Full Judgment Text
.* IN THE HIGH COURT OF DELHI AT NEW DELHI
th
% Judgment pronounced on: 20 January, 2015
+ O.M.P. No.1036/2012
IFFCO-TOKIO GENERAL INSURANCE CO LTD ..... Petitioner
Through Mr.Neeraj Kishan Kaul, Sr. Adv.
with Mr.Saurav Aggarwal,
Mr.Trinath, Mr.Mrinal OJha,
Mr.Siddhanth Sharma and
Mr.Bhuvan Mishra, Advs.
versus
INDO-RAMA SYNTHETICS LTD ..... Respondent
Through Mr.Prag P. Tripathi, Sr. Adv.
Mr.Joy Basu, Sr. Adv. with
Mr.Aayush Agarwal,
Mr.Abhimanyu Bhandari,
Ms.Aanchal Mullick & Ms.Monisha
Handa, Advs.
CORAM:
HON'BLE MR. JUSTICE MANMOHAN SINGH
MANMOHAN SINGH, J.
1. The present petition has been filed by the petitioner under
Section 34 of the Arbitration and Conciliation Act, 1996 (hereinafter
referred to as “the Act”) seeking setting aside of the Arbitral Award
st
dated 1 August, 2012 passed by the Arbitral Tribunal of quorum
comprising three arbitrators.
2. Brief facts of the present case are that the petitioner is a
Company duly incorporated under the Companies Act, 1956 and
having its registered office at IFFCO Tokio General Insurance Co.
O.M.P. No.1036/2012 Page 1 of 196
Ltd., IFFCO Sadan, C-1, District Centre, Saket, New Delhi-110017.
The respondent is Indorama Synthetics India Ltd., a company having
its registered office at Nagpur, Maharashtra and Corporate office at
Gurgaon, Haryana. The respondent manufactures Polyester Staple
Fibre, Partially Oriented Yarn, Fully Drayn Yarn, Draw Texturized
Yarn and Polyester Chips. The petitioner’s Nagpur branch issued to
respondent a Fire Loss of Profit Policy (Policy No.11171258 dated
th
28 February, 2007 – hereinafter referred to as the (“LOP Policy”)
and a Standard Fire and Special Perils Policy (Policy No.11179590
st
dated 31 March, 2007 – hereinafter referred to as Material Damages
policy or the MD Policy). Both policies were worded in accordance
with the policy wording statutorily mandated by the Tariff Advisory
Committee (hereinafter referred to as the “TAC”) set up under Section
64U of the Insurance Act, 1938 to stipulate policy wordings for all
general insurance companies.
3. The MD Policy covers the respondent/insured for the risk of
physical damage/loss to its property insured caused by the
specific perils listed in the said policy. The loss of profit policy covers
the peril of the loss of profits on account of the business interruption
arising out of the consequence of the fire. The said LOP policy
provides the mode of the computation of loss of profit by providing the
methods of arriving at the loss of profit. The said policy also
contained the definition indemnity period for which the said loss is
required to be covered.
th
4. On 29 October, 2007, during the currency of the insurance
policies, a fire broke out in Control Panel Room (in plant CP2 and
CP3) of the respondent’s polyester plant-I and four sets of control
O.M.P. No.1036/2012 Page 2 of 196
panels were burnt/gutted/destroyed. Due to this fire, plants CP2 and
CP3 that were manufacturing Polyester Staple Fibre (PSF), Partially
Oriented Yarn (POY), Fully Drayn Yarn (FDY), Draw Texturized Yarn
(DTY) and Polyester Chips came to a standstill. The said
manufacturing activity remained stalled from the two plants 238
days, however the maximum indemnity period is 6 months, so the
interruption of business is involved as per policy document for 182
days whereafter the respondent purchased 3 sets of control panels
for making operational remaining 3 PSF draw lines . As per petitioner,
on the date of the fire, the respondent had a stock in hand of 52,000
metric tonnes of the above said items which was sufficient to meet
any sale requirement for a substantially long period.
5. After the incident of fire, the respondent informed the petitioner
of the fire and the damage caused. Upon information, the petitioner
appointed Mr.Adarsh Gupta of Messrs Adarsh Associates, New Delhi,
as the Surveyor, to assess the loss under the MD and LOP policies,
st
who visited the site for inspection on 31 October, 2007. By way of a
th
letter dated 7 December, 2007, the respondent filed a provisional
loss of profits claim (under the Fire Loss of Profit Policy) for Rs.25
crores on the basis of reduction in output from Plants CP2 and CP3
st
for two months, i.e. upto 31 December, 2007 which is the alternative
basis provided under the loss of profit policy as against the turnover
basis of computing the loss of profits.
th
6. On 8 January, 2008, while the survey and assessment of the
loss was continuing, the Surveyor Adarsh Gupta submitted his interim
report to the petitioner recommending an on-account payment of
Rs.6 crores to be made to the respondent. He assessed the LOP
O.M.P. No.1036/2012 Page 3 of 196
loss on the basis of turnover at about Rs.5,11,31,567 crores and the
MD (Material Damage) loss at about Rs.2,24,82,332/-. He applied
the turnover method when calculating the loss of profits on account of
business interruption as a consequence to fire in LOP policy
although in this interim report, the Surveyor recorded that the
respondent/insured made a claim based on the alternative basis
clause which was contained in the policy seeking payment under the
LOP Policy on the basis of loss of output instead of loss of turnover.
th
7. By way of a letter dated 10 March, 2008, the respondent
raised its objection to the method of assessment of the claim by the
th
Surveyor. The respondent demanded Rs.60.33 cr. till 2088 on 17
th
March, 2008. The Surveyor responded to letter dated 10 March,
2008 stating that no single party has right to apply the alternative
th
basis clause. On 28 July, 2008, after completion of indemnity period
of 6 months, the respondent submitted its final claim under the Loss
of Profits on the basis of reduction in output from Plants CP2 and
CP3 during the period November, 2007 to April, 2008 to the tune of
Rs.72,94,16,362/- (seventy two crores ninety four lakhs sixteen
thousand three hundred and sixty two)
With regard to loss under the MD policy, the respondent had
earlier submitted a revised claim for Rs.6,42,72,550/- net of salvage
as against which the Surveyor arrived at an assessment of
Rs.2,24,82,332/-.
th
8. On 24 June, 2009, the Surveyor Mr.Adarsh Gupta submitted a
final report in which the business interruption claim under the LOP
th
Policy was assessed at Rs.4,17,46,359/-. On 6 July, 2009 the
O.M.P. No.1036/2012 Page 4 of 196
respondent wrote to the Surveyor asserting that the output basis
should have been adopted.
th
Subsequently, by way of an Addendum Report of 10
September, 2009, the Surveyor upwardly revised assessment of the
th
said business interruption loss to Rs.5,11,31,567/-. On 26
September, 2009, the Surveyor submitted its final report for the
material damage i.e. MD claim under the Material Damage Policy as
Rs.2.24 cr. against the claim of Rs.6.4 cr. made by the respondent.
th
On 6 November, 2009, the petitioner wrote to the respondent
informing that as per report submitted by Adarsh Gupta, Surveyor,
the loss assessed by him towards the loss of policy is
Rs.5,11,31,567/- and material damages loss is Rs.2,24,82,332/-.
th
9. By way of a letter dated 8 February, 2010, the respondent
approached the Insurance Regulatory and Development Authority
(IRDA), Hyderabad, with a request to appoint a second Surveyor
under Section 64UM(3) of the Insurance Act, 1938. Nothing is on
record to suggest as to what has happened to the said application
filed before IRDA by the respondent.
th
10. On 25 June, 2010, the respondent on its own appointed
Mr.R.Srivatsan of Messrs Professional Surveyors & Loss Adjusters
Pvt. Ltd. as its own Surveyor to assess the loss under the MD and
LOP Policies.
th th
11. Mr.Srivatsan, by way of his reports dated 25 and 30 October,
2010 calculated the claim under the MD Policy as being
Rs.3,37,99,883/- and the claim under the LOP Policy as being
Rs.35,79,42,559/-. Mr.R. Srivatsan has also dealt with the report of
rd
Mr.Adarsh Gupta, Surveyor in his affidavit dated 3 August, 2011
O.M.P. No.1036/2012 Page 5 of 196
st
before the Tribunal. By way of letter dated 1 November, 2010, the
respondent submitted Mr.Srivatsan’s report to the petitioner and
sought a payment of the loss of profit claim and material damages
claim in accordance with the said report and at the same time the
respondent also invoked arbitration in view of the said disputed
position between the parties. In view of arbitration clause, the Arbitral
Tribunal was appointed consisting of three retired Judges.
12. Before the Arbitral Tribunal, the respondent submitted its
th
statement of claims on 26 February, 2011 praying for the following
reliefs:
“(a) Pass an award for Rs.72,94,16,362/- in favour of the
claimant and against the respondent;
(b) Pass an award directing the respondent to pay the
amount of Rs.6,42,72,550/- in favour of the claimant and
against the respondent;
(c) Award interest @ 18% in favour of the claimant and
against the respondent from the date of the claim till
commencement of arbitration, from the commencement of
arbitration till date of award and post award till actual
payment.”
13. The basis of claim No.1 was that the payment of the full claim
amount of Rs.72,94,16,362/- for business interruption as calculated
on output basis with regard to LOP policy. According to the
respondent, the shortage in output from CP2 and CP3 during the
indemnity period was 86,624 MT when compared with the output of
CP2 and CP3 during the same time previous year (November, 2006
to April, 2007), which when multiplied with the expected gross profit
of Rs.8421/- per/MT, the total loss of profits claimed was calculated
as Rs.72,94,16,362/-. However, in the course of arguments, as noted
O.M.P. No.1036/2012 Page 6 of 196
at paragraph 35 of the Award, the respondent limited its claim to
Rs.35,79,43,559/- on the basis of Mr.Srivatsan’s report. The claim
No.2 was for payment of the full claim amount of Rs.6,42,72,550/- for
material damage against MD policy.
In the claim statement, the respondent has relied upon the
alternative basis clause by urging that the loss of profits are to be
computed on the basis of output method of computation as against
th
the turnover method. The respondent made the claim on 28 July,
2008 on the basis of reduction in output from plant CP2 and CP3. As
per respondent, in accordance with the departmental clause CP2 and
CP3 were taken as two separate departments and the claim was
worked out on the ‘Departmental Output basis’. The respondent
referred to the working of the rate of gross profit and stated in the
claim statement that the loss caused to the respondent on account of
business interruption is based on standard output from CP2 and CP3
and loss of Gross Profit. The respondent stated that it had suffered
losses due to damage to CPs1, 4 and 5. The losses on account of
damage to CPs1, 4 and 5 are not included in Rs.72,94,16,362/- and
that they are independent of the said amount. The reference was
th
made to letters dated 11 May, 2000, assessment made by Adarsh
th
Associates on 13 June, 2009, the final survey and assessment
report by Adarsh Associates. Reference was also made to letter
rd th
dated 23 June, 2009 and letter dated 6 July, 2009 pointing out the
mistakes in the final survey and assessment by Adarsh Associates. It
is stated by the respondent that M/s Adarsh Associates has
deliberately adopted an incorrect methodology. The respondent has
th
referred to the addendum dated 10 September, 2009 issued by
O.M.P. No.1036/2012 Page 7 of 196
Adarsh Associates. The respondent has referred to the letter dated
th
6 November, 2009 from the petitioner to the respondent wherein the
final assessment by Adarsh Gupta on material damage is
Rs.2,24,82,332/- and the loss of profit is Rs.5,11,31,567/- totaling
Rs.7,36,13,899/-. The respondent has made a claim for
Rs.6,42,72,550/- towards material damage under the material
th
damage policy. The final report dated 26 September, 2009 on
material damage by M/s Adarsh Associates is referred to. In fact the
respondent challenged the appointment of M/s Adarsh Associates as
Surveyor. The respondent relied upon the report of its own surveyor
Mr.R. Srivatsan, Director, M/s Professional Surveyors & Loss
th
Adjusters Pvt. Ltd., who on 25 October, 2010 made a final
assessment for Rs.35,79,43,559/-. Mr. Srivatsan also assessed the
claim under material damage at Rs.3,73,99,883/-.
14. The case of the petitioner before the Arbitral Tribunal was that:
a) The terms of the policy have to be strictly construed as per
interpretation of an alternative basis clause contains the
expression “‘where found necessary’ and not at the whims and
wishes of the petitioner. It was submitted before the arbitral
tribunal that in the present case The same is sine qua non for the
invocation of that clause.” It was submitted before the Arbitral
Tribunal in para 11 of the statement of defence:
“11…”Where found necessary” is the sine qua non for
the invocation of that clause…. Therefore, the claimant
ought to appreciate the scope and sweep of the
phrase “whenever found necessary” as employed in
the said Alternative Basis Clause in the proper
perspective, and that the said phrase is not a “mere
verbal apparel” which can be sought to be worn by the
O.M.P. No.1036/2012 Page 8 of 196
claimant at its will to embellish its claim under the
Insurance Policy in question. Further, the context of
output basis in lieu of turnover basis, by virtue of
‘Alternative Basis Clause’ cannot be seen in isolation
and has to be examined in the context of the overall
objective and principle of the LOP policy, which in any
case, cannot be ignored to carry out any arithmetical
calculation to depict erroneous result with an intent to
making profit out of given situation, which otherwise
could not have been earned by the claimant had the
said loss not occurred.”
In para 12, in reply to para 7 of the claim statement, it was
submitted:
“12…. In the para under reply, the claimant had
acknowledged that there are ups and downs in the
sales and any excess accumulation of finished stocks,
balances out in next upward cycle. However, under
the Business Interruption Insurance Policy, any
consideration for the period beyond the indemnity
period, i.e., for 6 months in this case, cannot be
considered affecting the assessment of loss, both on
turnover or output basis. Further, the effect of market
ups and downs, cannot be captured under the
assessment of loss, during the indemnity period,
covered under the involved Business Interruption
Policy and loss or gain due to such factors is to be
borne by the Insured/Claimant. For this purpose, the
captioned Business Interruption Policy has suitable
clauses and policy terms and conditions, which are
being conveniently ignored by the claimant, as well as
by its chose surveyor Mr.R. Srivastan.”
b) With reference to material damage, the petitioner adopted
the report given by its surveyor M/s Adarsh Associates. In
para 22, it was pointed by the petitioner that the
department clause would not apply. The claim of
Rs.72,94,16,362/- of the respondent was specifically
denied and disputed by the petitioner. It was alleged that
O.M.P. No.1036/2012 Page 9 of 196
the assessment by Mr.R. Srivatsan in respect of FLOP
Policy at Rs.35,79,43,559/- is illegal. As per petitioner, the
report of its surveyor Adarsh Associates is correct and
valid.
c) The petitioner submitted before the arbitral tribunal that the
loss of profit policy is no exception to the applicability of the
principle that the insurance policy is always intended to
indemnify the insured to the extent to loss suffered by him
as per the terms of the policy and cover provided therein.
The petitioner also submitted that the insured cannot made
profit out of the claims made to the insurance company.
d) The petitioner also took the stand that the turnover method
is the most preferred method of the computing the loss of
profits on account of business interruption as against the
output method which is seldom used. This is due to the
reason that one has to show the interruption in business
and the loss arising therefrom on account of such
interruption which can be best indicated with that the loss
of turnover basis.
15. The arbitral tribunal after considering the case of the
competing parties proceeded to frame the following issues:
“I. Whether the claimant is entitled to a claim of
Rs.72,94,16,362/- (Rupees Seventy Two Crores Ninety
Four Lakhs Sixteen Thousand Three Hundred and Sixty
Two Only) as set out in the Statement of Claim pursuant to
the terms of fire loss of profit policy (FLOP) or such other
amounts as may be determined by the Tribunal.
II. Whether the Claimant is entitled to a claim of
Rs.6,42,72,550/- (Rupees Six Crores Forty Two Lakhs
Seventy Two Thousand Five Hundred and Fifty Only) as
set out in the Statement of Claim pursuant to the terms of
material damage policy or such other amounts as may be
determined by the Tribunal.
O.M.P. No.1036/2012 Page 10 of 196
III. Whether the claimant is entitled to interest in
accordance with law from the date of the claim till
commencement of arbitration, from the commencement of
arbitration till date of award and post-award till actual
payment and if so at what rate.
IV. Reliefs.”
16. After recording the evidence of the parties and hearing on
behalf of both sides, the Arbitral Tribunal made and published its
st
Arbitral Award on 1 August 2012.
17. The Learned Arbitral Tribunal accepted the calculations by Mr.
R. Srivatsan/respondent surveyor and awarded a sum of Rs.34.70
crores (approx) towards Loss of profit and Rs.3.73 crores (approx)
Material Damage policies, but rejected the application of
departmental Clause. The respondent had received Rs 6 crores from
the insured, taking that into account, the respondent was awarded a
total sum of Rs.32.44 crores(approx) alongwith interest @ 9 % p.a.
18. The petitioner in the present petition has challenged the award
st
dated 1 August, 2012, inter alia, on the following grounds:
(a) The Award rendered by the Arbitral Tribunal is without any
reason. It is non-speaking award on various issues raised by the
petitioner. The same is mandatory requirement laid down in
Section 31 (3) of the Act.
(b) The award is perverse in law as the Arbitral Tribunal has ignored
the well known principle of an insurance policy i.e. the principle
of indemnity. The respondent has been benefited by virtue of
findings arrived at which are contrary to the concepts and
principles of insurance as such.
O.M.P. No.1036/2012 Page 11 of 196
(c) The award is contrary to the express terms of the policy, which is
contract between the parties. The Tribunal has incorrectly given
the meaning “whenever found necessary” and held that since the
loss computation on output basis was higher than that achieved
using the turnover method, the Tribunal opted for the output
basis. The Arbitral Tribunal has failed to consider the issue
involved in the matter as the issue before the Tribunal was the
methodology to be used for computation of the loss. The award
ignored that the assessment of the loss had to be carried out on
the loss of turnover basis along with the accumulated stock
clause and not on the loss of output basis which basis had to be
applied only “whenever found necessary” under the special
circumstance.
