Court highlights arbitrators' overreach and reliance on extraneous documents; underscores limited appellate interference under Arbitration and Conciliation Act, 1996
Vadodara, August 19, 2026 - In a landmark judgment delivered by the Division Bench of the Gujarat High Court, the court has set aside the majority arbitral awards passed in a dispute between National Insurance Company Ltd. and Polymech Plast Machines Ltd., related to an insurance claim under a Fire "C" Policy. The Court upheld the minority arbitral award, significantly curtailing the claim amount awarded earlier and reiterating the strict confines of jurisdiction under the Arbitration and Conciliation Act, 1996.
The dispute arose when Polymech Plast Machines Ltd., a manufacturer of plastic goods and injection moulding machines, suffered losses due to heavy rainfall causing damage to its machinery and stock in August 1997. The company had insured its machinery and stock with National Insurance Company Ltd. under Policy No. 97/3300182 for the period 1997-1998. After assessing the loss, the insurer sanctioned only Rs. 3,98,387/- against a claim exceeding Rs. 40 lakhs, leading to arbitration.
During arbitration, the three-member tribunal, constituted as per the arbitration clause in the Fire "C" Policy, issued majority awards in favor of the claimant with a sum exceeding Rs. 40 lakhs, while the minority arbitrator awarded a much lower amount of Rs. 4,25,000/-. The majority arbitrators relied on a policy document which was not the Fire "C" Policy but an office-note termed as "agreed bank clause," excluding the actual Fire "C" Policy terms containing the arbitration clause. The claimant argued it had lost the original policy and was provided duplicate copies which did not include the Fire "C" Policy conditions.
The appellant insurer challenged the awards under Section 34 of the Arbitration and Conciliation Act, 1996, and partly succeeded in the trial court, which awarded Rs. 40,28,289/- to the respondent. The insurer then filed a first appeal under Section 37, contending that the majority arbitrators exceeded their jurisdiction by ignoring the Fire "C" Policy, which was the sole basis for arbitration, and by relying on extraneous documents not forming part of the contractual agreement.
The Gujarat High Court meticulously analyzed the awards and the evidence, including witness depositions and the surveyor's report. It observed that the majority arbitrators had taken a perverse view by excluding the Fire "C" Policy merely because the claimant could not prove it was formally "issued," despite the insurer's own admission of practice to provide terms and conditions with the policy. The Court found that the arbitration clause, critical for jurisdiction, existed exclusively in the Fire "C" Policy and was missing in the document relied upon by the majority.
Importantly, the Court emphasized the limited scope of appellate interference under Section 37, following the Supreme Court's authoritative decision in Jan De Nul Dredging India Private Limited v. Tuticorin Port Trust (2026) 3 SCC 186. It reiterated that appellate courts cannot reappraise evidence or sit in appeal over the merits but can interfere where an award is patently perverse or outside the tribunal's jurisdiction.
Finding that the majority awards were based on documents extraneous to the contract and excluded relevant contractual terms, the Court held them to be perverse and a shock to judicial conscience. Consequently, it set aside the majority awards and upheld the minority award, which accorded with the insurer's surveyor's assessment and the Fire "C" Policy conditions.
The judgment underlines the imperative that arbitral tribunals must confine themselves strictly to the terms of the contract and the arbitration clause therein. Arbitrators cannot disregard the contractual framework or rely on extraneous documents to reach their decisions. The decision also underscores judicial restraint in interfering with arbitral awards, limited to correcting jurisdictional or legal perversities.
This ruling provides significant guidance for insurers, insured parties, and arbitrators alike, emphasizing careful adherence to policy terms and arbitration clauses, and ensuring arbitration awards maintain legal propriety and reasonableness.
Bottom Line:
Arbitration - Scope of interference by appellate court under Section 37 of the Arbitration and Conciliation Act, 1996 is limited to examining whether the decision under Section 34 has adhered to its prescribed limits - Arbitrators cannot rely on extraneous documents and exclude relevant contractual terms while deciding claims.
Statutory provision(s):
Arbitration and Conciliation Act, 1996 Sections 34, 37
