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sets aside arbitral award for relying on pre-contract notes to alter insurance policy
In a significant ruling that reinforces the primacy of written contracts, the has set aside an arbitral award that relied on pre-contract notes and discussions to alter the terms of an executed insurance policy. Justice Om Prakash Shukla held that the majority tribunal exceeded its jurisdiction by correcting an alleged typographical error without any legal basis, violating fundamental principles of contract law.
The case arose from a Contractor All Risk Insurance Policy taken by from for a major Chennai Metro project. The policy, issued in for a premium of ₹7.8 crore, covered the design and construction of underground stations under Package UAA-01, valued at approximately ₹2,597 crore.
The Flood and the Policy Dispute
In , severe flooding and heavy rainfall damaged the project sites. After the insurer’s surveyor assessed the loss, Oriental Insurance offered only ₹2.29 crore, making two unilateral deductions of ₹1 crore each. One deduction applied an excess clause for “tunnel risk/collapse” (minimum ₹1 crore) instead of the peril (minimum ₹50 lakh). The other was an adjustment from a separate policy.
The insured accepted the amount under protest and invoked arbitration in . The policy deductible schedule originally stated: - Normal claims: 5% of claim subject to a minimum of ₹20 lakh - AOG/Major Perils/Maintenance: 5% subject to a minimum of ₹50 lakh - Tunnel Collapse (AOG and Normal)/Design Defect: 5% subject to a minimum of ₹1 crore
Yet the policy extension letter dated , which renewed coverage upon payment of an additional ₹4.85 crore premium, reiterated the deductibles without the tunnel risk clause.
Arbitration and the Divided Tribunal
A three-member arbitral tribunal framed three issues. On Issue C—whether the insurer correctly applied the tunnel risk/collapse excess—the majority (2:1) held in favour of the insurer. It ruled that the omission of “tunnel risk” was a typographical error and relied on pre-contract cover notes and discussions to interpret the deductible schedule. The minority arbitrator disagreed, holding that the tunnel-risk deductible should not have been applied.
The insured challenged the majority award under , seeking the ₹1 crore claim along with interest and costs.
Petitioner’s Challenge
, appearing for the petitioner, argued that once a formal insurance policy is issued, and cannot be used to alter its plain terms. He emphasised that the policy extension letter, issued five years after the original policy, reaffirmed the deductibles without the tunnel risk clause. The respondent never filed a counter-claim for rectification under , nor issued any endorsement correcting the alleged omission.
Respondent’s Defence
, representing Oriental Insurance, supported the majority award, contending that the arbitral tribunal is the ultimate master of evidence and contract interpretation. He argued that a mere error of law does not warrant interference under Section 34, and the majority had taken a plausible view that this court should not disturb.
Court’s Reasoning: No Room for Rewriting Contracts
Justice Shukla rejected the respondent’s defence, finding the majority award vitiated by and . The court held that the tribunal had fundamentally erred by travelling beyond the executed policy to insert words based on pre-contract cover notes.
Referring to the ’s decision in K. Nagendra v. New India Insurance Co. Ltd. (2025 INSC 1270), the court reiterated that upon issuance of a formal insurance policy, the rights and obligations of the parties are governed solely by its terms. The arbitrator, being a , cannot .
The court further noted that the respondent had admitted in its statement of defence, filed after eight years, that the omission was typographical—yet the policy extension of 2016 continued without correction. No party had sought rectification, and the insurer failed to produce any internal file or competent authority decision to support its claim.
Critically, the majority tribunal declined to decide whether the damage occurred in the station or tunnel area, even though the respondent’s own surveyor (RW-3) admitted during cross-examination that zero loss occurred in the tunnel. The court termed this refusal a “.”
Key Observations from the Judgment
The court highlighted the following principles:
“It is a that upon issuance of a formal insurance policy, all prior noting, discussions, cover notes and .”
“An Arbitral Tribunal is a and cannot .”
“The majority Tribunal's unilateral correction of the policy terms is legally unsupportable.”
The Final Word
The allowed the petition and set aside the majority award to the extent of its findings on Issue C. The ₹1 crore tunnel-risk deduction was struck down, and the matter will now proceed as per the minority view, which correctly applied the peril deductible of ₹50 lakh.
The ruling serves as a strong reminder that arbitral tribunals must respect the and cannot rely on pre-contractual material to modify clear policy language—especially when the insurer itself failed to seek rectification over an eight-year tenure.
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Justice Om Prakash Shukla
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