The Arbitral Tribunal has ignored the fact that the loss for
which compensation was to be given had to be limited by the
indemnity period (of 6 months) from the date of incident, as
specified under the policy. The Tribunal has rather awarded
compensation to the respondent for an anticipated loss which
may occur several years later. The actual indemnity period of 6
months from the date of the incident has been completely
sidestepped.
(d) The Surveyor appointed by the Petitioner (who was an IRDA
licensed surveyor) had, in his report, set out detailed reasons for
the assessment of loss on the turnover basis. The reasons are
explained and set out in the Surveyor Report at paragraphs 9.3
to 9.4 of his report. The award quotes some parts of the
Surveyor’s report and rejects those with one-line conclusions. If
O.M.P. No.1036/2012 Page 12 of 196
the reasoning given by the Surveyor for applying the turnover
clause was not being accepted by the Tribunal, then it did not
necessarily mean that the assessment of loss had to be carried
out on output basis. There is no reason at all for applying the
output basis except that the assessment of loss would be higher.
(e) If the award is upheld then it would create serious prejudice as to
the manner in which insurance business is carried out and would
also tantamount to completely ignoring the difference between
Specification J and Specification B of the tariff clauses issued by
the Tariff Advisory Committee on the basis of which entire
insurance business is conducted. The matter thus involves
serious issues of public policy.
(f) The Tribunal has erred in applying the “alternative basis clause”
to the present claim. At paragraph of the Award, the Tribunal has
held as follows:
“It is for the Court or the Tribunal, while considering
the claim, to determine whether it is necessary to go to
the alternative basis clause on the mechanism
provided by the parties in the contract”.
“The sum assured could be only on the turnover. The
alternative basis clause is a clause which is available
free of cost in the All India Fire Tariff 2001, which is
part of the TAC Mandated Wording. It did not add
anything to the cover that was granted, and loss of
profits was supposed to have been calculated on an
indemnity basis.”
(g) The Tribunal has incorrectly stated at paragraph 77.3 that “the
parties had agreed for two methods, turnover basis or the
alternative basis clause”. This is contrary to the policy terms as
the parties nowhere agreed to the alternative basis clause as
O.M.P. No.1036/2012 Page 13 of 196
being a method of assessment. The alternative basis clause only
states that the output method may be employed if parties agree,
and failing that agreement the default mechanism is an
assessment based on turnover. As a matter of fact, there was no
agreement between the parties to apply the alternative basis
clause and the finding is contrary to specific terms of the contract
and the factual scenario.
(h) The Tribunal had ignored the complete absence of any materials
to demonstrate that the Respondent’s business is cyclical or it
being so is relevant to the adjustment of the loss. The
Respondent, for instance, ought to have shown when it would
have sold the entire accumulated stock-during the indemnity
period it managed to sell only c.16,000 tones out of the c.52,000
tones already accumulated with it and at that rate it would have
taken more than 1 year (after the indemnity period was over) for
the Respondent to have run out of accumulated stock. The true
measure of the Insured/Respondent’s loss of profits can only be
ascertained by calculating the same with reference to the impact
on the turnover of the Insured/Respondent. The
Insured/Respondent’s “profit” would only be calculated based on
turnover which is linked to the sales. “Output” by itself is of no
relevance to profits unless that output is sold in the market. It
would be an artificial calculation if loss of profits were to be
calculated on the basis of the output and not turnover. In the
circumstances were the Insured/Respondent did not justify why
this artificial calculation was to be adopted, such a calculation
could not be deployed in this case by the Tribunal.
O.M.P. No.1036/2012 Page 14 of 196
(i) The Tribunal ignored crucial parts of the evidence on record, and
in doing so has erroneously proceeded on the basis that
Mr.Srivatsan’s evidence was correct and in fact did not require
any further justification. The Tribunal has wholly ignored that
Mr.Srivatsan was appointed by the Respondent as a second
surveyor which is a practice that has been discouraged by the
Indian Courts, and the Courts have in fact gone to the extent of
saying that the report of the second surveyor cannot be relied
upon without first providing proper reasons for not relying on the
first surveyors’ reports. Mr.Srivatsan’s appointment was made in
rd
2010 and the first site visit that he carried out was on 3
September 2010, which is almost 3 years after the loss, which
th
occurred on 29 October, 2007. Essentially, Mr.Srivastan’s
assessment was a desk exercise, which had little or no
relevance to the present case because it was carried out without
the kind of empirical assessment that was carried out by the
independent surveyor contemporaneously. Even though the
Tribunal commented that a witness’ statement in respect of
policy interpretation is not relevant, it has effectively accepted
the interpretation/resultant assessment made by Mr.Srivastan on
output basis.
The indemnity afforded by consequential loss insurance,
which is a claim for damages, is intended to be as complete as
possible and is usually based on the turnover of the business,
which is made up from three items. These may be called:
O.M.P. No.1036/2012 Page 15 of 196
(a) The prime costs (which will vary according to the amount of
turnover) such as purchases for resale or manufacture, fuel,
electricity or consumable stores,
(b) Overhead expenses (which are constant) such as rent,
insurance premiums, salaries to permanent staff and wages
to skilled employees, usually referred to as “standing
charges”, and
(c) The net profit.
If a fire occurs, prime costs will not be incurred but the standing
charges will be incurred and will form a much larger proportion of the
turnover than before. At the same time there will be a loss of net
profit since the turnover on which it can be earned is reduced. The
usual form of consequential loss policy must compensate for these
two factors and therefore agrees to pay, on the amount of turnover
lost, the percentage which net profit plus standing charges bore to the
turnover in the financial year preceding the loss (this percentage is
known as the Rate of Gross Profit). Thus if, in the relevant year
preceding the fire, the standing charges and net profit constitute 40
per cent of a turnover of 30,000, the consequential loss claim will be
20,000. This sum will afford an indemnity in respect of reduction in
the turnover of the business; but the insured will also require
compensation for the additional expenditure incurred in order to
reduce the prospective loss of turnover, and the standard form of
consequential loss policy therefore includes a further agreement to
pay such compensation which may frequently exceed the loss
suffered by a reduction of turnover.
O.M.P. No.1036/2012 Page 16 of 196
19. The respondent has filed its reply disputing the grounds raised
by the petitioner and reiterating the position taken by it before the
arbitral tribunal and supported the award on the said basis. The
petitioner has filed the rejoinder thereof. The matter came for hearing
when Mr. Neeraj Kishan Kaul, learned senior counsel appeared on
behalf of the petitioner and Mr. Prag P. Tripathi, learned Senior
counsel appeared on behalf of the respondent.
20. Mr. Neeraj Kishan Kaul, learned Senior Counsel has made his
submissions in support of the challenge laid the impugned award
which can be summarized in the following manner:
a) Firstly, Mr. Kaul, learned Senior counsel appearing on behalf of
the petitioner has argued that all the findings of the Tribunal
would show that they are without any reason. The said findings
are without any answer to the arguments addressed by the
petitioner. There is absolutely no reason given by the Tribunal
as to basis of their conclusions. His argument is that the
impugned award is thus contrary to Section 31 (3) of the Act
which expressly requires that arbitral award shall state the
reasons upon which it is based, unless the parties have agreed
that no reasons are to be given, or the award is an arbitral award
on agreed terms under Section 30 of the Act.
In order to demonstrate this position as to lack of reasons
contained in the award, Mr. Kaul has painstakingly referred
to several paragraphs of the award on diverse points
discussed/ decided by the tribunal wherein there are stray
observations made by the arbitral tribunal which read like
“This is not acceptable in law” or “this is against the law” or
O.M.P. No.1036/2012 Page 17 of 196
“this ratio does not help the case of the claimant/
respondent”, “this approach is totally erroneous” without
according any reasons as to how and why the various
positions cited by the petitioner cannot be countenanced
and the arbitral tribunal arrived at the said conclusion. It has
been argued by Mr. Kaul, that the award in the present case
is merely reproduction of the stands and evidence of both
the parties with bare minimum reasoning on the part of the
arbitral tribunal as why the tribunal is choosing to prefer one
set of facts and legal proposition over the other. He refers
paras 67.18, 67.28, 67.29 of the Award. Mr. Kaul argued
that award does not disclose any reasons for arriving at the
final conclusion and there are more than 20 unreasoned
findings in the award where the Tribunal has rejected all the
contentions of the petitioner and without any exception
accepted all the contentions of the respondent without
assigning any reasons for doing so. In fact, he has read
various paras of the award and argued that the contention of
the petitioner was rejected without disclosing any reason.
Similarly, Mr. Kaul argued that not merely there are stray
observations made by the learned tribunal on various
aspects as noted above which demonstrate the lack of
reasons provided by the tribunal but also the decisions on
the main points of contentions which form the basis of the
ultimate decision of the arbitral tribunal to award the claims
in favour of the respondent are also lacking. This can be
seen by reading paragraph 65.12 and 66 of the award
O.M.P. No.1036/2012 Page 18 of 196
wherein uptil paragraph 65.12 the detailed discussion of the
disputed point on the interpretation of “wherever found
necessary” has been recorded and thereafter the arbitral
tribunal proceeded to decide the said point by merely
observing that “it is court which considers necessary to go in
to the alternative basis clause on the mechanism provided
by the parties under the contract” without according any
reasoning as why the court feels necessitated to adopt
alternative basis clause and without answering the import of
“wherever found necessary”. The said decision as per Mr.
Kaul is without any reason and affects the ultimate decision
of the tribunal to award the claim in favour of the respondent
and thus go into the root of the matter which is vitiates the
award on the basis of lack of reasons or non speaking
award.
It is argued by Mr. Kaul that the only reason for applying the
alternative basis clause is that the real object of the policy is
to indemnify the claimant and as the loss suffered is
immense, thus, the learned tribunal is choosing to proceed
to adopt alternative basis clause. This can be seen by
reading paragraph 42.1 read with paragraph 77.3 and 77.4,
of the Award. It has been argued by Mr. Kaul that this
reasoning is no answer to the disputed point “wherever
found necessary” and also to the issue as to how the
computations made by the surveyor do not intend to
indemnify the respondent and only the respondent’s
surveyors computations are required to be preferred just
O.M.P. No.1036/2012 Page 19 of 196
because the respondent states the computation of the loss
is more. It is argued by Mr. Kaul, there is a complete mix up
of the concepts by the learned arbitral tribunal wherein no
reasons are given for the various points decided which form
the pillars of the decision making by the learned arbitral
tribunal and even if there exists any reasons, the same are
totally perverse as no reasonable person can arrive at the
said view.
b) Mr. Kaul argued in the present case the parties did not agree
that no reasons are to be given. In fact the arbitration clause
states that the “arbitration shall be conducted under and in
accordance with the provisions of the Act”. It has been laid down
in a catena of judgments that under the Act it is mandatory for
the Tribunal to state reasons in the award as per the provisions
of Section 31 (3) of the Act. It is argued that the award passed in
contravention to the provisions of Section 31 (3) of the Arbitration
and Conciliation Act, 1996 would be an award which would be
against the public policy as it violates the provisions of law
relating to the Arbitration and thereby warranting interference of
this court. Learned counsel for the petitioner relies upon the
following cases:
(a) Saroj Bala v Rajive stock Brokers Ltd ., 2005 (4) AD
(Delhi) 266 at paragraphs 5, 6 & 7.
(b) Mc Dermott International Inc. V.Burn Standard Co Ltd ,
(2006) 11 SCC 181, at paragraphs 55 and 56.
(c) Som Datt Builders v State of Kerala , (2009) 10 SCC 259,
at paragraphs 20. 21, 23 & 25.
O.M.P. No.1036/2012 Page 20 of 196
(d) Videsh Samachar Nigam Ltd. v. Ess Kay Furnishers ,
2009 (6) R.A.J. 1 at paragraphs 21, 22 & 23.
c) Mr. Kaul argued that the impugned award passed by the arbitral
tribunal is also against the fundamental policy of law which is
that the contract of insurance is contract of indemnity. The
impugned award though states that the intent of the policy is to
indemnify the respondent for the losses suffered it but proceeds
to adopt an approach which clearly deviates from the
applicability of the said principle. Mr. Kaul, learned Senior
counsel for the petitioner has argued that the impugned award
proceeds to analyze the claim of the respondent based on output
basis of the methodology on the strength of the surveyor report
who has been appointed to computing the loss of profits 3 years
after the occurrence of the incident at the instance of the
respondent company.
It has been argued that while choosing to prefer the output
basis for computing the loss of the profits arising out the
business interruption due to fire by merely stating that it can
be seen from intent of the parties and object of the
insurance policy only due to the reason that the computation
shown by the respondent is on higher side, the learned
tribunal has failed to evaluate the stands of the parties and
surveyor reports of both the parties by applying the principle
of indemnity. It has been argued by the learned senior
counsel for the petitioner that there was categorical
submission made by the petitioner that the respondent
O.M.P. No.1036/2012 Page 21 of 196
cannot made profit out of the insurance. Still, the learned
tribunal has not arrived at any finding as to how the
computation made by the petitioner’s surveyor does not
indemnify the respondent and only respondent’s surveyors
computation is closer to the real indemnification. It has been
argued that by not adopting this approach of evaluating the
claims of the policy on touchstone of the principle of
indemnification and by merely finding faults upon the
surveyor report of M/s Adarsh and Associates in order to
sidetrack the main issue as to whether it really seeks to
indemnify for the loss of profits suffered by the respondent,
the impugned award passed by the arbitral tribunal is bereft
of any enquiry as to indemnification on account of the
business interruption in consequence of incident of fire. As
such, the impugned order warrants interference of this court
as it proceeds to grant the hypothetical valuation of loss of
profits submitted by the respondent.
The award is therefore based on an erroneous proposition
of a fundamental principle of law and its application that the
LOP policy was not a policy of indemnity and is thus
contrary to the settled law and public policy of India. The
award recompensed the respondent by an amount which
was much more than the loss actually suffered by the
respondent. The basic premise of an insurance contract is
that the insured has to be put in a situation he was before
the occurrence of the loss. It is submitted that in the award
the Tribunal not only ignored but also expressly rejected
O.M.P. No.1036/2012 Page 22 of 196
such a fundamental principle of insurance law. This
deviation, which led the respondent to profit from the
insurance policy, reflects the sheer perversity in the award.
This reason is enough to show that the award is contrary to
the settled law of the land and it shocks the conscious and
also puts the whole business of insurance in jeopardy.
Reliance in this regard is placed on Amravati District
Central Cooperative Bank Ltd v. United India Fire &
General Insurance Co. Ltd. (2010) 5 SCC 294 at
paragraph 23.
The petitioner relies on the Tariff Advisory Committee’s
(TAC) General Regulation 1 on Consequential Loss (Fire)
Insurance Section 1 which reads as under:
“Policy to constitute contract of Indemnity: Every
policy shall constitute a contract of indemnity only.”
The Tariff Advisory Committee was formed under
Section 64U of the Insurance Act, 1938 to
prescribe the terms/conditions/premium rates and
wordings of insurance policies, and at the time
when the insurance policy was issued to the
respondent by the petitioner, it was mandated by
law to issue it only in accordance with the LAC’s
prescribed wording. The policy was in fact issued
in the mandated form, and was a policy of
“indemnity only” as required by law and by the
TAC’s regulations.”
It is submitted that it has also been laid down in a catena of
judgments that contracts of insurance are contracts of
indemnity except in the case of life insurance, personal
O.M.P. No.1036/2012 Page 23 of 196
accident and sickness or contracts of contingency
insurance. The following cases were relied upon:
(a) United India Insurance Co Ltd v. Kantika
Colour Lab , (2010) 6 SCC 449 at paragraph
19.
(b) State of Orissa v. United India Insurance Co.
Ltd , (1997) 5 SCC 512.
(c) Union of India v. Sri Sarada Mills Ltd. , (1972)
2 SCC 877, at paragraph 36.
It is argued that the award is contrary to express terms of
the contract, the TAC mandated wording and specifications.
His submission is that the policy is issued in accordance
with the Tariff Advisory Committee’s prescribed wordings of
“Consequential Loss (fire) Tariff’s (paragraph 4.1 of the
petition). As stated above, the TAC is set up under Section
64U of the Insurance Act 1938 to stipulate policy wordings
for all general insurance companies, and the policy was
issued by the petitioner in accordance with the TAC wording
only.
Each specification in the TAC document deals with a
separate set of circumstances. For instance, “specification
A” covers insurance of gross profit on turnover basis which
has with it its own set of definitions, “Specification B” on the
other hand covers insurance of gross profit on output basis
exclusively with its own set of definitions and terms,
“Specification C” is entitled difference basis and provides
O.M.P. No.1036/2012 Page 24 of 196
cover on the basis of reduction in turnover, again with its
own set of definitions.
d) Mr. Kaul, learned Senior counsel for the petitioner has argued
that the impugned award criticizes the report of the surveyor
namely Adarsh & Associates by finding faults in the same in the
one line conclusions and proceeds to draw an inference on the
basis of the answers provided by him in the cross examination. It
has been argued that the criticism or non acceptability of the
report of the surveyor M/s Adarsh & Associates does not ipso
facto lead to the conclusion that the turnover basis which is
considered to be real indicator of the loss of profits on account of
the business interruption should not be preferred and only output
method and the computation arrived by the respondent is an
indicator towards indemnification. It has been argued that the
said approach and conclusion by mere ipse dixit of the
respondent’s surveyors and finding faults in the report of M/s
Adarsh and Associates ignores the principle of law relating to
indemnification and also enables the arbitral tribunal to arrive at
the hasty findings on the adoption of the output method in lieu of
turnover method without giving cogent reasons of preferring one
method over the other in the impugned award when the entire
case of the parties are dependent upon the finding as to which
method of computation is the best indicator towards
indeminifcation in the circumstances like the present one. Thus,
the impugned award is clearly against the non speaking award,
ignores the settled principles of law and mix up the legal
O.M.P. No.1036/2012 Page 25 of 196
concepts leading to perversity of the nature warranting
interference of this court.
e) Mr. Kaul argued that the only reason provided by the respondent
to compute the losses on the basis of alternative method which
is output basis is that their business is cyclical in nature. It is
argued that the said plea has been accepted by the learned
arbitral tribunal as such without any evidence on record to
suggest that the business of the respondent is cyclical in nature.
