Oriental Insurance Company Ltd. vs Jindal India Limited

Avneesh Jhingan, J

The present petition is filed under Section 34 of the Arbitration & Conciliation Act, 1996  (for short „the Act‟)  for setting aside of the arbitral award dated 10.02.2023.

The brief facts are that the respondent/claimant is engaged in the manufacturing of Galvanised Steel Sheets, Corrugated Sheets & Coils and operates an Aluminium Foil division at NH-6 Mouza Jangalpur  Hawra,  West  Bengal  comprising  of  an  old  mill  and  a  new mill. The respondent took an Industrial All Risk Policy from the petitioner valid from 13.01.2017 to 12.01.2018. The policy covered risk of fire, machinery breakdown and indemnity for business loss for a period of six months on account of business interruption i.e. Fire loss of Profit (FLOP).

2.1 On  the  night  of  27.09.2017  a  fire  broke  out  in  the  new  unit  of aluminium foil division. The petitioner appointed a surveyor (hereinafter referred to as „first surveyor‟). The survey report dated 25.12.2018  assessed  the  loss  to  the  tune  of  Rs.13,31,13,073/-  against the claim of Rs.19,31,69,106/-. The petitioner raised certain queries with regard to the method of calculation of Business Interruption Loss (for short„BIL‟).The first surveyor gave two additional reports dated 12.10.2019 and 18.11.2019 enhancing the business loss to Rs.17,02,77,352/- and Rs.17,38,24,536/- respectively. In both reports, a disclaimer was made that the first surveyor stood by the initial report dated 25.12.2018. On being dissatisfied with the report, the petitioner under Section 64UM of the Insurance Act, 1938 (for short „1938 Act‟) appointed  a second  surveyor  who  assessed  the BIL to the  tune of  Rs. 3,84,80,892/- and this amount was paid. Dissatisfied with the loss assessed, the respondent initiated arbitration proceedings by serving a notice under Section 21 of the Act and claimed an amount of Rs.13,53,43,644/- towards BIL alongwith interest. The arbitrator framed the following issues:

(I) Whether the present claim is barred by limitation? OPR.

(II) If the answer  to Issue No.  (I) is in negative whether the dispute under the Industrial All Risk Policy bearing No. 31170/11/2017/711 is arbitrable and if so, to what effect?

(III) If the answer to Issue No. (II) is in affirmative whether the payment of Rs.3,84,80,892/- to the Claimant by the Respondent and the consequent issuance of discharge vouchers stopped the Claimant from raising the present claim, if so, to what effect? OPR.

(IV) If  the  answer  to  Issue  No.  (III)  is in negative  to  what amounts is the Claimant entitled to under the present claim, if so, to what effect? OPC.

(V) Is the Claimant entitled to interest on the claim so awarded and if so, at what rate and for what period? OPC.

(VI) Relief.

The claim was held to be within limitation and the dispute to be arbitrable. Issue no. 3 was decided in favour of the respondent holding that the respondent by receiving an amount of Rs.3,84,80,892/- was not estopped from raising the dispute. The arbitrator held that the appointment of the second surveyor without recording reasons or affording  an  opportunity  of  hearing to  the  respondent was  not  valid. Proceeding  on  the  basis  that  the  petitioner  had  accepted  the  report  of the  first  surveyor  dated  25.12.2018  for  loss  of  machinery  assessed  at Rs.27 crores and had found fault only with the assessment of BIL, the arbitrator  awarded  the  assessed  amount  of  Rs.13,31,13,073/-  and  the amount of  Rs.3,84,80,892/-  already  paid was  to  be  adjusted.  Interest @ 7% per annum was granted in case the payment was not made within one month from the date of the award.

Learned counsel for the petitioner contended that the first surveyor assessed the BIL by determining the standard turnover in violation of the terms of the policy. It was submitted that the turnover of twelve months immediately preceding the date of loss was to be considered, adjustments were to be made  where the indemnity period exceeded twelve months and for business trends and other circumstances  but  the  first  surveyor  took  the  turnover  of  two  months for determining the standard turnover.

4.1 The  argument  is  that  the  rate  of  gross  profit  (for  short„GPR‟) should have been taken for both the units and not for the new unit alone. Further the GPR was to be calculated on the basis of gross profit earned on turnover during the financial year (for short„FY‟) immediately preceding the date of loss.

4.2 It is submitted that the departmental clause was wrongly invoked  on the  basis  of accounts certified by  a chartered accountant (CA) and not on the basis of audited accounts.

4.3 Lastly the emphasis is that the arbitrator erred in recording that there were no reasons for appointing the second surveyor despite relevant evidence in the form of the note dated 16.10.2019 being there on record.

