Brief case: Arbitration clause, insurance, PMLA, labour dispute, and more

A weekly selection of key court orders

Under-insurance harms policyholder

Those who undervalue their goods and property for saving on premium for general insurance might get into legal complications if they file claims. Under-insurance is a common practice. The insurance company will be a gainer in such cases, as was observed by the Supreme Court in the judgment, I C Sharma vs Oriental Insurance Co. In this case, the owner of house had declared less than the actual prices of items in the house. While he was away in England, there was a burglary at his house. The insurance company denied his item-wise claims. He moved the National Consumer Commission, where he could not get a satisfactory order, leading to the appeal.  The Supreme Court assessed the claims item-wise, like clothes, cutlery and electrical equipment and set value for each to dispose of the appeal. It discussed the dangers of under-insurance and said: “Even if the entire insured property is lost, the policyholder will only get the maximum sum for which the property has been insured and not a paisa more than the sum insured. To give an example, in case a person takes out the householder policy covering fire insurance and gives the value of the structure and goods stored at Rs 50,00,000 (Rs 5  million), though the value is Rs 10,00,000 (Rs 10 million) then even if the entire house and goods are completely lost in a fire, he cannot get an amount above Rs  50,00,000(Rs 5 million).” 

Arbitration clause in purchase order 

The question whether there is provision for arbitration in the contract came up again in the Supreme Court and it held that a general reference to a standard form of contract by one party would be enough to incorporate an arbitration clause. Also, a reference to the standard form of professional bodies and trade associations would be sufficient to incorporate an arbitration clause.  In this case, Inox Wind Ltd vs Thermocables Ltd, a purchase order was issued by Inox, manufacturer of wind turbine generators, with Thermocables for wind power cables. The purchase order contained a clause on dispute resolution. It said that a sole arbitrator would resolve disputes according to the Arbitration and Conciliation Act. Disputes indeed arose over the quality of the cables. Inox named an arbitrator. Thermocables maintained there was no arbitration clause. The matter was taken to the Allahabad High Court. It ruled that there was no arbitration clause and therefore it could not appoint an arbitrator. On appeal, the Supreme Court set aside the high court ruling and appointed a retired judge as the arbitrator. It stated that Thermocable had accepted the terms and conditions in the purchase order, which contained the arbitration clause. “The purchase order is a single contract and general reference to the standard form even if it is not by a trade association or a professional body is sufficient for incorporation of the arbitration clause,”  the judgment said.

Attachment of property under PMLA 

A division bench of the Delhi High Court has dismissed a batch of writ petitions challenging the power of the authorities under the Prevention of Money Laundering Act  Section 5, which deals with provisional attachment of property involved in money laundering including possession of proceeds of the crime. But it has made certain procedural directions to prevent misuse of the power. Though Section 5 and other provisions speak about “reason to believe” before taking action, the court stated that at every stage it must be noted down by the officer in the file. A copy of the complaint accompanied by the reasons to believe, as found in the file, must be served upon the person affected by such attachment. The failure to disclose, right at the beginning, the reasons to believe to the affected party “would not be a mere irregularity but an illegality. A violation thereof would vitiate the entire proceedings and cause the order of provisional attachment to be rendered illegal,” said the judgment in the case SRS Mining vs Union of India. All the petitioners had been served with attachment orders under the Act and are facing prosecution.

RBI rules ignored in naming defaulter 

The Delhi High Court last week quashed two notices issued by Punjab National Bank (PNB) to the directors of Skan Cables & Wires declaring their loans as non-performing assets (NPA) and threatening to publish their photographs for default in repaying a loan. The judgment in Bijay Madan vs PNB stated that the bank had failed to follow the procedure laid down by the Reserve Bank of India on July 1, 2014, in its Master Circular on declaring willful defaulters. The decision of the identification committee should be examined again by a review committee headed by the chairman of the bank and two independent directors. “The bank reversed the entire procedure by putting the cart before the horse,” the order said.

Curtains for 27-year-old labour dispute

The Supreme Court stated that it would not interfere in the finding of fact made by an industrial court unless it was “manifestly erroneous”. In this case, the dispute between the trade union and the management was how many were employed by the company when it closed down in 1990 due to losses. The industrial court stated there were 115 workers. According to the Industrial Disputes Act, if there are 100 or more workers, there are strict conditions with regard to payments to the employees. The management went on appeal to the Bombay High Court. It went through the record and found there were only 99 workers and therefore the firm was not obliged to follow Section  25K of the Act. In the appeal, National Kamgar Union vs Kran Rader Ltd,  the Supreme Court declined to interfere in the finding of the high court.   

Insurers battle over payment of award 

In a litigation between National Insurance Company and New India Assurance over liability to pay compensation for a road accident death, the Supreme Court set aside the high court judgment which directed both to pay equally to satisfy the award of Rs 3.3 million as compensation. In this case, an NTPC executive driving his car was killed when a tanker ahead of him applied brakes suddenly, leading to the car crashing into the tanker. The car was insured with National Insurance and the tanker with New India. The tribunal awarded Rs 3.3 million to the dependents. The dispute arose over which company will pay. The high court asked them to share the burden. But on appeal, the Supreme Court ordered New India to pay the full amount as the deceased was not at fault. It also enhanced the compensation to Rs 4.3 million, recalculating the loss.