It has been argued by Mr. Kaul while responding the
submissions of the respondent that the mere fact that the
petitioner did not cross examine the respondent’s witness on the
computation proposed by them does not lead to a conclusion as
a matter of consequence that the method of computation
adopted by the respondent is correct. It has been argued by Mr.
Kaul that the challenge of the petitioner is at non applicability of
particular method of computation of loss of profit and as such the
cross examination on the actual computation or finding
inaccuracies therein would be inconsequential when the
petitioner’s case is that the said method ought to not have been
applied at all in the particular circumstances of the present case.
Lastly, it is submitted by Mr.Kaul that it is true that the cross-
examination of the petitioner before the Court did not produce or
cross the witnesses of respondent on the aspect of calculation
mainly on the reason that the challenge of the petitioner was
from the very beginning about the method adopted by the
respondent towards the claim of output instead of turnover basis,
O.M.P. No.1036/2012 Page 26 of 196
the method stressed by the petitioner in its case which is
appropriate in the facts and circumstances of the present case.
By making the aforementioned submissions, It has been prayed
by Mr. Kaul that this Court should allow the petition filed by the
petitioner under the provisions of the arbitration and conciliation Act
and proceed to accept the turnover method as a basis of the
computation of loss of profits arising out of the business interruption
as a consequence of fire and set aside or modify the award
accordingly.
21. Per Contra, Mr. Prag P. Tripathi, learned Senior counsel
appearing on behalf of the respondent has made his submissions in
support of the award and the same can be outlined in the following
manner:
a) Mr.Tripathi, learned Senior counsel appearing on behalf of the
respondent has argued that the alternate basis clause providing
for the output method of computation of loss of profits in LOP
policy was added to safeguard the interests of the respondent so
that the respondent should be fairly indemnified by the losses on
account of business interruption. The said clause has been a
part of the policy in dispute for the last many years and the
insurance policy was renewed from time to time. The reason for
use of this clause was that, as there are ups and downs in the
sales of the respondent’s products and any excess accumulation
of stocks balances out in the next upward cycle, the respondent
sought protection based on the actual production rather than the
turnover. The nature of the business of the respondent is
cyclical. The products manufactured by the respondent are not
O.M.P. No.1036/2012 Page 27 of 196
perishable goods and have a shelf life and that accumulated
stock gets depleted once the market picks up, thus output is
correctly adopted to calculate the loss suffered by the
respondent who has rightly sought to invoke the “alternative
basis clause”. The respondent has suffered huge losses due to
the fire and the petitioner now is trying to avoid its liability to pay
the loss suffered by the respondent.
b) Mr. Tripathi has argued that the words “whenever it is found
necessary” denote some level of subjectivity in the determination
of what is necessary and it is the right of the insured to
determine the situation. The said submission advanced by the
learned senior counsel is the reiteration of the submission
advanced by the respondent before the arbitral tribunal that it is
upon the respondent as insured to choose the method of
computation of the loss of profits on account of business
interruption.
c) Mr. Tripathi, learned Senior counsel for the respondent has
argued that assuming for the sake of argument, the learned
Arbitral Tribunal after considering the evidence of the parties
came to the conclusion that the output method is to be adopted
for the computation of loss of profits claimed by the respondent,
which is one of the possible view other than the view that
turnover method as per contract was also possible under certain
circumstances. It has been argued by Mr. Tripathi, that the
merely because one of the two possible interpretations have
been adopted by the learned arbitral tribunal is no ground to
interfere within the scope of Section 34 of the Act as per the
O.M.P. No.1036/2012 Page 28 of 196
settled law of Apex Court. The Apex Court in Rashtriya Ispat
Nigam Ltd. v. Dewan Chand , (2012) 5 SCC 306 has held:
“43. In any case, assuming that Clause 9.3 was capable
of two interpretations, the view taken by the arbitrator
was clearly a possible if not a plausible one. It is not
possible to say that the arbitrator had travelled outside
his jurisdiction, or that the view taken by him was against
the terms of contract. That being the position, the High
Court had no reason to interfere with the award and
substitute its view in place of the interpretation accepted
by the arbitrator. The legal position in this behalf has
been summarized in paragraph 18 of the judgment of
this Court in Sail v. Gupta Brother Steel Tubes Ltd.
(supra) and which has been referred to above. Similar
view has been taken later in Sumitomo Heavy Industries
Limited v. ONGC Limited reported in 2010 (11) SCC 296
to which one of us (Gokhale J.) was a party. The
observations in paragraph 43 thereof are instructive in
this behalf. This paragraph 43 reads as follows:
“43. …The umpire has considered the fact situation
and placed a construction on the clauses of the
agreement which according to him was the correct
one. One may at the highest say that one would
have preferred another construction of Clause 17.3
but that cannot make the award in any way
perverse. Nor can one substitute one’s own view in
such a situation, in place of the one taken by the
umpire, which amount to sitting in appeal. As held
by this Court in Kwality Mfg. Corpn. V. Central
Warehousing Corpn, 2009 (5) SCC 142. The Court
while considering challenge to arbitral award does
not sit in appeal over the findings and decision of
the arbitrator, which is what the High Court has
practically done in this matter. The umpire is
legitimately entitled to take the view which he holds
to be the correct one after considering the material
before him and after interpreting the provisions of
O.M.P. No.1036/2012 Page 29 of 196
the agreement. If he does so, the decision of the
umpire has to be accepted as final and binding.”
th
Mr. Tripathi also relied upon the judgment/order dated 11
January, 2010 in OMP No. 8/2010 in the matter of Cement
Corporation v. Vaswani Industies , wherein this Court held:
“10. It is settled law that if two views are possible from a
situation an Arbitrator is fully entitled to take one plausible
view. The detailed Award shows that Arbitrator was
justified in taking one plausible view which he has taken.
Merely because another view is possible, as is contended
by counsel for the petitioner, does not entitle this Court to
interfere with the findings arrived at OMP 08/2010 by the
Arbitrator. The scope of challenge to an award in a
proceeding under Section 34 is no longer res-integra. This
Court can interfere with an Award only if the Award is
illegal or it is against the contractual provisions or it is so
perverse that it shocks the judicial conscience. I do not
find that the Award is in any manner illegal in view of what
has been stated above”.
d) Mr.Tripathi submits that the purpose is always by the insured is
to get the losses arising from interruption to its business from fire
damage. In the present case, the respondent has correctly
requested that the output measure be applied in order to know
the actual losses would have been suffered as the respondent
was not able to produce what it would have been able to produce
had the fire not taken place. The main reasons behind asking for
the Output method was that the nature of the respondent’s
business was such that it could only be indemnified for its loss
due to the fire under the LOP policy if the loss was calculated on
the Output method basis. The facts even admitted by the
petitioner:
O.M.P. No.1036/2012 Page 30 of 196
(i) The Respondent’s production is usually and normally
constant and stable while its sale is cyclical.
(ii) The Respondent continues to produce and run its
machines on a 24 X 7, 365 days basis. The major
products (PSF, POY and DTY) are produced in different
varieties such as merge and denier, etc.
In view of the aforementioned position, Mr. Tripathi
argued that no fault can be found with the view adopted by the
learned arbitral tribunal and the output basis was rightly adopted
as mode of computation of the loss of profits as per the peculiar
nature of the business despite the respondent restricted its claim
before the Tribunal. The calculation of the respondent was on
the basis of rate of profit i.e. 10.3%.
Mr. Tripathi, in order to lend strength to his submission
relied upon the literature available on the adoption of alternative
basis of the computation of loss of profits including IRDA
guidelines wherein it has been provided that the output basis of
computation of losses can be adopted when the business of the
entity is cyclical in nature which is that when the decrease in
production level does not immediately reflect corresponding
decrease in the sales due to peculiar nature of the business. In
such cases, as the losses are there but are not reflected in
decrease in sales or turnover, the alternative basis which is
output method is adopted to arrive at the computation. Mr.
Tripathi argued that the present case is of such a nature wherein
the respondent has lead such evidence before the tribunal by
filing the production trend of the respondent for the last 5 years
and other evidences which has not been disputed by the
O.M.P. No.1036/2012 Page 31 of 196
petitioner and has been appreciated by the tribunal. In such a
case, it cannot be said that the view adopted by the arbitral
tribunal is illegal or perverse.
e) Mr. Tripathi argued that interpretation given by the petitioner of
the “alternative basis clause” is absolutely devoid of any logic. In
fact the petitioner has misinterpreted the said clause. The trigger
of “whenever found necessary” is fully satisfied in the present
case. The Alternative Basis Clause has been correctly applied
by the Arbitral Tribunal who after discussing evidence and
certain admissions made by the petitioner has reached the
conclusion that Alternative Basis Clause should be applied.
f) Mr.Tripathi has argued that the Arbitral Tribunal has placed
reliance on the “output method” of calculation of loss suffered by
the respondent who has dealt with each and every point by way
of objections raised by the petitioner. It is a well considered and
speaking award and is sustainable in law. The Arbitral Tribunal
has taken a plausible view and the said alternative clause is
correctly interpreted by the Arbitral Tribunal. The same does not
render the award unjust and unreasonable and ripe for
interference by this Court.
g) Mr. Tripathi has argued that as far as calculation of loss suffered
by the respondent as mentioned in the final reports of
Mr.Srivatsan appointed by the respondent is concerned, the
petitioner never disputed the calculations given by the
respondent for the amount of loss claimed on the output basis.
The learned Tribunal has clearly held in para 68.25 of the award,
that:
O.M.P. No.1036/2012 Page 32 of 196
“Therefore, it could easily be seen that there is no
cross examination on the actual figures given by CW-3
in his report dated 25.10.10. Thus, the irresistible
inference is that the respondent has accepted them as
being correct and there is no need to analyze those
details. When that is the factual position, the argument
on behalf of the respondent that the policy is a contract
of indemnity and if the alternative basis clause is
applied, it would result in unjust enrichment by the
claimant is not sustainable.”
In view of the said finding, as per Mr. Tripathi, the petitioner
challenge of the impugned award should be rejected.
h) It has been argued by Mr. Tripathi that it has been established by
the respondent before the Arbitral Tribunal that the respondent’s
production is usually and normally constant and stable while its
sale is cyclical. The respondent continues to produce and run its
machines on a 24X7, 365 days basis. The major products (PSF,
POY and DTY) are produced in different varieties such as merge
and denier, etc. The reason the respondent does this is because
the respondent needs to maintain a very high level stock so that
it is in a position to meet the demand of any customer as and
when it occurs. There is a significant time lag between
production and sales. The accumulation of stock if any gets
depleted very rapidly as sales trends are erratic in nature and the
goods produced by the respondent are non-perishable goods,
hence can be stored for a long period of time.
i) The respondent has provided last 5 years production data
demonstrating the cyclical nature of the respondent’s business,
which was accepted by the Surveyor Mr. Adarsh Gupta as has
O.M.P. No.1036/2012 Page 33 of 196
been recorded by the Arbitral Tribunal in para 76 and 76.1 of the
award as under :
“76. Mr. Abhimanyu Bhandari, learned counsel for the
claimant, submitted that the claimant had produced
records to show the production made by the claimant for
five years from 2003 to 2008. The details are given at
page 10 of the written arguments of the claimant:
(a) For example, that from June 2003 to March 2004,
the production was static. Notwithstanding, that in
February 2004, net sale had fallen to 17, 545 MT,
but still the claimant produced 25, 488 MT in March
2004.
(b) Production continued in full swing between April
2004 & December 2004. This is notwithstanding
that sales dipped to 18, 292 in the month of
November 2004, whereas the production in the
month of December 2004 remained static at 21,
108 MT.
(c) Similarly, between April 2005 and November 2005,
production was stable notwithstanding that sales
dropped to 12, 948 MT in September 2005.
(d) Between April 2006 and December 2006 the
maximum produce by the claimant was of 34, 317
MT however the sales dropped to 14, 165 MT.
Yet, the claimant continued its production in
January 2007 and produced 33606MT of yarn.
(e) Production increased during the months from
April 2007 to October 2007, since CP-4 was
commissioned. Production was again stable,
however there were fluctuations in the sales
pattern.
The above data clearly shows that the claimant
continues to produce regardless of its sales patterns.
O.M.P. No.1036/2012 Page 34 of 196
76.1. Mr. Adarsh Gupta-RW-1 has accepted the factual
position presented by the claimant with regard to
production.”
j) It has been argued by Mr. Tripathi that the respondent is not
disputing the contract being one of indemnity. Admittedly, the
respondent has paid the premiums of the policy, the respondent
was covered under the insurance policy when the incident
occurred, and therefore the respondent is entitled to receive the
compensation. It has been argued that the mere fact that the
respondent’s witness states that it is not policy of indemnity
would not alter the legal position. A witness’s view who does not
have legal viewpoint cannot be the basis for asserting that the
respondent is stating that this is not a policy of indemnity. The
Arbitral Tribunal specifically states at para 42.1 of the Award that
the intention of the contract is to indemnify the insured.
“42.1. The main object and intent of the contract of
insurance is to indemnify the loss as per the terms of
the policy. According to the respondent-insurer, on a
true construction of the contract/policy, the turnover
basis alone could be followed for assessing the loss of
consideration. It seems to us that it would defeat the
object and intent of the contract to hold that it was
entered into with an absolute and unchangellable right
to the respondent to assess the loss in the manner in
which it liked and arrive at the quantum as it calculates
and determines. Dealing with such a construction, the
House of Lords opined:
“Is there any rule of law which compels the
construction contended for? I think there is not.
Where general words are used which are
obviously intended to be applicable, so far as they
O.M.P. No.1036/2012 Page 35 of 196
are applicable, to the circumstances of the
particular contract, which particular contract is to
be embodied in or introduced into that printed
form, I think you are justified in looking at the main
object and intent of the contract and in limiting the
general words used, having in view that object
and intent.”
Similarly, the Arbitral Tribunal reiterated at para 77.3
“… The object and the intent of such clauses is to
really indemnify the claimant for the loss which has
been immense, as admitted by RW-1 and also the
respondent.”
In view of the same as per Mr. Tripathi, the Tribunal has
followed the principle of indeminity and the petitioner challenge on
this count has to be rejected.
k) Mr. Tripathi has argued that the report of the surveyor M/s
Adarsh and Associates suffered from the fundamental faults
which are not trivial but are vital in nature. The surveyor M/s
Adarsh and associates opinion that the calculation of losses at
the output method or turnover method would give same results is
indicative of the fact that the report of the surveyor was based on
wrong premise and as such rightly discarded by the learned
arbitral tribunal. It has been argued by Mr. Tripathi that the
conclusion arrived by the learned arbitral is based on established
facts and evidence on which if the legal position as narrated by
the petitioner is applied, still the conclusion arrived by the
learned arbitral tribunal is clearly justifiable and cannot be faulted
with.
O.M.P. No.1036/2012 Page 36 of 196
22. In the light of the aforementioned submissions, it has been
prayed by Mr. Tripathi that this Court should dismiss the challenge
laid by the petitioner in the form of present petition. The learned
Senior counsel has also referred many decisions of the Apex Court
as well as of this Court with regard to scope of interference of Court
sitting under the jurisdiction of Section 34 of the Act. He says that the
Tribunal has taken the plausible view out of two, thus the question of
any interference does not arise.
23. I have gone through the impugned award passed by the
learned arbitral tribunal. I have also seen the records of the present
case including the petition filed by the petitioner, reply and rejoinder
and documents filed by the parties in the matter. I have also given my
careful consideration to the submissions advanced by the learned
counsel for the parties at the bar.
24. Firstly, I deem it appropriate to consider the plea that the
challenge laid by the petitioner is required to be dismissed as it seeks
to reappreciate the evidence in the matter or the interpretation of the
contract/ insurance document which can result in plausible view by
the tribunal, the same is not required to be interfered with under the
provisions of Section 34 of the Arbitration and Conciliation Act. I have
examined the said submissions canvassed by the respondent on the
count that the award passed by the tribunal takes one view about the
matter by awarding the claims preferred under the FLOP policy by
adopting the output method as prescribed under the insurance policy/
contract by examining the intent of the policy and purpose of the
policy which is to indemnify the respondent and the said view being a
plausible view should be respected and should not be interfered with
O.M.P. No.1036/2012 Page 37 of 196
in order to arrive at the different view of the matter on the
appreciation of the same material available on record. I would have
in the normal course concurred with the respondents
submissions if that would really have been the only case which
does not require interference of this court under the provisions
of Section 34 of the Act. On the contrary, the careful perusal of
the award would reveal that the arbitral tribunal not merely
proceeds to award the claims preferred by the respondent under
FLOP policy and MD policy by adopting the view on the matter
which is a particular method of arriving at the consequential
loss of profits payable under the insurance policy but has given
minimum reasons which are totally contrary to the fundamental
policy of law governing the insurance contract which is that the
insurance is aimed at to indemnity the insured and not to profit
anyone whereas the reasoning in the award seems to suggest
that the claim is awarded to the insured on account to the higher
valuation suggested by the method of the computation
presented by the insured. Such reasoning is clearly affecting the
larger public policy governing the law of insurance more
particular the business interruption insurance which are based
of assessment of loss of profits as a consequence of the peril
insured. Moreover, the analysis done by me in the later part of
the judgment would reveal that not merely the interpretation
done by the arbitral tribunal to the contract/ policy document is
erroneous but also the said incorrect interpretation has resulted
in granting the hypothetical claims in the form of the
consequential loss of the profits which are not the direct
O.M.P. No.1036/2012 Page 38 of 196
consequences of the happening of the event without showing
any such loss occurring during the indemnity period or for that
matter in the near future and thus violating the principles of law
which are fundamental policy of law of insurance and contracts
which are that the insurance contract is always the contract of
indemnity and the insured cannot get more than the mere
indemnity out of the insurance policy and the principle that
insurer is liable only for losses proximately caused by the
events insured against and not the ones which are remotely
caused and connected. Accordingly, the submissions of the
respondent that the award rendered by the tribunal is justifiable
as it merely takes one of the two plausible views and/or even if
gives erroneous interpretation to the contract should not be
interfered with by this court are non meritorious as for manifold
reasons the award violates the fundamental policy of law which
is the ground prescribed under the provisions of Section 34 of
the Act for interference of the award and also as per the well
settled law in the case of ONGC v. Saw pipes Ltd , AIR 2003 SC
2629 and the lines of the authorities emerging therefrom
empowering this court to interfere with the award passed by the
arbitral tribunal.