Per contra, re-examining  the report of the first surveyor  would amount to re-appreciation of evidence. The contention is that the view taken by the arbitrator is plausible and  for every factual or legal error the  award  cannot  be  set  aside.  The  report  is  defended  stating  that  the consideration of turnover for two months is backed by reasons that consequent to the anti-dumping duty imposed in May 2017 there was an increase in turnover and in prices. The first surveyor by two clarificatory  reports  addressed  the  objections  raised  by  the  petitioner. The non-applicability of the departmental clause was refuted stating that considering the consolidated position of the old and new units would result in inclusion of figures of the old unit which was not affected by fire. The assessment of the GPR is supported to have been calculated as per the terms of the policy. Submission is that the standard turnover defined in the policy permitted adjustments in GPR based on changing business trends. Lastly the contention is that the calculation  of  the  petitioner  and  the  second  surveyor  suffered  from  a fundamental  flaw  of  not  calculating  the  BIL  as  per  the  departmental clause.

Heard the learned counsel for the parties at length. The relevant record was perused with their able assistance. No other issue than those noted above was pressed.

The  bone  of  contention  is  with  regard  to  the  correctness  of  the methodology adopted for assessment of BIL under the policy.

Section II of the policy provides that loss resulting from business interruption caused due to loss destruction or damage during the  period  of  insurance  is  to  be  indemnified,  subject  to  the  condition that the liability of the insurer shall not exceed the total sum insured.

The  basic  insurance  cover  is  limited  to  the  loss  of  gross  profit due to reduction in turnover and increase in cost of working. The increase in cost of working is not in issue in the present case.

The reduction in turnover is defined as a sum arrived at by applying the GPR to the shortfall in turnover during the indemnity period as compared to the standard turnover consequent to loss destruction or damage. The gross profit is defined as the excess of the sum  of  turnover,  closing  stock  and  work-in-progress  over  the  sum  of opening stock, work-in-progress and uninsured working expenses. The definition of GPR is the rate of gross profit earned on the turnover during FY immediately preceding the date of loss destruction or damage. The standard turnover is defined as the turnover of twelve months immediately preceding the date of loss destruction  or damage to be adjusted correspondingly where the indemnity period exceeds twelve months and necessary adjustments shall be made to account for business trends and variations or other circumstances affecting the business either before or after the loss  which would have affected the business.

The arbitrator held the appointment of the second surveyor to be bad  for  non-recording  of  reasons  and  in  violation  of  the  principle  of audi alteram partem by  not issuing notice to the respondent for not accepting the report of the first surveyor.

The Supreme Court in the case of Sri Venkateswara Syndicate v. Oriental Insurance Company Ltd. & Ors. (2009) 8 SCC 507 held that  a  second  report  cannot  be  called  for  as  a  matter  of  course  in  the absence of a valid reason and for the purpose of obtaining a tailor- made report.

The petitioner has the power to appoint a second surveyor under Section  64UM  of the 1938 Act. The  note of the  petitioner company dated  16.10.2019  is  on  record  wherein  the  reasons  for  calling  for  the second report are mentioned. It is stated that the standard turnover was to be taken from the turnover of twelve months whereas the first surveyor without justifiable reasons restricted it to two months. The GPR was not in accordance with section II of the policy.

To resolve the objections to the report of the first surveyor a meeting was convened on 01.10.2019 in the presence of the first surveyor and the respondent, thereafter a decision was taken for appointment of a second surveyor. The finding recorded by the arbitrator that there were no reasons for appointing a second independent surveyor is contrary to  the record. The arbitrator ignored the relevant evidence. The meeting convened to resolve the issues provided an opportunity to the respondent to respond to the objections of the petitioner to the report.

The  arbitrator  after  having  held  the  appointment  of  the  second surveyor to be bad in law did not consider the second report on merits. The  first  report  dated  25.12.2018  of  the  first  surveyor  was  accepted. There cannot be a dispute on the proposition that under Section 34  of the Act, there can be no re-appreciation of evidence and this court shall  not  sit  in  appeal  over  the  report  submitted  by  a  surveyor.  What warrants judicial scrutiny is whether the report of the surveyor was in accordance with the terms of the policy.

The  acceptance  of  the  report  of  the  first surveyor  assessing the loss of machinery by the petitioner cannot operate as an estoppel against  the  petitioner  from  challenging the  report.  The  report  was  in two  parts  dealing  with  two  claims  under  different  heads. Acceptance of one claim does not debar raising objection to the second part of the report.

