leslie Harper. The Plaintiff brought an action against Harper and Cundy and obtained a verdict of damages against both of them. It was alleged that on the date of accident Harper was insured by the Western Australia Assurance Company against third party risk under a policy and the Plaintiff''s suit against Cundy and Harper was defended by the said insurance company. The Plaintiff obtained his decree for damages on July 18 and 19, 1932. But on September 13, 1932, Harper was adjudicated bankrupt and had no asset and therefore, by virtue of Section 1 of Third Party''s (Rights against Insurer) Act, 1930, the Defendant company were made liable to pay to the Plaintiff the decretal sum with costs. After the said decree and after Harper became bankrupt the Plaintiff issued a writ against the Defendant company in subsequent proceeding and the insurance company thereupon took out a summons to stay the action on the ground that under the arbitration clause in the insurance policy the obtaining of an award was a condition precedent to bring an action. On appeal by the insurance company it was held that the insurance company was entitled to rely on the arbitration clause. The facts of the said English case are distinguishable. Firstly, the English case has been decided under the English Act, Third Party''s (Rights against Insured) Act, 1930, read with Section 36(4) and (5) of the Road Traffic Act, 1930. We are, however, governed by the Motor Vehicles Act, 1939, under which the rights and liabilities of the third party, the insurer and the insured are to be determined in a more limited or restricted manner. Secondly, the learned Judges there decided the case after the money decree was passed against Harper and Cundy. Thirdly, the scope of the arbitration clause on which the learned Judges relied was a very wide one. There the said clause contained the following words : If any differences or disputes of any kind whatsoever shall arise between the insured or any claimant and the company. Naturally, the third party who relied upon the policy, was bound by the arbitration clause under which there must be an award before an action is brought against the insurance company. Obviously the Parliament there has given the right to the insurance company of having the disputes and differences of any kind between the insurance company on the one side and a third party and the insured on the other to be determined by an arbitration before an action is brought against the insurance company. In the present case, however, the arbitration clause is very limited in its scope. In the premises I am of opinion that the law laid down in the said case is not applicable to the case before me.

For all these reasons I hold that the Petitioner is not entitled to make the present application u/s 34 of the Arbitration Act and as such, the application is dismissed with costs.