25. I shall now proceed to examine the award in detail and
simultaneously answer the challenge laid by the petitioner and the
submissions of the parties on the various points raised by the parties.
st
The award dated 1 August, 2012 begins with providing with the
overview of the facts with the preliminary observations where it has
been stated that the factory of the claimant/respondent was
O.M.P. No.1036/2012 Page 39 of 196
established in the year 1989. The sales of the claimants product are
cyclical in nature. The accumulation of stocks if any during the
downward sales cycle get depleted within a couple of months once
the market picks up. By making these observations, the tribunal
proceeded to narrate the facts of matter including the control panels
which are CPs working at the respondents premises. It has been
th
stated that the fire accident took place on 29 October, 2007 in the
control panel room of the respondents continuous process plant
which causes the extensive damage to the control panels of all four
Polyester Staple Fiber. Thereafter tribunal narrated the events post
the incident of fire including the lodging of the provisional claim by the
respondent, report of the surveyor M/s Adarsh and Associates, final
claim raised by the respondent after obtaining the report of Mr.
Srinivatsan and all other events noted above giving rise to the
invocation of the arbitral proceedings. It is noticeable that, the tribunal
has made certain observations along side the narration of facts by
observing that “this is not in accordance with the policy” without giving
reasons as how it is not accordance with the policy. The later part of
the discussion made in the judgment together with the reading of
such stray observations noticed herein would show that at many
places such one line observations exist where the tribunal has
attempted to brush aside several aspects which are vital to arriving at
the decision making including the report of the surveyor M/s Adarsh
and Associates by making fewer observations like “this is not
accordance with policy” or “this is not accordance with law” without
informing as to how and why the same is not accordance with the
policy or the law.
O.M.P. No.1036/2012 Page 40 of 196
26. Pursuant to the narration of facts which quotes the version of
both the sides along with the observations of the tribunal on several
points including the criticism to the report of the surveyor M/s Adarsh
and Associates at the threshold itself, the tribunal proceeded to
record the case of the parties by reproducing the contentions from the
claim statement and the statement of defence and rejoinder.
Likewise, the tribunal reproduces the exhibits or annexures which
were filed along with the claim statement and statement of defence
and later on by the parties. The tribunal thereafter records the issue
as to challenge of the jurisdiction of tribunal and observes that in view
of the concession made by the counsel for the petitioner/respondent
therein, the tribunal has jurisdiction to entertain and try the
proceedings.
27. Thereafter, the Arbitral Tribunal at paragraph 32 of the
impugned award reproduced the issues framed by the same and
divided the said issues under two heads which are:
a) The assessment of loss under the FLOP (Fire loss of profit)
policy.
b) The assessment of loss on Material Damage policy.
Claim 1 : Assessment of loss under FLOP
Under the first head of assessment of loss under the FLOP
policy, the arbitral tribunal reproduced the submissions of the counsel
for the parties and proceeded to frame the question upon reading of
the terms of the policy, whether the alternative basis clause could be
applied in paragraph 37 of the award. Thereafter, the arbitral tribunal
proceeded to discuss the law on the subject that for the purposes of
O.M.P. No.1036/2012 Page 41 of 196
interpreting the policy of insurance, the object and intent of the parties
are to be derived upon reading of the policy of the document. After
discussing the said law, the arbitral tribunal arrived at some finding at
paragraph 42.1 unrelated to the analysis of law done by the tribunal
by observing that the object of the contract of insurance is to
indemnify the loss as per the policy and it would defeat the object and
intent of the contract if the turnover basis alone could be followed for
assessing the loss. Thereafter, again the tribunal reproduced several
judgments of the Supreme Court as to how the sale deed and other
instruments are to be read in order to deduce the intention of the
parties and also quoted the judgments cited by the respondent on the
principle of contra preferentum uptil paragraph 58.3. It is noteworthy
to mention that the award merely reproduces the judgments from
paragraph 43 to 58.3 with some one line observations like “this ratio
does not advance the case of the claimant” or like nature. The said
discussion of law is not further analyzed by the arbitral tribunal as to
which principle of law is applicable to case and what bearing it has on
the facts in hand.
Furthermore, the arbitral tribunal reproduced the relevant
clauses of the insurance policy including the Specification C relating
to the Gross profit computation, Specification J relating to alternative
basis clause, the definitions of the various terms prescribed under the
policy. The said reproduction of the terms continued uptil paragraph
61. In paragraph 62 of the impugned award, the arbitral tribunal
proceeded to discuss the applicability of the alternative basis clause
by observing that the term “output is to be substituted here” and in
paragraph 63 onwards, the arbitral tribunal proceeded to discuss the
O.M.P. No.1036/2012 Page 42 of 196
meaning of the words “wherever found necessary”. By this time, if
one reads the award from paragraph 42.1 to paragraph 63, it is
difficult to discern any discussion and reasoning relating to the true
meaning of the terms of the policy. The award uptil paragraph 63
proceeds to reproduce the judgments cited by the parties along with
the clauses of the policy without interpreting the wordings of the
policy document which is essential for the purposes of analyzing what
sort of the damage or loss is recoverable under the policy. There is
no answer to the said question after reading the policy document as
to what is the extent of the damage or loss recoverable under the
policy document after doing the analysis of the same. The arbitral
tribunal only states that the object of the policy is to indemnify the
insured and it would defeat the object of the policy, if the turnover
basis remains the only one to assess the loss. I find that the petitioner
never disputed the very existence of the alternative basis clause but
merely maintained through the report of the surveyor M/s Adarsh and
Associates, turnover is the index for the assessment of the loss in the
case in hand and is widely used. Thus, the finding of the arbitral
tribunal that the alternative basis clause goes out of consideration if
the turnover basis is applied is almost unnecessary. The tribunal on
the other hand failed to give any satisfactory reasoning uptil
paragraph 63 as to why the alternative basis clause is applicable to
the instant case.
The discussion of the arbitral tribunal after paragraph 63
onwards is on the interpretation of the wordings “wherever found
necessary”. The said discussion begins with the reproduction of the
arguments of the parties and continued uptil paragraph 65.11 which
O.M.P. No.1036/2012 Page 43 of 196
is almost reproduction of the authorities including case laws and law
lexicons. Thereafter in paragraph 65.12 and 66, the arbitral tribunal
observed that it is the court or tribunal to determine whether it is
necessary to go the alternative basis clause. In paragraph 67, the
arbitral tribunal again observed that the necessity to assess the loss
on the alternative basis clause has arisen because the value of the
loss is far less than the value arrived at the loss on the basis of the
alternative basis clause. The said findings of the tribunal in paragraph
66 and 67 are again without any analysis and reasoning as to how it
is upon the court or tribunal necessary in the given facts to invoke
alternative basis clause. The finding that merely because the value of
the loss comes on higher side by way of alternative basis clause is in
violation of the principle of law of insurance which is that the
insurance is the contract of indemnity and not to profit the insured. In
that light of the matter, one has to really pose the question as to
which of the methods provided under the policy document, turnover
or the alternative basis clause or output method truly indemnify the
loss which has arisen as a consequence of the event of fire and
damage arising from the same. The discussion on the same can be
done by interpreting the terms of the policy in order to find out of what
kind of loss is payable by the insurer to the insured and the analyses
of the recovery of the said kind of loss by adoption of suitable
methodology as provided under the insurance policy document which
is in consonance with the indemnity principle. The discussion on the
said aspect is completely missing in the findings of the arbitral
tribunal while finding it necessary to invoke the alternative basis
clause or output method merely on the ground that the value of the
O.M.P. No.1036/2012 Page 44 of 196
loss if calculated by adopting the alternative basis clause is higher
than the value in the case of the turnover basis. I shall discuss this
later on. However, at this stage shall proceed to analyze the award
completely.
The arbitral tribunal thereafter proceeded to invoke the
alternative basis clause or output basis by finding that the surveyor
evidence Adarsh Gupta RW1 is faulty and pointed out number of
faults and proceeds on wrong premise and the said fact coupled with
the higher valuation in the case of the output basis has enabled the
arbitral tribunal to observe in paragraph 67.6 that the tribunal finds it
necessary to go into alternative basis clause for the assessment of
the loss. Thereafter, the arbitral tribunal proceeded to analyse the
reports of RW1 Adarsh Gupta further and pointed out numerous
infirmities in the same by observing that the approach followed by Mr.
Gupta is not correct. This position continued uptil paragraph 67.50.
There are similar one line findings alongside the analyses of the
report that “this is not correct approach” or “this is not acceptable”
“this is not relevant”. The arbitral tribunal by paragraph 67.50
discussed the report of the surveyor Adarsh Gupta and his cross
examination and concluded that the same is flawed approach. The
arbitral tribunal from paragraph 67.51 to 67.57 also disregarded with
the evidence of RW2 – Mr. Srinivasan by observing that the mere
assertion by RW2 to support the report of RW1 Mr. Adarsh Gupta
cannot at all be taken an evidence to prove a particular fact. Likewise,
the arbitral tribunal proceeded to examine the evidence CW1 Dr.
Ranjit Kumar Datta by merely reproducing the questions asked to
him during cross examined and observed that there was fewer
O.M.P. No.1036/2012 Page 45 of 196
questions and suggestions which were put to the CW1 on the
applicability of the turnover basis and the objection on the alternative
basis clause. The said finding is arrived at paragraph 68.4 and 68.5.
The arbitral tribunal further examined the report of CW3 Mr. R.
Srivatsan of M/s Professional Surveyors and Loss Adjusters Pvt. Ltd.
and his evidence and cross examination. By reproducing the
questions and answers, the tribunal proceeded to observe that the
report of Mr. Srivatsan is appealing as there will be a variation
between the assessment of loss on turnover basis and output basis.
This finding is arrived at in paragraph 68.20 merely on the basis of
the answer of the witness and not on the basis of any legal
discussion otherwise done by the arbitral tribunal. Further, there were
some questions of the cross examination of Mr. Srivatsan were
reproduced along with the answers uptil paragraph 68.24 of the
Award and in paragraph 68.25 it was concluded that there is no cross
examination on the actual figures given by CW3/Mr. Srivatsan on the
assessment of the loss and thus the inference can be drawn that the
respondent has accepted them as being correct and there is no need
to analyse them in detail. On the ground of failing to cross
examination on the figures submitted by the CW3 Mr. Srivatsan, the
arbitral tribunal also rejected the submission that the insurance
company/ petitioner herein that the policy is a contract of indemnity
and the alternative basis clause would lead to unjust enrichment to
the respondent. The said submission is again rejected by merely on
the basis of the fact finding that there is no cross examination of the
CW 3 done by the petitioner herein on the figures submitted it and not
on the legal discussion.
O.M.P. No.1036/2012 Page 46 of 196
The discussion done by the tribunal in paragraph 69.4 and
69.5 by the arbitral tribunal further show that the tribunal
observed that it is not acceptable in law that the principle of
indeminity is intrinsic to all insurance contracts and the an
insured cannot be allowed to make a profit out of the insurance .
The arbitral tribunal paragraph 70 onwards started discussing the
various case laws along with the submission of the parties and
simultaneously rejecting or accepting the said submissions and
proceeded to observe in paragraph 77.3 and 77.4 that the object and
intent of the alternative basis clause is to really indemnify the
claimant for the loss and the tribunal again reiterated that it is
necessary to apply alternative basis clause and is the real object and
intent of the policy. In between tribunal also observed in paragraph
75.1 that the tribunal is on the interpretation of the contract and thus
the opinion of the witness on behalf of the insurance company cannot
be of any assistance. At this stage, it is suffice to say that it is difficult
to find any interpretation to the contract/ insurance policy rendered by
the arbitral tribunal in the award. So far, the award is merely the
reproduction of the position of the parties, case laws, contentions,
reproduction of the clauses of the policy document and evidence of
the parties. There is no interpretation which has been found in the
award of the interplay between the clauses of insurance policy
document uptil paragraph 77.4. The award merely adopts the
inferences of the cross examination of the surveyors and forms the
opinion of the tribunal on the basis of the answers to the questions
when the said questions are not purely factual in nature. I shall
O.M.P. No.1036/2012 Page 47 of 196
discuss this in detail while commencing my discussion immediately
after I complete my analysis of the award with respect to first claim.
From paragraph 77.5 onwards, the learned arbitral tribunal
proceeded to discuss the computation of the loss given by CW3/ Mr.
Srivatsan, surveyor of the respondent. After making certain
corrections in the computation in paragraph 77.6, the arbitral tribunal
proceeded to observe that the actual loss is quantified at
Rs.34,70,55,231-/ and proceeded to award the said sum at
paragraph 80.32. At this stage, I would discuss the points which fall
for consideration with respect to challenge of claim No. 1 preferred by
the petitioner. I shall discuss the award with respect to other claims
along side my discussion under the respective heads.
28. The entire reading of the award for the Claim No.1 leaves
several questions unanswered or not explained with cogent
reasons in law and the reasons whatsoever are existing are
contrary to the well settled principles of law governing the
insurance including the principle of indemnity and proximate
cause existing in the law of insurance which has lead to this
court to examine the said questions as no useful purpose would
be served by adjourning the matter for supply of additional
reasons under Section 34(4) of the Act as the entire approach of
the tribunal and the mindset reflected from the reading of the
reasons that are existing in the award seems to be flawed and
contrary to the well settled principle of law. Therefore, this court
is proceeding to examine the said questions. The said questions
are:
O.M.P. No.1036/2012 Page 48 of 196
a) When it is desirable to adopt the alternative basis method in
assessment of losses of business interruption in consequence of
the damage arising out the incident of fire. The tribunal answers
this question by observing that it is the point for the tribunal
determination and the tribunal deems it necessary to apply the
said method merely due to the reason that valuation of the loss
on the output basis comes on higher side than that of the
turnover basis, secondly that it is in the nature and purpose of
the policy to indemnify the insurer and thus it would be in
consonance with the purpose and nature of the policy to adopt
such method. Thirdly, the tribunal though nowhere categorically
observed that the business of the respondent is cyclical in nature
but by approving the report of CW3 and analyzing the cyclical
nature of business in certain paragraphs but by not returning the
findings on the same in effect implicitly approved the said
reasoning as well. Thus, all these reasons according to the
learned Arbitral Tribunal enabled the Tribunal to depart from the
turnover approach.
I find that the said reasons are either no reasons in
law to justify the adoption of the alternative basis method
for computation of the consequential loss and/or in the
alternative the said reasons are not in consonance with the
fundamental policy of law of insurance which is that the
insurance contract is always a contract of indemnity and the
insured cannot benefit out of the payments made towards
the indemnification . I find that merely because the value of sum
to be recompensed to the insured is higher when computed by
O.M.P. No.1036/2012 Page 49 of 196
one method or the other can never be the basis for preferring
one method over the other. The true test according to me is
that which of the two methods would truly and realistically
indemnify the insured . The enquiry from the said standpoint is
completely missing in the impugned award contrary the public
policy and settled principles of law relating to insurance and thus
perverse which would also affect the future grant of the claims in
the business interruption insurance contracts as well . Likewise,
it cannot be the nature of the policy and/or purpose of the
policy to recompense higher sum to the insured. The
indemnity policy never mean that invariably the view which
benefits the insured with higher sum is to be preferred over
and above the insurer till the time the decision on the
question which of indemnity is determined or ascertained.
The third reasoning which is a sub silentio finding on the
cyclical nature of the business of the respondent is also no
where firstly answering the question as to how the respondent
could not be adequately indemnified by way of loss of turnover
basis which is the first method for assessment of the losses.
Even assuming for the argument that the cyclical nature of the
business is per se an answer to the question why the respondent
could not adequately indemnified by any other method, still it
would be reflected on facts of the case in the later paragraphs of
the judgment when the evidence is analyzed that the said plea of
the respondent about the cyclical nature of business does not
advance the case of the respondent towards the applicability of
the output basis as a method to assess the loss of profits in
O.M.P. No.1036/2012 Page 50 of 196
consequence of the damage arising out the incident. In view of
the same, I would answer this question in my discussion.
b) Whether the business interruption insurance or loss of profit
insurance in consequence to the damage arising out of the fire is
a contract of indemnity. The answer to this question is essential
in as much as the Arbitral Tribunal at paragraph 69.4 and 69.5
has while rejecting the submission of the petitioner that it is a
contract of indemnity observed that it is not acceptable in law. As
the tribunal has not given any reasoning as to why it is not
acceptable in law. I shall be proceeding to analyze the terms
of the policy document and also the legal position as to
whether the business interruption insurance or loss of profit
insurance is a contract of indemnity or not.
c) Whether the desirability and adoption of the method for the
assessment of the loss of the profit on account of the business
interruption in consequence to damage arising out of the incident
of fire is a pure question of fact or mixed question of fact and
law. The answer to this question is also essential in as much as
the arbitral tribunal proceeded to answer the said question by
merely placing reliance of the stand of the rival parties and
contentions advanced by them and finding faults of the testimony
and cross examination of one side over the other. The arbitral
tribunal did not conduct any analyses as to why it is legally
desirable to adopt the alternative basis or output basis in order to
indemnify the respondent as against the reduction of turnover
basis. I find that the said question is not merely dependent
upon the pleadings or evidence of the parties but is on the
O.M.P. No.1036/2012 Page 51 of 196
other hand is a mixed question of fact and law as the
desirability of the method to be adopted for computation of
the losses has to be ultimately tested upon the touchstone
of the well settled principle of law of insurance which is
indemnity principle and other principles which is that the
insurance indemnifies for the losses for the proximate
cause of the perils insured and not others . In that way, the
question of desirability and adoption of the method for
assessment of the loss is a mixed question of fact and law and
not pure question of fact.
d) Which method for assessing the consequential loss of profit in
the facts of the present case and as per the legal principles
evolved by the courts governing the field is applicable to the
present case which can be said to be indemnify the respondent. I
shall answering this question after objectively analyzing the
terms of the policy and legal position. This is due to the reason
that though the tribunal observed that it has given some
interpretation and justification for the adoption of the method or
basis for computation of the consequential loss of the profits in
the present case but did not as a matter of fact provide any such
interpretation and nor discussed legally on the same.