The  challenge  that  the  standard  turnover  was  not  calculated  as per the policy wherein the turnover of twelve month immediately preceding the date of loss was to be considered but in the instant case the turnover of two months was taken by the surveyor, need not be gone into in detail. Suffice to say that the terms of the policy provide leeway for making necessary adjustments to the standard turnover, taking into account the business trends and circumstances affecting the business either before or after the loss. The first surveyor recorded reasons for making adjustments and the law is well-settled that a plausible view shall not be interfered in exercise of powers under Section 34 of the Act.

The contention of the learned counsel for the petitioner that the gross profit should have been taken of both the units is fallacious. The standard turnover assessed on the basis of the turnover of the new unit is not  challenged  and the only objection  raised is that the  turnover  of two months was considered instead of twelve months. On one hand the  turnover  of  the  new  unit  for  determining  the  standard  turnover  is not objected to while on the other hand a contradictory stand is taken that the gross profit of both the units combined should be considered. 19. The figures relied upon for calculating the mill-wise turnover for invoking the departmental clause were from  financial statements certified by a CA relying upon the figures provided by the management. The argument that the departmental clause could not have  been  invoked  on  the  basis  of  verified  account  statements  in  the absence of audited accounts lacks merit. Learned counsel for the petitioner  despite  repeated  queries  failed  to  point  out  any  term  in  the policy providing that for invoking the departmental clause audited accounts are to be relied upon.

Another  angle  is  that  the  fire  incident  took  place  in  September 2017 and  the  impugned award was  passed in February 2023  but  the petitioner failed to adduce evidence that the verified account statements produced were not at par with the audited accounts prepared for the FY in question.

The challenge to the determination of the GPR deserves acceptance. The method adopted by the first surveyor  to calculate the GPR  is  contrary  to  the  terms  of  the  policy.  The  definition  of  GPR  is reproduced below:

“Rate of gross profit earned on the turnover during the financial year immediately before the date of loss destruction or damage.”

The first surveyor noted that the gross profit of both the old and new units in the FY immediately preceding the date of loss was 10.75% and when compared to the last six months prior to the loss the GPR  was  19.35%.  By  considering the  turnover  of  six  months of  the FY 2017-18 of the new unit and making adjustments for business trends the GPR calculated at 31.64% is under challenge being contrary to the terms of the policy. The calculation in the surveyor‟s communication dated 18.11.2019 is reproduced below:

Particulars

Amount (Rs.)

Rate of Gross Profit

40,608

Per Ton

Add increase in GP due to trends of business

43,403

Per Ton

Less decrease in GP due to Increased other costs

2,158

Per Ton

Trend Adjusted GP

81,853

Per Ton

Selling Prices

2,54,802

Per Ton

Trend Adjusted Rate of GP

32.124

%

From the departmental clause and the method of calculation provided therein it is evident that for determining the loss, the GPR is to  be  applied  to  the  shortfall  in  turnover  during  the  indemnity  period as  compared  to  the  standard  turnover.  There  are  two  components  i.e. the standard turnover and the GPR. The definition of the standard turnover gives flexibility to the surveyor to make adjustments for business trends, variations or other circumstances affecting the business either before or after the loss destruction or damage to enable the  surveyor  to  arrive  at  a practicable  result.  The  turnover  during  the indemnity  period  is  to  be  reduced  from  the  standard  turnover  and  on the difference amount the GPR is to be applied.

The definition of GPR is unambiguous that the GPR is to be taken on the turnover of the FY immediately preceding the date of loss destruction or damage. The fire incident took place in September 2017 and  FY  2016-17  preceded  the  date  of  incident.  There  is  no  provision in the policy for trend adjustment to the GPR. The first surveyor went beyond  the  terms  of  the policy by  calculating  GPR of  31.64% on the basis of turnover of the six months of the FY 2017-18 instead of taking the GPR earned on turnover of the FY 2016-17 and also by making trend adjustments to GPR. The different language used for determination of standard turnover and GPR is important. Turnover of twelve months preceding the date of loss or destruction is to be considered for determining the standard turnover whereas GPR earned on the FY immediately preceding the date of loss or destruction is to be taken to determine the loss.

The arbitrator  cannot  go  beyond  the  terms  of  the contract  and before accepting the report of the first surveyor it was to be scrutinized whether both the components for assessing the loss of gross profit due to reduction in turnover were calculated in accordance with section II of the policy.

There  cannot  be  a  departure  from  the  trite  law  that  awarding  a claim beyond the terms of the contract renders the award perverse and it is not a case of a factual or legal error.

The report of the first surveyor was not in accordance with section II of the policy and the arbitrator by accepting the report went beyond the  terms of  the  policy,  consequently  the award  is  set aside. The petition is allowed.