Court’s Decision
The Bombay High Court, in a detailed judgment authored by Justice Somasekhar Sundaresan, dismissed a challenge under Section 34 of the Arbitration and Conciliation Act, 1996, filed by ECGC Limited against an arbitral award directing it to pay over ₹59 lakh to Baco Metallic Industries under a shipment comprehensive risk policy.
The Court held that no interference was warranted since the arbitral tribunal’s findings were plausible, well-reasoned, and not contrary to the contract. Justice Sundaresan observed:
“It is not permissible for a Section 34 Court to substitute one plausible view taken by the Arbitral Tribunal with another competing plausible view canvassed by the party challenging the award.”
Reaffirming the autonomy of arbitral tribunals, the Court emphasized that arbitral awards should not be interfered with unless they are perverse, patently illegal, or contrary to public policy.
Facts
The case arose from a shipment comprehensive risk policy (SCR Policy) issued by ECGC to Baco Metallic Industries for exports to an Italian buyer, PM Trade SRL. The policy was valid from October 14, 2016, to October 13, 2017, requiring Baco to obtain a credit limit approval before each shipment.
Baco shipped leather footwear worth USD 127,904 (approximately ₹84.19 lakh). When the buyer defaulted, citing alleged quality issues, Baco claimed ₹75.77 lakh from ECGC — 90% of the unpaid amount. ECGC approved only ₹16.71 lakh, citing lapses and quality disputes but released it as a “special case.” Despite representations, the insurer did not revise the assessment, prompting arbitration for the remaining ₹59.05 lakh.
The arbitral tribunal awarded the entire claim with 9.5% interest per annum and ₹9.95 lakh as costs, holding that ECGC’s refusal to pay the balance was unjustified. ECGC challenged the award under Section 34, arguing that the tribunal had exceeded its jurisdiction and ignored the contract’s exclusion clauses.
Issues
- Whether the arbitral award was contrary to the SCR Policy and beyond its scope.
- Whether the arbitral tribunal erred in adjudicating quality disputes between the exporter and the foreign buyer without the buyer’s participation.
- Whether ECGC’s partial payment constituted a waiver of its right to rely on exclusion clauses.
- Whether the award suffered from patent illegality under Section 34(2A) of the Act.
Petitioner’s Arguments
Counsel for ECGC contended that the award was contrary to the terms of the policy, particularly its exclusion clause that barred indemnity where disputes over quality or quantity were raised by the buyer. The insurer argued that once a buyer raised a quality dispute, the claim automatically fell under an excluded risk, unless a court in the buyer’s country adjudicated the dispute.
It was also submitted that the tribunal had no jurisdiction to pronounce upon quality issues without hearing the buyer, who was not a party to the arbitration. ECGC relied on several National Consumer Disputes Redressal Commission (NCDRC) decisions which had held that insurance claims arising from quality disputes were excluded from coverage.
Counsel further asserted that insurance contracts must be strictly construed and the insurer’s discretionary decision to make a partial payment could not be reviewed by an arbitral tribunal.
Respondent’s Arguments
Baco’s counsel countered that the insurer’s reliance on the exclusion clause was untenable, as ECGC had already exercised its discretion to waive the exclusion by approving a partial payment. This act, it was argued, reflected ECGC’s internal satisfaction that the buyer’s quality dispute was not tenable.
Baco contended that it had fulfilled all its obligations and that the buyer’s quality complaints were an afterthought raised only after repeated requests for payment. The exporter pointed out that only USD 26,500 of USD 250,660 worth of goods were questioned, yet ECGC withheld 90% of the claim.
It was also argued that the set-off claim raised by ECGC—suggesting that the buyer’s affiliate who supplied raw leather was entitled to adjust payments—was fictitious, as there was no evidence of such a set-off being exercised.
Baco maintained that the tribunal’s conclusions were based on a fair appreciation of evidence, including correspondence, invoices, and communication with debt recovery agencies engaged by ECGC itself.
Analysis of the Law
Justice Sundaresan meticulously analyzed the SCR Policy’s exclusion clause, which required ECGC to be satisfied that a quality dispute raised by a buyer was not tenable before waiving the exclusion. The Court noted that ECGC’s payment of ₹16.71 lakh and later offer of ₹12.59 lakh clearly demonstrated its satisfaction that the buyer’s claim was meritless, thereby waiving the exclusion condition.
“Once ECGC had waived the exclusion in part, it is plausible to hold that there was no need to insist on a judgment from a competent court in the buyer’s jurisdiction.”
The Court observed that ECGC could not later reverse its position by invoking contractual rigidity, having already exercised its discretion under the same policy.
Precedent Analysis
Justice Sundaresan referred extensively to Supreme Court jurisprudence clarifying the scope of interference under Section 34, citing:
- Dyna Technologies Pvt. Ltd. v. Crompton Greaves Ltd. (2019) 20 SCC 1 – Held that courts cannot set aside arbitral awards merely because another view is possible.
- Associate Builders v. DDA (2015) 3 SCC 49 – Clarified that only perverse or patently illegal awards are open to judicial interference.
- Ssangyong Engineering v. NHAI (2019) 15 SCC 131 – Distinguished between erroneous interpretation and patent illegality.
- Konkan Railways v. Chenab Bridge Project Undertaking (2023 INSC 742) – Reaffirmed that contractual interpretation by arbitrators must be respected if plausible.
- OPG Power v. Enoxio (2025) 2 SCC 417 – Emphasized that courts cannot replace a tribunal’s plausible interpretation with their own.
The High Court applied these precedents to conclude that the arbitral tribunal’s findings were consistent with the contract and evidence, and hence not subject to judicial substitution.
Court’s Reasoning
Justice Sundaresan underscored that arbitral tribunals are the “masters of evidence” and the Section 34 Court cannot act as an appellate forum. The tribunal had duly examined correspondence between Baco, the buyer, and the debt collection agency, concluding that the buyer’s quality dispute was a post-facto justification to avoid payment.
“The arbitrator’s findings were based on contemporaneous documentary evidence, including ECGC’s own conduct of part payment, which negated its claim of exclusion.”
The Court further held that ECGC’s decision to make payments in stages was inconsistent with its current plea of exclusion, and that a strict construction of insurance contracts could not justify arbitrary discretion.
Conclusion
The Court held that the arbitral tribunal’s interpretation was not implausible or perverse, and therefore the award was immune from interference under Section 34. Justice Sundaresan concluded:
“A Section 34 Court is not an appellate body; it cannot replace one plausible view with another. The arbitrator’s conclusion was a fair and reasoned application of the contract and evidence.”
The petition was dismissed, and all interim applications were disposed of. Deposits, if any, were ordered to be released within four weeks.
Implications
This judgment reinforces judicial restraint in arbitral matters and clarifies the limits of Section 34 review. It emphasizes that insurers cannot use exclusion clauses to deny liability after exercising discretion under the same policy.
The decision strengthens the principle of finality in arbitration, ensuring commercial parties that courts will respect arbitral autonomy unless an award is patently illegal or shocks the conscience.
It also sends a strong message to insurers and state enterprises: partial payments and subsequent reversals of position are inconsistent with contractual good faith.