All these four questions which are unanswered by the
tribunal can be answered sequentially if one firstly analyses the
terms of the policy in order to see the language of the policy and
ascertain as to whether it provides for indicators towards
indemnification principle or not and thereafter apply analyze the
O.M.P. No.1036/2012 Page 52 of 196
case of the parties along with the application of the legal
principles on the same.
Firstly, it is therefore necessary to discuss the terms of
the FLOP policy which are reproduced hereinafter:
“CONSEQUENTIAL LOSS (FIRE) POLICY
Policy Form, Schedule and Conditions
In consideration of the insured named in the Schedule hereto
having paid to The Iffco-Tokio General Insurance Co. Ltd.
(hereinafter called the Company), the premium mentioned in the
Schedule, the Company agrees (subject to the Special Conditions
and Exclusions contained herein or endorsed or otherwise
expressed hereon and also to the Conditions and Exclusions
contained in the Fire Policy covering the interest of the insured in
the property at the premises) that if any building or other property
or any part thereof used by the insured at the premises for the
purpose of the Business, be destroyed or damaged by the perils
covered under the Fire Policy, (destruction of damage so caused
being hereinafter term damage), and the business carried on by
the insured at the premises be in consequences thereof
interrupted or interfered with, then the Company will pay to the
insured in respect of each item in this schedule hereto the amount
of loss resulting from such interruption or interference in
accordance with the provisions contained therein :
Provided that
1) Such Damage is caused at any time after payment of the
premium during the period of insurance named in the Schedule
or of any subsequent period in respect of which the insured
shall have paid and the Company shall have accepted the
premium required for the renewal of the policy.
2) At the time of the happening of the Damage there shall be in
force a Fire Policy covering the interest of the insured in the
property at the premises against such Damage and that
payment shall have been made or liability admitted thereunder.
However, the Proviso shall not apply where payment is not
made under Fire Policy solely due to operation of a proviso in
fire policy excluding liability for losses below a specified
amount.
O.M.P. No.1036/2012 Page 53 of 196
3) The liability of the Company shall in no case exceed in respect
of each item the sum expressed in the said Schedule to be
insured thereon or in the whole the total sum insured hereby or
such other sum or sums as may hereafter be substituted
therefor by memorandum duly signed by or behalf of the
company.
No claim under this Policy shall be payable unless the terms of
this condition have been complied with and in the event of non
compliance therewith in any respect, any payment on account
of the claim already made shall be repaid to the Company
forthwith.
4) In no case whatsoever shall the Company be liable in respect of
any claim under this Policy after the expiration of :
(a) One year from the end of the period of indemnity or if later,
(b) Three months from the date on which payment shall have
been made or liability admitted by the Insurers covering
the Damage giving rise to the said claim, unless the claim
is the subject of pending action or Arbitration.
5) This Policy and Schedule annexed (which forms an integral part
of this Policy) shall be read together as one contract, and words
and expressions to which specific meanings have been
attached in any part of this Policy or of the Schedule shall bear
such specific meanings wherever they may appear.
6) This insurance does not cover any loss resulting from damage
occasioned by or through or in consequence, directly or
indirectly of any of the following occurrences, namely :-
(a) War, Invasion, act of foreign enemy, hostilities or Warlike
Operations (whether war be declared or not), Civil War.
(b) Mutiny, Civil, Commotion assuming the proportion of or
amounting to a popular – rising, military rising, insurrection,
rebellion revolution, military or usurped power.
In any action suit or other proceeding where the Company
alleges that by reason of the provision of this condition any loss
or damage is not covered by this Insurance, the burden of
proving that such loss or damages is covered shall be upon
Insured.
O.M.P. No.1036/2012 Page 54 of 196
7) At all times during the period of insurance of this Policy, the
insurance cover will be maintained to the full extent of the
respective sum insured in consideration of which, upon the
settlement of any loss under this Policy, pro-rata premium for
which the unexpired period from the date of such loss to the
expiry of period of insurance for the amount of such loss shall
be payable by insured to the company.
The additional premium referred above shall be deducted from
the net claim amount payable under the Policy. This
continuous cover to the full extent will be available
notwithstanding any previous loss for the company may have
paid hereunder and irrespective of the fact whether the
additional premium as mentioned above has been actually paid
or not following such loss. The intention of this condition is to
ensure continuity of the cover to be Insured subject only to the
right of the Company for deduction from the claim amount when
settled of pro-rata premium to be calculated from the date of the
loss till expiry of the Policy.
Notwithstanding what is stated above, the Sum Insured shall
stand deduced by the amount of loss in case Insured,
immediately on occurrence of the loss, exercises is option not to
reinstate the sum insured as above.
Specification C – “Difference” Basis
Item No. Sum Insured
1. On Gross Profit Rs.3801840000/-
The insurance under Item No.1 is limited to loss of Gross profit
due to (a) Reduction in Turnover and (b) increase in Cost of
Working and the amount payable as indemnity thereunder shall
be : -
(a) IN RESPECT OF REDUCTION IN TURNOVER : the sum
produced by applying the Rate of Gross Profit to the amount by
which the Turnover during the Indemnity Period shall, in
consequence of the damage, fall short of the Standard Turnover.
(b) IN RESPECT OF INCREASE IN COST OF WORKING: the
additional expenditure necessarily and reasonably incurred for the
sole purpose of avoiding or ,diminishing the reduction in Turnover
which but for that expenditure would have taken place during
O.M.P. No.1036/2012 Page 55 of 196
Indemnity period in consequence of the Damage but not
exceeding the sum produced by applying the Rate of Gross Profit
to the amount of reduction thereby avoided.
Less any sum saved during the Indemnity Period in respect of
such of the charges and expenses of the business payable out of
the Gross Profit as may cease or be reduced in consequence of
the Damage;
Provided that if the Sum Insured by this Item be less than the sum
produced by
applying the Rate of Gross Profit* to the Annual Turnover, the
amount payable shall be proportionately reduced.
* Insert the appropriate multiple if the indemnity period
exceeds 12 months.
Departmental Clause:
If the business be conducted in departments, the independent
trading results of which are ascertainable, the provision of Clauses
(a) and (b) of Item 1 shall apply separately to each department
affected by the damage except that if the Sum Insured by the said
item be less than the aggregate of the sum produced by applying
the rate of gross profit for each department of the business
(whether affected by the damage or not) to the relative Annual
Turnover thereof, the amount payable shall be proportionately
reduced.
Definitions
GROSS PROFIT – The amount by which
(1) The sum of the Turnover and the amount of the Closing
Stock shall exceed.
(2) The sum of the amount of the Opening Stock and the amount
of the Specified Working Expenses.
Note 1- The amount of the Opening and Closing Stocks shall be
arrived at in accordance with Insured’s normal accountancy
methods, due provisions being made for depreciation.
Specified Workings Expenses:-
1. All Purchases (less Discounts Received) ;
O.M.P. No.1036/2012 Page 56 of 196
2. % of the Annual Wage Roll (including Holiday and Insurance
contributions);-
3. Power;
4. Consumable Stores;
5. Carriage;
6. Packing Materials;
7. Packing Material;
8. Bad Debts;
8. Discounts Allowed;
9. Any other expenses to be specified.
Note 2·- The words and expressions used in this Definition shall
have the meaning usually attached to them in the books and
accounts of the Insured.
TURNOVER - The money paid or payable to the Insured for goods
sold and delivered and for services rendered in course of the
business at the premise.
INDEMNITY PERIOD - The period beginning with the occurrence
of the damage and ending not later than Six months thereafter
during which the results of the business shall be affected in
consequence of the damage.
RATE OF GROSS PROFIT--
The rate of Gross Profit
earned on the turnover during
the financial year immediately
before the date of the damage.
To which such adjustments
shall be made as may be
necessary to provide for the
trend of the business and for
variations in or special
circumstances affecting the
business either before or
after the damage or which
would have affected the
business had the damage
not occurred so that the
figures thus adjusted shall
represent as nearly as may
be reasonably practicable
the results which, but for the
damage, would have been
obtained during the relative
period after the damage.
Annual turnover – The
Turnover during the twelve
months immediately before the
date of the damage.
Standard Turnover – The
Turnover during that Period in
the twelve months immediately
before the date of the damage
which corresponds with the
Indemnity Period.
Memo 1 :If during the Indemnity Period goods shall be sold or
services shall be rendered elsewhere than at the
O.M.P. No.1036/2012 Page 57 of 196
premises for the benefit of the business either by the
Insured or by others on his behalf of money paid or
payable in respect of such sales or services shall be
brought into account in arriving at the Turnover during
the Indemnity Period.
Memo: 2 If the Insured declares, at the latest twelve months after
the expiry of any Period of Insurance, that the Gross
Profit earned (or a proportionately increased multiple
thereof where the maximum Indemnity Period exceeds
12 months) during the accounting period of 12 months
most nearly concurrent with any period of Insurance, as
certified by the Insured’s Auditors, was less than the
Sum Insured thereon, a pro-rata return of premium not
exceeding 50% of the premium paid on such Sum
Insured for such period of Insurance shall be made in
respect of the difference. Where, however, the
declaration is not received by the Company within
twelve months after the expiry of the period of
insurance, no refund shall be admissible.
If any damage has occurred giving rise to a claim under this policy,
such return shall be made in respect only of said difference as is
not due to the damage.
11. Return of Premium :
i) The full premium for the selected sum insured based on
estimated Gross Profits shall be chargeable under all
Consequential Loss (Fire) Policies in advance.
ii) Where it is desired to provide for the Return of premium for
the actual Gross Profits being lower than the selected sum
insured, the following clause should be used :
"If the Insured declares at the latest twelve months after the
expiry of any period of Insurance, that the Gross Profits
earned (or a proportionately increased multiple thereof
where the maximum Indemnity Period exceeds 12 months)
during the accounting period of 12 months most nearly
concurrent with any period of Insurance, as certified by the
Insured’s Auditors was less than the Sum Insured thereon, a
pro-rata return of premium not exceeding 50% of the
premium paid on such Sun Insured for such period of
insurance shall be made in respect of the difference. Where
however the declaration is not received by the Company
O.M.P. No.1036/2012 Page 58 of 196
within twelve months after the expiry of the period of
insurance no refund shall be admissible.
If any damage has occurred giving rise to claim under this Policy,
such return shall be made in respect only of said difference as is
not due to such damage.”
iii) Similar Clause in respect of “Wages” cover under Rules 3(a)
and (b) of Section II should be used by substituting the words
“Actual Wages Paid” for the words “Gross Profit Earned” in
the third line of the above Clause.
iv) In exceptional circumstances, Head Office of TAC may
permit, on specific applications from the Insurers, Return of
Premium upto a maximum of 75 percent under the above
Clause, on the merits of each case.
Note : The above Rules/Clause shall uniformly apply to all
factories/industries.
N.B. No reduction will be allowed in the Sun Insured during the
currency of the Policy except as provided for under this Clause.
Specification J – Alternative Basis Clause
It is agreed and declared that, whenever found necessary, the
term ‘Output’ may be substituted for the term “Turnover” and for
the purpose of this policy ‘Output’ shall mean the sale value of
goods manufactured by the ‘Insured’ in the course of the business
at the premises.
Provided that :
(a) Only one such meaning shall be operative in connection with
any one occurrence involving damage (as within defined).
(b) If the meaning set out above be used, memo No.1 shall be
altered to read as follows :
Memo 1 : If during the INDEMNITY PERIOD goods shall be
manufactured other than at the premises for the benefit of the
business either by the Insured or by others on the Insured’s
behalf, the sale value of the goods so manufactured shall be
brought into account in arriving at the OUTPUT during the
INDEMNITY PERIOD.
O.M.P. No.1036/2012 Page 59 of 196
13. Accumulated Stock Clause :
“In adjusting any loss, account shall be taken and an equitable
allowance made if any shortage in turnover due to the damage is
postponed by reason of the Turnover being temporarily maintained
from accumulated stock of finished goods in the Insured’s
warehouse.”
14. Earthquake Extension :
Extension to cover Consequential Loss due to Earthquake Fire
and Shock
In consideration of the payment of the after mentioned premium, it
is hereby agreed and declared that, notwithstanding anything in
the within written policy contained to the contrary, the term
‘Damage’ as defined in this policy shall (subject always to the
Special Conditions hereinafter contained) extend to include
damage due in Earthquake Fire and Shock.
Provided that it is hereby further expressly agreed and declared
that :
(1) The liability of the Company shall in no case under the
Endorsement and the Policy exceed the sum insured by this
Policy.
(2) All the Conditions of this Policy shall apply in all respects to
the insurance granted by this exclusion save in so far as the
same may be expressly varied by the above Special
Conditions.
(3) The Special Conditions herein shall apply only to the
Insurance granted by this extension and the Conditions of
the Policy shall apply in all respects to the insurance granted
by the policy as if this Endorsement had not been made
thereon.”
29. From the reading of the aforementioned provisions of the policy
document, specification and definitions mentioned and appended
along with the policy, the following position can be discerned:
a) From the reading of the wording the main clause/ clause 1 along
with the title of the policy, it can be seen that the kind of the loss
which is insured in the present policy is “consequential loss”. The
O.M.P. No.1036/2012 Page 60 of 196
main clause/ clause 1 providing for the insurance states that the
company agrees (subject to the special conditions and
exclusions contained herein or endorsed or otherwise expressed
hereon and also to the conditions and exclusions contained in
the Fire policy covering the interest of the insured in the property
at the premises)…….. be destroyed/damaged by the perils
covered and the business carried on by the insured at the
premises be in consequence thereof interrupted or
interfered with , the company will pay to the insured in respect of
each item in the schedule hereto the amount of the loss
resulting from such interruption or interference in
accordance of the with the provisions contained herein . The
careful reading of the clause would show the wordings used in
the clause providing the liability of the company is towards the
“business interruption in consequence of the damage by the
perils covered” and/or loss resulting from such interruption or
interference. The use of the wordings “in consequence” or “loss
resulting from” indicates that the kind of the loss payable under is
the insurance is the consequential loss which is the on account
of the damage or destruction to the property or any part at the
premises for the purpose of the business by the perils covered.
The consequential loss is thus has to have some realistic nexus
with the business interruption. The said loss thus has to have
proximate reality and/or in real likelihood to be suffered by the
insured in order to be categorized or called as consequential loss
and not the one which is merely favoring the insured on account
of higher valuation.
O.M.P. No.1036/2012 Page 61 of 196
b) The reading of the first proviso to the operative clause would
show that the damage is caused at any time after the payment of
the premium during the period of insurance named in the
schedule or of any subsequent period of which the insured shall
have paid and the company has accepted the premium required
for the renewal of the policy. The period of the policy for the one
nd st
year from 2 March, 2007 to 1 March, 2008. The damage has
to occur within the said period only. There is an indemnity period
which is prescribed which is for the period of 6 months from the
date of the occurrence of the damage during which the results of
the business shall be affected in consequence of damage. The
rationale behind the distinction of indemnity period from the
period of the policy is that liability of the company is
circumscribed by the consequential effect on the business or
interruption to be shown on the business on account of the
damage during the indemnity period and not beyond the same
though the damage may occur during the validity of the policy
and basing upon which the indemnity period shall be
ascertained.
c) The reading of clause 4 of the proviso to the main clause shows
that in no case whatsoever shall the company be liable in
respect of any claim under this policy after the expiration of one
year from the end of the period of the indemnity or if later. The
wordings used in proviso clause 4 is “period of indemnity” is itself
indicator to the fact that the policy is intended to indemnify the
losses that too consequential losses arising out the damage due
to perils insured.
O.M.P. No.1036/2012 Page 62 of 196
d) The reading of definition of indemnity period would reveal that
the period commences with the occurrence of the damage and
ending not later than six months thereafter during which the
results of the business shall be affected in consequence of the
damage. The said definition again reinforces the belief that the
policy is intended by the parties for the purposes of the
indemnification and that for the occurrence of the business
interruption or interference in consequence of the damage during
the period of 6 months from the damage. The use of the words
“in consequence” of the damage is likewise indicator towards
consequential loss.
e) Another thing which is obvious after reading of the definition of
the indemnity period is that the results of the business shall be
affected during the indemnity period only. Thus, the indemnity
period is kind of cut off period which delimits the cover of the
policy and the liability thereof towards the business interruption
which has occurred during this indemnity period by way of
showing the results of the business having been affected in
consequence of the damage. It is essential to discern this
position in order to indentify as to how one has to show loss of
the profits during the indemnity period. The results of business
cannot be said to be effected during the indemnity period in
case the said results are not shown to have adversely
effecting the business on account of the damage caused in
this period but somewhere postponed which cannot be
forecasted in any manner which shall be seen later on in the
O.M.P. No.1036/2012 Page 63 of 196
judgment. At this stage, it is noteworthy to mention the
definition of the indemnity period.
f) The reading of the main clause of the policy alongside the other
clauses would show that the company liability is towards
“business carried on by the insured….. in consequence thereof
interrupted or interfered with”. This is again clear when the
definition of the indemnity period also use the wordings “the
period during which the results of the business shall be affected”.
g) For the purposes of assessment of the business interruption, the
mode of the computation is prescribed under specification C
annexed with the policy document which is on the basis of the
calculation of the gross profits. The term gross profit is defined
as the amount by which the sum of the turnover and the amount
of the closing stock shall exceed and the sum of the amount of
the opening stock and the amount of the specified working
expenses.
