Arbitrability of Repudiated Insurance Claims Must Be Decided by Arbitral Tribunal, Not S.11 Court: Delhi High Court

New Delhi: In a significant ruling clarifying the scope of judicial intervention under Section 11(6) of the Arbitration and Conciliation Act, 1996, the Delhi High Court has held that the question of whether a dispute is arbitrable, particularly in insurance matters where the insurer has repudiated the claim, must be left for the Arbitral Tribunal to decide. The judgment, delivered by the Hon'ble Mr. Justice C. Hari Shankar on September 18, 2024, arose from a petition filed by PayU Payments Private Limited against The New India Assurance Co Ltd seeking the appointment of an arbitrator for disputes arising from cyber-attack related insurance claims.

The case, ARB.P. 1209/2023 , centered on disputes stemming from two insurance policies (Policy 33 and Policy 34) held by PayU with New India Assurance. These policies covered risks associated with cyber and computer-related security breaches. Following a cyber-attack affecting PayU's banking partners in April 2018, PayU reported losses exceeding ₹8.58 Crores and lodged composite insurance claims under both policies.

A forensic investigator appointed by the insurer, BDO India LLP, estimated covered damages at ₹2.91 Crores in a draft report. However, after a delay of over four years, New India Assurance repudiated the claims in October 2022, relying on a separate report and asserting that the cyber-attack occurred on the banks' networks, not PayU's, and thus did not fall under the policies.

PayU subsequently invoked the arbitration clauses in the policies. While Policy 34 contained a standard arbitration clause for any disputes, Policy 33's clause included a provision stating that "no dispute or difference shall be referable to arbitration... if the company has disputed or not accepted liability under or in respect of this policy."

Arguments Presented

PayU contended that the repudiation of claims, especially given the BDO report acknowledging partial covered loss, constituted an arbitrable dispute. Citing recent Supreme Court jurisprudence, particularly SBI General Insurance Co Ltd v Krish Spinning (2024 SCCOnLineSC 1754) , PayU argued that issues of arbitrability, including the effect of the insurer's repudiation on the arbitration clause, must be decided by the Arbitral Tribunal, not the Section 11 court whose role is limited to confirming the prima facie existence of an arbitration agreement.

New India Assurance countered, relying on the specific wording of Policy 33's arbitration clause and prior Supreme Court judgments like Oriental Insurance Co Ltd v Narbheram Power and Steel Pvt Ltd (2018 6 SCC 534) and United India Insurance Co Ltd v Hyundai Engineering and Construction Co Ltd (2018 17 SCC 607) . They argued that these judgments established that where an insurer denies liability outright, the dispute falls into an 'excepted category' and is not referable to arbitration under such clauses. Therefore, they submitted, the Section 11 court must examine this and decline to refer the dispute.

Court's Analysis and Decision

Justice C. Hari Shankar carefully considered the arguments and the evolution of the law regarding the scope of Section 11. The Court acknowledged that earlier decisions like Oriental Insurance and United India Insurance indeed supported the view that the Section 11 court could examine if a dispute was non-arbitrable due to the insurer's repudiation based on specific clause wording.

However, the Court found that the landscape had been fundamentally altered by the Supreme Court's ruling in SBI General Insurance . The judgment noted:

> "The decision in SBI General Insurance, however, has resulted in a paradigm shift in the scope of examination by a Section 11 court. As of today, a Section 11 court cannot examine the aspect of arbitrability of the dispute."

Referring to paragraph 120 and 114 of SBI General Insurance , the Court emphasized that the Supreme Court has "left no scope for doubt" that the scope of enquiry at the appointment stage is strictly limited to the "prima facie existence of arbitration agreement, and nothing else."

The Court reasoned that accepting the insurer's argument – that the repudiation renders the dispute non-arbitrable and thus not referable under Section 11 – would require the High Court to pronounce on the arbitrability of the dispute, which is precisely what SBI General Insurance prohibits.

> "If this Court were to accept the submissions... and hold that the dispute that the petitioner seeks to be referred to arbitration cannot be referred because of the repudiation..., it would amount to a finding that the petitioner’s claims have, by reasons of their repudiation..., been rendered non-arbitrable. Such a finding would amount to this Court pronouncing on the arbitrability of the dispute while acting as a referral court. That this Court cannot do, in view of the law laid down in SBI General Insurance..."

Consequently, the Court held that the submissions regarding the non-arbitrability of the dispute due to the insurer's repudiation cannot be accepted at the Section 11 stage.

With the consent of both parties, the Court appointed a three-member Arbitral Tribunal to adjudicate the disputes. Crucially, the Court explicitly stated:

> "All questions of facts and law including the arbitrability of the dispute and the issue of repudiation that has been raised before this Court shall remain open to be agitated before the learned Arbitral Tribunal."

The petition was accordingly disposed of, directing each party to appoint a nominee arbitrator within two weeks, who would then jointly appoint the presiding arbitrator.

This judgment reinforces the principle, post- SBI General Insurance , that the power of the Section 11 court is narrow, primarily focused on establishing the existence of an arbitration agreement, while leaving complex questions of arbitrability, including those arising from specific clause exclusions like repudiation in insurance contracts, to be determined by the duly constituted Arbitral Tribunal.