The said assessment is logical in nature in as much as
the gross profit of any business without deduction of the
expenditure/ and other deductions which is called net profit
would at least reflect the business done by any enterprise during
the period.
h) The computation of the gross profit is provided on the basis of
the reduction in turnover. The definition of the turnover provides
the money paid or payable to the insured for the goods sold and
delivered and for the services rendered in the course of the
business at the premises. The computation of the gross profit is
arrived at on the basis of the assessment of the reduction in the
O.M.P. No.1036/2012 Page 64 of 196
turnover/ price for which the goods ought to have been sold but
for the damage and multiplying the same with the rate of the
gross of profit. This is again logical in commercial sense in as
much as the gross profit as we have seen above would atleast
indicate the business done by the enterprise. If one would have
to assess the business interruption, then one has to find out the
gross profit which ought to have been earned by the enterprise in
case there is no loss or damage during the interruption period.
This is done by notionally seeing the amount of the sales of the
enterprise of the last year for the same period which is called
standard turnover and after seeing the same, one comes to the
figure of the reduction in turnover. The said figure of the
reduction in turnover is thereafter multiplied with the rate of the
gross profit in order to find out of the gross profit which could
have been earned by the insured in case there was no damage.
i) There is a formula prescribed in specification C which provides
for the assessment of the gross profit in respect of the reduction
of the turnover and the other adjustments and reductions like
sum saved during the during indemnity period, other
circumstances clause in respect of the expenses of the business
payable out of the gross profit etc.
j) The computation of the gross profit simplicitor shall also not
suffice the purpose lead to the conclusion that it is loss of profit
during the indemnity period, the said gross profit computed
during the indemnity period thereafter be compared with the
standard turnover and annual turnover of the business in order to
forsee the possible loss of profits and thereafter the deductions
O.M.P. No.1036/2012 Page 65 of 196
are made including under “other circumstances clause” which
are towards the circumstances other than that of the damage as
a result of peril in order to arrive at the realistic figure of the loss
of profits/ business interruption as against notional one. This is
due to the reason that the insurance policy is aimed at
recompensing the consequential loss which is direct
consequence of the damage as a result of the peril and not for
the losses suffered on account of the other circumstances like
bad weather, business crunch etc.
k) The reading of the entire scheme of Specification C and the
wordings used therein would show that the insurance under the
item No.1 is limited to the loss of gross profit which is due to
the reduction of the turnover and increase in the cost of the
working. Thus, the entire scheme of the calculation of the loss of
profit is based on the assessment of the gross profit and its loss
thereof on account of the damage. The reading of the later
clauses of the policy document providing for the output basis
would also show that the gross profit is calculated on the basis of
value of the production as against the reduction in the turnover.
Thus, in order to assess the loss of profits arising out the
business interference, every endeavor is made for the
assessment of the gross profit during the interruption period/
indemnity period in view of the formulae provided/ annexed
herewith the policy document and thereafter to forsee its effect
on the business during the indemnity period due to damage
caused. This is due to the reason that one has to ultimately
arrive at the business interruption or interference which can be
O.M.P. No.1036/2012 Page 66 of 196
reflected from the gross profits which is sale of the goods or
services done by the enterprise or by any other mode during the
indemnity period.
l) The reading of the specification J provides that it is agreed and
declared that wherever found necessary, the term “output” may
be substituted for the term “turnover” and for the purposes of
“output” shall mean that the sale value of the goods
manufactured by the insured in the course of the business at the
premises. This clause provides an alternative method of the
assessment of the gross profit which is on the basis of the
reduction of the output as against the reduction in the turnover.
The existence of this clause coupled with the wordings
“whenever found necessary” raise a question of the desirability
or necessity as to when this clause would be pressed in to
service which shall be seen later part of the discussion.
m) The reading of clause 13 would show that in adjusting any loss,
the account shall also be taken to the shortage in turnover due to
the damage is postponed and is being maintained from the
accumulated stocks of the finished goods in the insured
warehouse. The clause essentially provides that in case there
exists a reduction in turnover which is maintained by selling of
the accumulated stocks from the warehouse of the insured, the
account shall be taken in adjusting the said loss for assessment
of the reduction of turnover.
Upon reading of the terms of the policy document and
analyzing the import of the terms used in the policy which are
germane to the present controversy, Let me now deal with the
O.M.P. No.1036/2012 Page 67 of 196
various aspects in this regard which fall for consideration as an
unanswered questions by the arbitral.
The Contract of FLOP/Business Interruption Insurance as
contract of indemnity .
30. As noted above that the impugned award based the finding in
paragraph 67 for awarding the sum of Rs. Rs.34,70,55,231/- in the
claim no. 1 as loss of profits computed on output basis by observing
that the valuation of the loss when computed on output basis is
coming to be higher than that of the turnover basis. Further, the
learned arbitral tribunal also rejects the submissions of the petitioner
herein/ respondent therein in paragraph 69.5 that the business
interruption insurance/ FLOP policy is a contract of indemnity by
observing that “it is not acceptable in law”. Likewise on the facts of
the case, the claimant’s surveyor/ Mr. R. Srivatsan/CW3 during his
cross examination in answer to the questions 62 and 69, 72, 73, 74
also maintained the position that the business interruption
insurance/FLOP is not the indemnity policy but is policy driven by the
definitions and can provide higher and smaller loss as per definitions.
All this clearly goes on to show that the arbitral tribunal by making the
observations that the computation of the loss which is higher in
valuation is required to be preferred over the computation and
simultaneously rejecting the plea that the indemnity principle is
intrinsic to all insurance contracts has in effect mixed up with the
concept of the indemnity underlying the insurance contracts and/ or
has tampered with the same. The question then arises as to whether
the policy of the business interruption insurance/ FLOP is a contract
of the indemnity. The respondent though in the written
O.M.P. No.1036/2012 Page 68 of 196
submissions argued that this question is non issue as the
respondent maintains the position is that the business
interruption insurance is the contract of indemnity. I find that the
said submission of the respondent is misconceived as the
respondent fails to realize that the arbitral tribunal renders the
contradictory findings in paragraph 69.5 as noted above.
Further, the arbitral tribunal proceeds to approve the report of
the surveyor Mr. Srivatsan who computes the losses under the
policy document on the premise as if the said policy is not of
indemnity but to provide maximum amount to the respondent
which is clear from his cross examination reproduced below.
Thus, the arbitral tribunal clearly gave a nelson’s eye to the
principle of indemnity and approved the report of the surveyor
who computes the losses on erroneous premise and belied and
also renders finding that it is not acceptable in law that the
indemnity principle is intrinsic to all insurance contracts. Under
these circumstances, the change of the position by respondent
today that it also believes that the business interruption
insurance policy is a contract of indemnity does not absolve the
court’s duty to examine as to whether the arbitral tribunal
applied the principle of indemnity or not. Thus, the issue of
indemnity indeed arises for consideration in the present case on
account of non application of the said principle by the tribunal
and rendering contradictory findings on the same . I find that both
in law as well as on the facts of the present case, the business
interruption policy is the contract of indemnity and my reasons for
arriving at the said finding are as follows :
O.M.P. No.1036/2012 Page 69 of 196
a) The business interruption insurance contracts or fire loss of the
profit policy like other contracts of insurance are no exception to
the applicability of the principle of indemnity. The said policies
are clearly aiming at indemnifying the insured and not to allow
the insured to earn more than the suffering of the loss. This due
to the reason that the term consequential loss of profit as a term
itself suggests that there has to be an establishment of the loss
of the profit on account of the business interruption as a result of
the damage. Thus, the establishment of the loss is a condition
precedent. There are number of the case laws indicating that the
business interruption insurance is a contract of indemnity.
Even in the case of City Tailor v. Montague Evans ,
1921 Loyds Law Reports, 394, decided by the Court of Appeal,
which the respondent herein/claimant before the arbitral tribunal
relies upon heavily to support the view that the output basis of
assessment of loss of profits should be applicable in the present
case, it was clearly laid down in the opinion expressed by Lord
Atkin (as he then was) that the business interruption insurance is
a prima facie a contract of indemnity. In the words of the Lord
Atkin, it was observed thus :
“This result in a contract which prima facie is one of
indemnity, appears unreasonable and though
undoubtedly the contract may be framed so as to give
plaintiffs the right claimed one is bound to examine such
a suggested contract with some care.”
From the reading of the aforementioned observations of
Lord Atkin in the case of City Tailor (supra), it is clear that the
even the valued policy where the loss of the profits are valued
O.M.P. No.1036/2012 Page 70 of 196
continue to be the policy of indemnity and it merely discharges
the insured to compute the loss.
Likewise, In the case of Coalex Pty. Ltd. v Commercial
Union Assurance Company of Australia , decided by Supreme
rd
Court of New South Wales by Wood J on 23 July 1986
available on lexis-nexis which was a case relating to business
interruption insurance and has been discussed in detail later in
this judgment under separate head. In the said case, learned
single judge Wood J had observed that the business interruption
insurance is a contract of indemnity by placing reliance on the
decisions passed by Queens Bench Division in the case of
Castellian v. Preston in the year 1882 by Brett J. In the words of
the Wood J, it was observed thus:
“In relation to a policy of indemnity, as Windeyer J said
(at 104): "An assured is not entitled to recover the
amount specified in the policy unless it represents his
actual loss." The fundamental rule was stated in
Castellain v Preston (1882) 11 QBD at 350, by Brett LJ
at 386: " In order to give my opinion upon this case,
I feel obliged to revert to the very foundation of
every rule which has been promulgated and acted
on by the Courts with regard to insurance law. The
very foundation, in my opinion, of every rule which
has been applied to insurance law is this, namely,
that the contract of insurance contained in a
marine or fire policy is a contract of indemnity, and
of indemnity only, and that this contract
means that the assured, in case of a loss against
which the policy has been made, shall be fully
indemnified, but shall never be more than fully
indemnified . That is the fundamental principle of
insurance, and if ever a proposition is brought
forward which is at variance with it, that is to say,
O.M.P. No.1036/2012 Page 71 of 196
which either will prevent the assured from
obtaining a full indemnity, or which will give to the
assured more than a full indemnity,that
proposition must certainly be
wrong ." (Emphasis Supplied)
The circumstances in which a policy might be
construed as a valued policy were examined in Wilson
v Nelson (1864) 33 LJ KB 220, from which it appears
that, in general ,a clear intention will need to be
conveyed by the language of the policy before
such a conclusion will be reached .
(Emphasis supplied)
Unmistakably, it appears to me, the present policies
are those of indemnity. Not only is the promise by
the insurers one "to indemnify" the insured for
material damage or consequential loss, but the
property insured is defined in terms of "loss of
gross profit" and the wording in S2 Item 1 relates
to "Actual Loss sustained by the Insured". There
are other clear indications pointing to this
conclusion in the deduction from increased costs
of working of any sums saved (p17), the co-
insurance clause (p24) and the due diligence
clause (p26). ” (Emphasis Supplied)
The decision of Wood J was affirmed by the Court of
th
Appeal in a separate Judgment rendered on 7 June, 1988.
Thus, as a matter of law, the business interruption insurance is a
contract of indemnity though the true intention is to be deduced
from the reading and construing the policy document which if
done in the present case would also lead to the same conclusion
that the policy in the instant case is a contract of indemnity.
The above analysis became necessary in order to show
that the contract of business interruption insurance is a contract
O.M.P. No.1036/2012 Page 72 of 196
of indemnity. Otherwise, there are several judgments passed by
our own Supreme Court in the field of insurance law approving
the same very principle which is fundamental to the insurance
law. (For Reference please see Union of India v. Sri Sarda
Mills , (1972) 2 SCC 877 and United India Insurance Co Ltd v.
Kantika Colour Lab , (2010) 6 SCC 449)
b) Upon the facts of the case, Wood J in Coalex (supra) observed
that the reading of the policy suggests that there are clear
indicators as to indemnity by employment of the language “actual
loss” and the words “to indemnify” used in the policy document
besides other. In facts of the present case, from the reading of
the clauses of the policy document as done above, it is clear that
there are clear indicators that insurance policy in the present
case is intended to indemnify the insured. The clause like
deduction from the increased costs of working of any sums
saved during indemnity period is also present in the policy
document of the present as in the case of Coalex (supra) which
is indicator as to indemnity based on actual loss. It has been
discerned above upon the plain reading of the clauses of the
policy document that the loss which is recoverable is arising out
of the interference or interruption of business resulting from the
damage. The policy document provides for the indemnity period
which is again an indicator that the insurance policy/FLOP is
intending to indemnify the insured and not to provide any higher
valuation of the loss of the profits.
O.M.P. No.1036/2012 Page 73 of 196
On facts, even the claimant/respondent’s witness Mr. Alok
Banerjee took the position that the company should be
reimbursed the actual losses as it has incurred while answering
the cross examination to the following questions :
“Q. Please turn to Q. No.91, can you tell the Hon’ble
Tribunal what do you mean by the term “more beneficial”?
A. By the term “more beneficial” I meant that the
company should be reimbursed for the actual losses it has
incurred.
…
Q. From your answer to question No.91 will it be correct
to infer that more beneficial according to you would mean
indemnity?
A. Yes, the actual losses ought to be indemnified.”
From the above discussion, it is beyond cavil of doubt that the
business interruption insurance or FLOP is a contract of indemnity as
a matter of law like other insurance contracts and the said position is
also clear from the construction of the policy and the attendant
circumstances as the respondent also took the same position.
Thus, to say that the principle of indemnification has no
application either from the claimants/ respondents surveyor’s end or
finding from the tribunal’s finding on the facts of the present case is
factually and legally incorrect and against the fundamental policy of
law involving the insurance contract rendering the award contrary to
public policy as per the provisions of Section 34 of the Arbitration and
Conciliation Act, 1996.
O.M.P. No.1036/2012 Page 74 of 196
Desirability and Adoption of Mode of the Assessment of Loss of
Profits
31. The question now arises as to which of the mode of
assessment of loss of profits/ method of computation of the loss of
profits is applicable to the facts of the case and when it is desirable to
apply the alternative basis of assessment of the loss of profits as per
specification J which reads that “whenever found necessary”. I have
already answered one of the connected question that may also aid in
the answering the larger question on desirability which is the
desirability and adoption of the method of assessment of loss of the
profit is a mixed question of fact and law and not merely the question
of fact. The arbitral tribunal in paragraphs 65.12, 66 and 67 of the
impugned award proceeded to adopt the alternative basis of
assessment of loss of profits merely because the tribunal found it
necessary on facts and in the said enquiry, the tribunal analyzed the
facts, pleading presented before it and evidence adduced by the
parties on that basis came to the conclusion that it is desirable to
adopt the alternative basis method of computation of losses in the
facts of the fact of the case. I find that the said question is not merely
dependent upon the pleadings or evidence of the parties but is on the
other hand is a mixed question of fact and law as the desirability of
the method to be adopted for computation of the losses has to be
ultimately tested upon the touchstone of the well settled principle of
law of insurance which is indemnity principle and other principles
which is that the insurance indemnifies for the losses for the
proximate cause of the perils insured and not others. In that way, the
question of desirability and adoption of the method for assessment of
O.M.P. No.1036/2012 Page 75 of 196
the loss is a mixed question of fact and law and not pure question of
fact.
32. The first limb of the question which is required to be answered
is that how this desirability is required to be determined. In tribunal’s
view, it is the tribunal to determine whether it is necessary to go to the
alternative mechanism provided by the parties in the contract as per
the finding of paragraph 66 are no reasons in law, the tribunal in
paragraph 67.6 observed that it finds it very necessary to go to the
alternative basis clause for the assessment of loss. I find that the said
discussion done in paragraph 66 to 67.6 and thereafter towards the
necessity to adopt the alternative assessment of loss of profits as per
specification J is not objective assessment of desirability to adopt the
alternative basis approach for assessment of losses. Nor the
reasonings provided thereafter by the tribunal either in the form of
criticism to the testimony of surveyor of the petitioner M/s Adarsh and
Associates or the other reasoning as to higher valuation in case the
computation is made on output basis is an answer to the said
question or provide any reason for adopting the alternative approach.
This court is thus proceeding to determine the said question as the
parties dispute the desirability of the adoption of alternative mode of
assessment in the present case by seeing as to how the necessity or
desirability of the adoption of the mode of assessment is determined.
33. In order to answer the question as to when it is desirable to
adopt the alternative basis of assessment of losses, it is always upon
the court or tribunal to answer “whenever found necessary” as per the
clause where there exists a dispute between the parties as to
O.M.P. No.1036/2012 Page 76 of 196
whether it is necessary to adopt the alternative basis of assessment
of losses or not. For adopting the said view that it is jury question or
decision of the tribunal, no further legal analysis is necessary to be
done as it is obvious that once there exists a dispute, it is for the court
or tribunal to answer the said question. The tribunal view which is
deciding the desirability on the necessity to adopt the alternative
basis of assessment of losses in business interruption losses
cases must however adopt a judicious approach. The said
judicious approach must have some objectivity in it which
reflects the necessity to compute the loss of profits by adopting
an alternative mode of assessment. The said objectivity in the
decision of “whenever found necessary” would only come when
the tribunal provide the reasons for adopting the said approach
which are justifiable in facts and law and not the ones which are
unconnected thereto. Thus, it is though correct that it is for the
court or tribunal to determine the desirability of adopting the
alternative mode of assessment of losses but the said
determination must adopt some judicious approach .
34. The said judicious approach can be adopted by the tribunal by
analyzing the host of the factors including construing the policy
document, comprehending the requirements of adopting and
preferring one particular method of assessment of loss of profits over
the other, understanding the nature of business of the claimant
company and the tenability of the pleas raised or position taken by
the parties whether correct or incorrect, discussing the pre-requisites
for the applicability of particular approach or method and whether one
O.M.P. No.1036/2012 Page 77 of 196
particular method of assessment of loss of profits is befitting or
justifiable in the given circumstances or not. All this enquiry is
missing from the tribunal’s decision making in the present case
in the impugned award on the basis of which it can be said that
the tribunal has adopted any such judicious approach in
preferring one particular method of assessment of loss of profit
over the other. That is also the reason why I do not agree with
the contention of the learned senior counsel for the respondent
Mr. Tripathi that the tribunal has adopted one of the two
plausible views. In my view, the tribunal has not even justified
while adopting a view as to why it is adopted that particular view
and also whether it is plausible one in the given case or not
when the dispute was raised before it that it is not plausible in
the given facts by the petitioner herein . Such a case like the
present one is not the case of two views about the matter but is
the case involving the reasons which contrary to well settled
principles of law relating to insurance contracts and the settled
principles governing its operation.
35. Coming back to the second limb of the question which is when
it is desirable to adopt the alternative method of assessment of loss
of profits in the business interruption insurance case, no straight
jacket guidelines can be laid down by the court. Suffice it to say that
the answer to the said question can be given by looking into overall
attendant circumstances in the case which can be summarized in the
following steps which are inclusive but not exhaustive :
O.M.P. No.1036/2012 Page 78 of 196
a. Firstly by construing the policy document itself in order to
understand the true nature of the policy, ascertaining intent of
the parties from the policy and analyzing the other clauses
peculiar to the policy;
b. Secondly by understanding the pleas raised by the parties in
support of the desirability of one method over the other and
also the factual position in the case including the peculiarities
attached to the business of the company if any;
c. Thirdly by analyzing the requirements in law or other pre-
requisites in adopting and preferring one approach or method
of calculation of losses of profit over the other;
d. Fourthly by applying the said principles to the facts of the
case and see as to whether the said requirements are fulfilled
in the facts of the case;
e. Fifthly by finding out the most desirable method of
assessment of loss of profits by posing the question as to
which of the method of assessment of losses can truly and
most appropriately indemnify the insured in the given case.
36. Let me now evaluate the desirability of the method of
assessment of the loss of profits step by step in the following
manner :
a) Firstly, I have already analyzed the clauses of the policy
document in detail and I shall briefly discuss the position
discerned in the form of following pointers:
O.M.P. No.1036/2012 Page 79 of 196
The mode of computation of the business interruption is
based on the computation of gross profit as per
specification C. This is due to the reason that one has to
calculate the loss of profits which may indemnify towards
the business interruption caused as a result of the
damage during the indemnity period.
The term gross profit is defined under the definition clause
which is the sum of the turnover and the closing stock.
The gross profit is computed on the basis of reduction of
turnover as per the formula provided under the
specification C appended to the policy.
The shortage of the turnover during the indemnity
period computed after analyzing the standard turnover is
multiplied or applied to the rate of the gross profit in order
to arrive at the figure of the loss of profits and thereafter
such adjustments as mentioned in the formula are made.
The indemnity period is the period beginning with the
occurrence of the damage and ending not later than 6
months thereafter during which the results of the
business shall be affected in the consequence of the
damage . The indemnity period is thus a period which
delimits the liability of the company to indemnify the
business interruption occurring the during the said period
only as a consequence of damage and not beyond the
same. Thus, the results of the business interrupted or loss
O.M.P. No.1036/2012 Page 80 of 196
of profits are required to be shown during the indemnity
period only and not beyond the same.
Specification J provides that it is agreed and declared that
wherever found necessary, the term “output” may be
substituted for the term “turnover” and for the purposes of
“output” shall mean that the sale value of the goods
manufactured by the insured in the course of the business
at the premises. This clause provides an alternative
method of the assessment of the gross profit which can be
by operation of this clause can be computed on the basis
of the reduction of the output as against the reduction in
the turnover by replacing output in place of turnover in the
formula provided in specification C.
All these pointers amply explain the nature of the policy
which is towards the business interruption caused as a
consequence of the damage occurred during the indemnity
period and the conditions and exclusions on the basis of which
the liability of the company/ insurer is decided. The validity of the
claim under the policy is dependent upon the occurrence of the
damage during the term of the policy, for which the premium is
paid to the company/ insurer which is evident from the first
proviso to the policy. Likewise, the liability of the of insurer
company towards business interruption is limited to the
results of the business having been affected during the
indemnity period in consequence of damage . (This can be
evinced from the reading of definition of indemnity period and the
O.M.P. No.1036/2012 Page 81 of 196
formula which provides for the computation of the gross profits
on the basis of the shortage of the turnover which also talks
about the indemnity period). All this position discerned from
the policy as mentioned in this paragraph as well as the
pointers above contribute towards arriving at the
determination as to when it is desirable to adopt the
alternative basis of assessment of loss of profits and in
what circumstances which shall be seen in the subsequent
steps below. (Emphasis supplied)
b) Secondly, let me now evaluate the case of both the sides
towards the desirability and adoption of the mode of assessment
of the loss of profits by analyzing the arguments raised by both
the parties in support of the particular method of assessment of
losses. The same can be outlined in the following manner:
The petitioner contends that the reduction of the turnover
is one of the most recognized and credible mode for
assessment of loss of profits and thus the same should be
applicable. There is no need to apply for the alternative
mode of assessment as the turnover basis itself would
reflect the results.
The petitioner contends that the results of the output
method and reduction in turnover method should be more
or less the same with minor variation. The petitioner gives
the rationale that the possible variation between the
computation of loss of profits done on output basis vis a
O.M.P. No.1036/2012 Page 82 of 196
vis the turnover basis. The said rationale is explained in
the following manner:
“(i) P 20 of Mr. Srinivasan’s affidavit : “I state that I
do not agree with Mr.Srivatsan that working of the
claim on output and turnover basis would give
different results. In my considered opinion, both the
methods would give more or less the same results
with minor variation, as rate of gross profit on output
and turnover would vary. However, in a running
plant, where the insured has been able to sell
whatever it produces, the variation will be minor”.
(ii) P 25 of Mr. Srinivasan’s affidavit : “I do not
agree with the claimant that the loss ascertained from
‘output basis’ will differ from ‘Turnover basis’. In my
opinion, the loss will nearly work out to same
(variation of about 5% to 7.50%) on both the bases, if
suitable allowance is made for depletion of stocks
under Turnover basis; but subject to condition that
the Insured has been able to sell whatever they
produce. The variation is on account of rate of gross
profit, which will differ on ‘Output basis’ vis-à-vis
‘Turnover basis’.”
The petitioner also contends that if the respondent/
claimant is simply accumulating stock and has
accumulated to the extent that can reasonably keep up
the turnover even if the production was stopped, then the
respondent/ claimant would not be entitled to claim the
loss of production as there would no business interruption.
The respondent/claimant in such a case would be entitled
to claim the amount of stock utilized to keep up the sales
and the turnover. This as per the petitioner can be seen
from reading of the stock accumulating clause contained
O.M.P. No.1036/2012 Page 83 of 196
in the policy. Therefore, as per the petitioner, the turnover
basis is appropriate index applicable to assess the loss of
the profits.
On the contrary, the respondent/claimant contends the following :
That the respondent/claimant had specifically written to
th
the petitioner by its communication dated 28 February,
2007 to incorporate the alternative basis clause. It is
contended that the respondent consciously requested for
the insertion of the alternative basis clause considering
the nature of the business which is cyclical in nature.
The respondent has contended that given the cyclical
nature of the business it has, the output method can
provide more fair and accurate assessment of loss.
The respondent has relied upon commentaries explaining
the desirability of alternative basis clause when there is no
link between the production and demand and the nature
of business is cyclical in nature. The said authorities are
reproduced as under:
“(a) To further understand the implications of the
above clause it will not be out of place to cite certain
leading commentaries on LOP policies generally.
Learned author G.J.R. Hicknott at page 225 has stated
that :
“The desire for this clause arises from the problem
of a short interruption of production and the
practical difficulty of tracing the fall in turnover
therefrom especially where large stocks of
O.M.P. No.1036/2012 Page 84 of 196
completed products are held. This is particularly
true where production of only one product out of
many is interrupted and where the turnover is very
large. It also applies to plants which are run on a
continuous basis irrespective of demand.
To meet this it has been common practice for
insurers and adjusters to calculate the loss on a
sales value of output basis, provided that the
output could not be made up within the indemnity
period and thus minimize any loss of turnover or
output.”
“…For example where, if there had been no
damage a plant would have still been kept in
operation, the effect of the incident is to reduce the
output over a period resulting probably in a
combination of lost turnover and run down or run
up of completed stocks. If the stock level is up, but
less than what it would have been if the damage
had not occurred, the business has been affected
by such damage. The quantum is the loss arising
from not having such extra stock and the realizable
sale value of it less the cost of the raw material and
variable production costs may be the best
estimate.” (Emphasis Added)
The Insurance Institute of India has stated in its Manual
called “Fire and Consequential Loss Insurance” (IC-57)
Revised Edition 2010 as follows :
“To conclude, the output basis is useful in the following
circumstances :
- When one or more standard products are
manufactured where each unit of production can
be said to earn a regular proportion of gross profit.
- Where there is efficient cost accounting system to
determine the overall cost per unit of production.
O.M.P. No.1036/2012 Page 85 of 196
- Factory is working at a constant rate of production,
sales show a definite seasonal tendency or are
liable to irregular fluctuations.
- Where there is appreciable time lag between
production and sales, there can be interruption of
production without any immediate or corresponding
reduction in turnover.”
37. As per the respondent, the said factors are fully applicable to its
case. It is stated that the respondent products are all standard
polyester based products. It is stated that the respondent maintains
the efficient cost accounting system by which it can be determined
what the overall cost per unit of the production would be. It is stated
that the respondent’s factory works at the constant rate of the
production and the sales are liable to be irregular and fluctuations
and fourthly, there is a time lag between the production and sales.
It is contended by the respondent that it has shown the
following evidence in order to show the cyclical nature of the
business :
(i) Para 20 Evidence by way of Affidavit of Mr. Alok
Banerjee.
“21. I state that, it was brought to the notice of the
respondent that :
(a) ….
(b) ….
(c) given the cyclical nature of sales in the
claimant’s business and late sale of the excess
production during an upward cycle, in the present
case, the computation of loss should be based on the
production and not turnover.”
O.M.P. No.1036/2012 Page 86 of 196
(ii) At Para 25 page 391, Mr. Alok Banerjee state that
“The methodology used by the Surveyor was not in
consonance with the Contract for Insurance :
Firstly, the output of POY is almost nearly
constant whereas the sales/turnover varies from time
to time, as the POY industry has cyclic ups and down
and the period of cycle is not fixed. Therefore, the
production and sales have no correlation and as per
the Alternate Basis clause, the correct basis for
calculation is the production.”
(iii) Further, during the cross examination of Mr.Alok
Banerjee, he stated the following at page 409 Vol. 3 :
“Q 82 What are the ups and downs in the sales of products
as mentioned in para 5 of your affidavit?
A. As I have explained earlier the business ups and
downs cyclical. The sales move ups and downs
erratically.
Q 83 Based on your company experience are such ups
and downs not foreseeable?
A. Our experience shows that it is not foreseeable and
since the movement are erratic and do not follow any
set pattern.
Q 84 In such a contingency how do you plan your
inventory?
A. Our production is static and we keep manufacturing
our products. The finished products are stored till
they are sold off. Our past experience is that in the
due course the finished products are sold out.”
(iv) The above evidence clearly shows that the sales
pattern of the claimant is cyclical in nature and that
the claimant does not stop production despite having
O.M.P. No.1036/2012 Page 87 of 196
stocks. The above submission is also supported by
the following evidence, where Mr.Srivatsan in his
cross-examination at page 445 Vol. 3 has stated :
“Q102. Please see answer to Q 101, what is the
management philosophy of the claimant and what
was the availability of working funds?
A. I have studied the production and sales trends of the
insured for the last five years before the loss and
found that they have never stopped the production
based on inventory build up. Based on this, I came to
the conclusion that the management philosophy of
the claimant was to keep producing, store the same
and sell the same when the market is good.
Obviously, the claimant had enough working funds to
carry out this management philosophy based on the
historical data.” (Emphasis added)
(v) The claimants in good faith submitted last five years
production and sales data to M/s Adarsh Gupta &
Associates which further substantiated the Claimant’s
claim. In particular, the last five years monthly sales
and production data clearly demonstrates that :
(a) The Claimant has always produced on a
continuous 24X7 basis.
(b) Regardless of the level of sales or the level of
inventory the Claimant continues to produce and
run its CPs.
(c) The claimant has never stopped production
because stocks are high.
O.M.P. No.1036/2012 Page 88 of 196
This data is set out at pages 124-128 of Vol. 2A and has
also been annexed by M/s Adarsh Gupta in their final
Survey report.
(vi) The above-mentioned sales and production data
support the claimant’s contentions :
(a) For example, that from June 2003 to March
2004, the production was static.
Notwithstanding, that in February 2004, net sale
had fallen to 17, 545 MT,but still the Claimant
produced 25, 488 MT in March 2004.
(b) Production continued in full swing between April
2004 and December 2004. This is
notwithstanding that sales dipped to 18,292 in
the month of November 2004, whereas the
production in the month of December 2004
remained static at 21,108 MT.
(c) Similarly, between April 2005 and November
2005, production was stable notwithstanding that
sales dropped to 12,948 MT in September 2005.
(d) Between April 2006 and December 2006 the
maximum produce by the claimant was of 34,317
MT however the sales dropped to 14,165 MT.
Yet, the claimant continued its production in
January 2007 and produced 33606 MT of yarn.
O.M.P. No.1036/2012 Page 89 of 196
(e) Production increased during the months from
April 2007 to October 2007, since CP-4 was
commissioned. Production was again stable,
however there were fluctuations in the sales
pattern.
The above data clearly shows that the claimant
continues to produce regardless of its sales patterns.
(vii) The above clearly demonstrates that :
(a) In the last five years the Claimant has never shut
down its plant because of inventory build up or
erratic sales.
(b) The Claimant was producing in full swing
immediately prior to the fire incident.
(c) The Claimant continued to produce during the
interruption period as using CP-4 and CP-5.
(d) There was no intention or plan to shut down any of
the machines had the fire not taken place.
(viii) M/s Adarsh Gupta during his cross-examination
admitted that to his knowledge CP-2 and CP-3 were
fully functional and were producing till the date of the
incident. This shows that the claimants were
producing the goods and running CP-2, CP-3 CP-4
and CP-5 immediately prior to the incident.
O.M.P. No.1036/2012 Page 90 of 196
(ix) The following cross-examination of Mr.Adarsh Gupta
@ page 482 of Vol. 3 supports the above contention
of the Claimant :
“Q87. Were CP-2 and CP-3 fully functional and up
and running prior to the date of the incident?
A. Yes, they were functioning in their normal
course.
Q 74. During your visits did you notice whether CP-4
and CP-5 were shut down or functioning?
A. Yes they were functioning.
Q 91. Did you notice during your visit to the site that
goods manufactured by the claimant was
stored outside the claimant’s warehouse ?
A. Yes
Q 92. Am I right to suggest that this shows that the
claimant continued producing the goods
notwithstanding that the warehouse was full?
A. Yes, because claimant had only meager
storage capacity in the warehouse.
Q.70. Does the LOP policy specifically state that the
goods produced have to be sold during the
indemnity period?
A. No. It need not.
Q.103. Does the policy anywhere state that the stock
in hand should be all before the Alternative
Basis Clause could be invoked?
A. No. It need not.”
(x) The Claimant humbly submits that M/s Adarsh Gupta
and Associates have completely ignored the
O.M.P. No.1036/2012 Page 91 of 196
Claimant’s contention and overlooked all this
evidence set out above which clearly shows that the
claimant continues to produce regardless of inventory
levels or sales pattern. M/s. Adarsh Gupta completely
dismisses the Alternative Basis Clause in their interim
th
report dated 8 January, 2008, wherein in para 10.1
of their report, they state :
“10.1 insured submitted that provisional claim
on the basis of shortfall in production/output from
Plants CP-2 and 3, without properly accounting
the actual rate of gross profit, as per their last
audited balance sheet and as per other
provisions/standard basis specified in policy.
Insured argued that in view of ‘Alternative Basis
Clause’ attached in the policy; they are entitled
for settlement of loss on output basis. Similarly,
they also argued that in view of ‘Departmental
Clause’ their loss shall be assessed for the
output of the affected Plants i.e. CP-2 and 3.
However, we appraised Insured that keeping in
view of their sales trend and inventory position in
hand, before and after the incident, we don’t find
any merit/justification to carry out assessment of
loss on output basis. Similarly, in respect
Departmental Clause, also we did not find any
merit to consider plant-wise assessment of loss,
as all Plants are producing common products,
using similar raw materials and plant-wise
assessment would distort the spirit of the
assessment under LOP policy.”
The above shows M/s Adarsh Gupta fails to
appreciate that Claimant continues to produce
irrespective of their sales trend or inventory
position. ”
O.M.P. No.1036/2012 Page 92 of 196
38. As per the respondent, the said evidence shown by the
respondent would clearly establish that the business of the
respondent is such that the respondent continues to produce
irrespective of the sales trend or inventory position. Besides the
above, it is contended by the respondent for manifold reasons, the
petitioner’s surveyor has wrongly interpreted the alternative basis
clause and thus there exists a desirability to apply the alternative
basis clause in its favour.
39. I have gone through the submissions advanced by both the
parties towards the preference of one mode of assessment of loss of
profits over the other. I shall answer the said pleas/ submissions in
the subsequent steps after considering the legal position on the
subject. This is essential as some guidance is required from the
relevant authorities and case laws which have been decided on the
subject which will throw some light on the tenability of the pleas
raised by parties.
40. As I said that some guidance from authorities on the subject is
essential in order to answer the problem raised before the court, I
shall now proceed to discuss some relevant concepts which would
enable the court to proceed to answer the questions raised before the
court and act as a guideline to test the appropriateness of the method
or mode of assessment of loss of profits in a business interruption
policy case. The said concepts along with the commentaries are
discussed as under:
O.M.P. No.1036/2012 Page 93 of 196
Alternative basis clause and its option to convert to output basis
– It is indeed correct there are business interruption policies
wherein the wordings allow the calculation of loss following an
incident to be based on loss of production suffered and gives an
option in the hands of the insured to convert the turnover basis to
th
output basis. Riley on Business Interruption Insurance, 9
Edition, Sweet and Maxwell (hereinafter referred to as ‘Riley or
Riley on Business Interruption), which is an authority on the
subject recognizes the said option in the hands of the insured to
convert the computation of the assessment of loss of profits to
output basis but only when the wordings of the policies allow the
same. The learned author infact discusses the wordings of the
clauses wherein such options are available to the insured in the
business interruption insurance policies. The learned author
observes as under:
“(c) Option to convert to output
Some policy wordings allow for the calculation of the loss
following an incident to be based on the loss of production
suffered. The calculation of the output loss follows very
much along the lines of the reduction in turnover calculation
including application of the other circumstances clause.
Two example wordings are given below :
“In respect of any lost insured under Section 1 of
this Policy the Insured shall have the option to
convert the basis of settlement from Turnover to
output or such other basis as may more realistically
measure the loss. For this purpose output shall
mean the sale value of materials produced by the
Insured in the course of the Business as the
O.M.P. No.1036/2012 Page 94 of 196
Premises provided that only one basis shall be
operative in connection with any one loss”.
“At the option of the Insured, the term Output may
be substituted for the term Turnover, provided that
only the meaning of Output or the meaning of
Turnover shall be operative in connection with any
one event resulting in interruption if the meaning of
Output be used the Accumulated Stock Clause shall
be inoperative and the following memo shall be
added at the end of the definition of Rate of Gross
Profit :
‘If during the Indemnity Period, goods, shall be
manufactured or processed other than at the
Premises for the benefit of the business either by the
Insured or by others on behalf of the Insured, the sale
or transfer of such goods shall be brought into account
in arriving at the Output during the Indemnity Period.”
“Output shall mean the sale or transfer value, as
shown in the Insured’s books of goods manufactured
or processed by the Insured, to which such
adjustment shall be made as may be necessary to
provide for the trend of the business and for the
variation in other circumstances affecting the business
either before or after the Incident or which would have
affected the business had the Incident not occurred, so
that the figures thus adjusted shall represent as nearly
as may be reasonably practicable the results which but
for the Incident would have been obtained during the
relative period after the Incident.”
The main argument in favour of this alternative basis of
cover is that it can provide a more accurate assessment of
the loss suffered by an Insured in a business which seeks to
maximize its output from the plant in which it has invested.
Its application can prove difficult, however, if there are a
number of processes involved and only one is halted by an
incident. If the production process is lengthy, or stocks of
finished product are held strategically, the impact on
O.M.P. No.1036/2012 Page 95 of 196
turnover will be delayed and, a bit like ripples on a pond, will
be less pronounced as they spread out.
Against this type of cover, are the arguments that a loss of
production may not actually result in a loss of turnover,
either within the maximum indemnity period, or actually
result in a loss of turnover, either within the maximum
indemnity period, or at all. Thus no loss may actually be
suffered. The clause also provides an opportunity for the
insured to select against the Insurer. If there is a
demonstrably greater reduction in turnover on the traditional
basis insurers will be required to pay the higher figure. If,
however, the turnover loss is less than on the output basis,
insurers will pay on the (higher) output figures. In reality the
provisions of the standard business interruption wording are
sufficiently flexible to address both the above issues and
thus this type of cover is generally only available as per of
an engineering breakdown cover and, even then only rarely
included.”
41. From the above reading of the excerpts from Riley on Business
Interruption insurance, it is clear that peculiar to the wordings of the
policy, there lies an option in the hands of the insured to insist the
computation on particular method of assessment of loss of the profits.
However, if one sees the wordings of the specification J on the facts
of the case, it can be seen that the wordings of the alternative basis
clause no where gives any option in the hands of the respondent but
on the contrary reads “whenever found necessary”. Therefore, the
said necessity either are to be based on the agreement on both the
sides and if not then, the decision to the same vests with the
competent authority or court or tribunal where such dispute is
pending. That is an additional reason for me to arrive at the finding
that the decision on the desirability and need for the adoption of the
O.M.P. No.1036/2012 Page 96 of 196
alternative method of the assessment lies with the court or tribunal
based on judicious considerations.
Determining the adequate cover – It is equally essential for the
insurer and insured to determine consciously and carefully the
events covered in the policy so that the insured is adequately
indemnified for the given circumstances leading to loss of
business under certain peculiar conditions best known to him
and the insurer is paid the same level of the premium required
under the policy depending upon the events covered. In order to
fairly determine the cover required under the business
interruption policy, there are several aspects which fall for
consideration on which the decisions are required to be taken
including as to whether the cover should be sought for gross
profit or for increase in cost for working, what is the length of the
indemnity period, How the sum of the gross profit is calculated.
th
Riley on Business Interruption Insurance, 9 Edition, Sweet and
Maxwell, outlines the number of the questions which are required
to be asked in order to fairly determine the cover under the
business interruption insurance policy which as per the learned
author are the decisions required to be made while deciding the
cover. It has been observed by the learned author in the
following word:
“4.15 Determining the cover required
The remaining chapters of this section of the book
address the factors that are most likely to be relevant
when seeking to obtain business interruption insurance.
O.M.P. No.1036/2012 Page 97 of 196
There are a number of key decisions that need to be
made including, not necessarily in the order that follows :
1. Should cover be sought on an all risk basis or on
specified perils? If the former, which exclusions
should be bought back? If the latter, which perils
need to be included?
2. What income streams would be affected by an event?
3. Should cover be sought for gross profit, gross
earnings or for increase in cost of working?
4. What length of maximum indemnity period is
appropriate?
5. Should cover be sought on a declaration linked (non-
averg) basis?
6. How is the sum Insured/estimated gross profit
calculated?
7. What additional clauses are required?
8. What dependencies are there, e.g. on suppliers or
customers? What limits should apply to any
extensions of cover?
9. Are there any different types of cover available,
tailored more closely to the requirements of the
business?”
From the reading of the aforementioned paragraph from Riley
on Business Interruption Insurance, it is clear that there exists several
considerations for the purposes of determination of the cover in the
policy. The maximum period of indemnity or period of indemnity is
one such consideration. The aspect is relevant in order to
comprehend the next concept which is based on the maximum
indemnity period.
O.M.P. No.1036/2012 Page 98 of 196
Role of Indemnity Period in the Business Interruption Insurance-
As underscored above at several places while analyzing the
insurance policy/ FLOP in the instant case, the indemnity period
has been distinctly defined under the policy which has a role to
play in order to determine the scope and extent of the cover
provided by the policy. The indemnity period is thus period
delimiting the liability of the insurer company to a specified
period defined in the policy as per the permissible wordings in
the policy document.
In UK, there exists a peculiar definition of indemnity
period which also incorporates the term named as “Maximum
indemnity period”. This dual use of the terms indemnity period
and within which there is extension available uptil maximum
indemnity period is consciously provided so that the insured at
the time of taking insurance can decide and prescribe the
maximum period for which the insured intends to have cover/
indemnification from the insurers end and the maximum
indemnity period can even extend beyond the time when the
business of the insured has been resumed to normal trading.
This has been explained in Riley on Business Interruption
Insurance lucidly in the following word:
“7.2 Definition of Indemnity period
In the standard UK business interruption
specification, the definition of the indemnity period
reads,” The period beginning with the occurrence of the
incident and ending not later than the maximum
indemnity period thereafter during which the results of
O.M.P. No.1036/2012 Page 99 of 196
the business shall be affected in consequence thereof”
and is completed by a definition of the maximum
indemnity period which simply states the number of
months selected. The dual definition, is an example of
the careful drafting which applies throughout the
specification in order to express the exact intention of the
insurers.
It is important to note first of all, that the
indemnity period does not necessarily end when a
business is rehabilitated to the point of being able to
resume normal trading activities. Subject to the
maximum limit selected and stated in the definition
the indemnity period continues until the results of
the business are restored to normal, which may be
many months after the physical damage to buildings,
machinery and stock has been made good . Whilst
there is no definition of the term “results” this should be
taken to mean financial results and thus encompass not
just the turnover of the business, but also its costs.
Therefore, if the business continues to incur additional
expenditure by way of increase in cost of working once
turnover returns to pre incident levels, then the indemnity
period will extend as long as that expenditure is being
incurred, subject to application of the maximum
indemnity period. It is also conceivable that the costs of a
business may be reduced, e.g. if a more efficient
production process is introduced following an incident.
Again the results of the business are continuing to be
affected and thus the indemnity period is
extended. (Emphasis Supplied)
It should further be noted, that should an
incident cause an interruption of business the
indemnity period is not necessarily the same as the
maximum period during which indemnity may be
given, that is, the number of months which is
selected to be shown in the definition for any
particular insurance . It is the period, measured from
the date of the incident, at the end of which liability
ceases because the results of the business are no
O.M.P. No.1036/2012 Page 100 of 196
longer affected by the incident, subject to this period
not exceeding the insured maximum number of
months (“months” means “ calendar months” ,as in all
such contracts: vide the law of property act 1925
s.61). For example, in the case of an insurance with a
maximum indemnity period of 12 months if an
incident should occur and cause an interference
with the business for 15 weeks the indemnity period
will be 15 weeks. This point is also of special
relevance in connection with the time limit in the
claims condition-action by the insured. ”
(Emphasis Supplied)
42. The reading of the aforementioned excerpts from Riley on
Business Interruption Insurance, the following position can be
discerned :
i) That the indemnity period prescribed in the policy is dependent
upon the wordings provided in the definition and subject to the
wordings being flexible and incorporation of the concept of the
maximum indemnity period, the indemnity period can be
extended uptil the limit of the months or years provided in the
definition of maximum indemnity period. In the present case,
there is no maximum indemnity period which as a concept is
incorporated in the policy document. What is relevant at this
stage is to comprehend is that the indemnity period is largely
dependent upon the wordings of the policy which are germane in
order to ascertain whether it can be extended at all or not.
ii) That the indemnity period prescribed in the policy does not mean
that the insurer company shall be liable to indemnify the insured
for all this period irrespective of the business resumed to normal
O.M.P. No.1036/2012 Page 101 of 196
condition and is no longer affected by the incident. This can be
explained by way of an example like if there is an indemnity
period of 12 months starting from the date of the incident and the
business of the insured is affected only for one month. Then, the
liability of the insurer is limited to the period when the business of
the insured is interruption. This is obvious as the liability of the
insurer to indemnify against the business interruption caused
within the period of indemnity uptil the maximum period
prescribed in the definition and not for the entire period of
indemnity dehors the interruption period. In simple words, it does
not always hold true that the interruption period coincide with the
indemnity period and sometimes interruption may last for lesser
period though occur within the indemnity period.
Delayed commencement of the indemnity period but only in
certain cases where the language of the policy permits –
There exists a possibility wherein the terms of the policy, it
can be argued that there can be delayed commencement of
the indemnity period. Riley on the business interruption
insurance recognizes the said concept but goes on the state
that the terms of the policies should be flexible enough to
accommodate the delayed commencement of the indemnity
period. In the words of the author, it has been observed:
“Delayed start of indemnity period : There are
occasions when an incident occurs but the turnover of
the business is not immediately affected as a result.
However, it is difficult to predict when the
circumstances will be such as to cause this to happen.
O.M.P. No.1036/2012 Page 102 of 196
Thus in determining the length of the maximum
indemnity period required all assumptions regarding
the time that will be required to rehabilitate the
business should have, as the start date ,the assumed
date of any incident. The indemnity period is normally
defined as being “ the period relating beginning with
the occurrence of incident and ending not later than
the maximum indemnity period thereafter during which
the results of the business shall be affected in
consequence thereof.
The end of the indemnity period is thus determined by
the trading results of the business ( unless the results
are affected beyond the maximum indemnity indemnity
period when the limits of the period applies).It might
therefore be argued that the indemnity period should
not commence until the results of the business are
affected by the incident .Indeed such an argument was
submitted by the claimants in Loyaltrend Ltd v
Creechurch Dedicated Ltd (2010)EWHC 425 (Comm)
where subsidence caused damage to retail premises
occupied by the insured and which subsequently
resulted in water ingress that caused damage to trade
contents and tenants improvements.
Evidence of subsidence had first become apparent in
2003 where there had been minor ingresses of water
which had caused some damage to trade contents and
tenants improvements but had no apparent effect on
trading results. The subsidence damage became more
severe during the later stages of 2004.More serious
ingress of water occurred and trading results started to
be adversely affected, with a further deterioration
during 2005.
The policy in question only provided business
interruption cover in the event of damage to property
insured under the material damage section of the
policy. In particular event, this meant that damage to
the building itself would not trigger the business
interruption cover. With a 12 month maximum
O.M.P. No.1036/2012 Page 103 of 196
indemnity period, the claimants were concerned that if
the indemnity period commenced with the date of the
initial damage in 2003, their loss over the subsequent
12 months would prove to be minimal. Thus, the
claimant’s chose to base their business interruption
claim on a 12 month maximum indemnity period
commencing when the results of the business started
to show a downturn.
The case was actually decided on other issues. Thus,
the judge did not have to consider the extent of
damage suffered both prior and subsequent to the
year of insurance in question. Nevertheless Judge
Mackie QC observed that taking Oct 2004, when
trading results started to be affected, as being the date
of incident “was not a helpful starting point.” Thus,
whilst damage was continuing to occur the claimants
could not merely wait and choose a later date based
on the impact on trading results .A valid business
interruption claim had to be the result of material
damage. General conditions five of the policy required
the insured to give, immediate notice to the insurers on
the happening of any injury or damage in
consequence of which a claim is or may be made
under this policy.” The test was an objective one, not
subjective.
The three most likely scenarios where there may be a
delay before the turnover of the business is adversely
affected are discussed below:-
1. Turnover maintained from accumulated
stockholding. It is possible that finished goods may
escape damage in an incident, particularly if they
are stored off site, or in a segregated area. Under
these circumstances, insurers may benefit from the
existence of such stocks. If the insured is likely to be
disadvantaged at the end of the maximum indemnity
period the inclusion of accumulated stocks will
redress the position.
O.M.P. No.1036/2012 Page 104 of 196
2. Subsidence. The first signs of subsidence are
normally damage in the form of cracks in the
structure of the building. However such damage
rarely necessitates an immediate response by way
of repair. Indeed the likelihood is that a period of
investigation and monitoring will be required to
establish the root cause of the problem, and in
particular to establish if the damage is the result of
subsidence. There are no particular provisions in
the policy to cater for these circumstances but for
the reasons outlined earlier, it is normally the case
that an equitable solution can be found.
Nevertheless for those businesses that seek cover
for subsidence, either as a specified peril or by
buying back this cover under an all risks policy, they
might be well advised to seek a revised definition,
atleast in respect of subsidence such as follows:
“The “indemnity period “shall be a period of up to
xx months, being the period during which the
business is or would have been interfered with, for
such length of time as would be required to
rebuild, repair or replace the property which has
been list, destroyed or damaged and to resolve
the resulting interruption or interference,
commencing with the date of damage or
interference and not limited by the date of
expiration of this policy.”
iii) Trading has not yet commenced, or has been temporarily
suspended. If the business is not expected to commence
trading until some future date, then any impact on turnover
can only occur from that point in time onwards. This scenario
is catered for by a specific type of cover known as advanced
profits or delayed start up. Under such policies the definition
of the indemnity period is amended to make the
commencement date coincide with the date on which trading
would have commenced.
For a business which is temporarily silent a similar
amendment to the definition of the indemnity period can be
O.M.P. No.1036/2012 Page 105 of 196
sought from insurers. Temporary inactivity should not be
confused with seasonality where for the reasons outlined
later, insurers would not accede to any divergence from the
standard definition of the indemnity period.”
From the reading of the aforementioned excerpts from Riley on
business interruption insurance, it can said there are limited
eventualities where it can be said that there should be delayed
commencement of the indemnity period. However much shall be
dependent upon the terms of the policies flexible enough to
accommodate such belated start. The definition of the indemnity
provided in the policy documents are required to be amended in order
to allow such belated start of the indemnity period . The three
eventualities recognized by Riley no where exists in the present
case except the first one which is that the turnover is maintained
in the present case out the accumulated stock in which case, the
policy document provides for the adjustments for the
accumulated stock in the form of accumulated stock clause.
Thus, the terms of the policy in the present case allows such
adjustments of the turnover being maintained from the existing
stock and no need arises to intiate the commencement of the
indemnity period belated and it is not the case of either side as
well in the present case. The concept is discussed here in order to
complete the discussion and for better understanding that there are
certain eventualities where delayed commencement of the indemnity
period can be possible in terms of the policy.
Special consideration to indemnity period in seasonal business:
As discussed above that the indemnity period has a role to play
O.M.P. No.1036/2012 Page 106 of 196
in delimiting the liability of the insurance company and in
determine the cover of the loss under the policy, greater caution
and care is required to be taken by the insured in choosing the
indemnity period on the basis of the nature of the business
carried out by the insured. Riley on business interruption
Insurance recommends that the seasonal businesses where
there exists a business cycle or business season, the business
interruption policies require the longer period of indemnity as
otherwise the policies carrying shorter period of indemnity period
wherein the effect of the loss on the business is not realized uptil
completion of business cycle would contribute nothing or very
little to the insured. In the words of the author, it has been
discussed as under:
“Seasonal businesses:
General
Businesses which are predominantly of a seasonal nature
such as hotels, boarding houses ,holiday camps,
fairgrounds, amusement parks, theatres ,bingo halls,
amusement arcades and other concerns at seaside
resorts and inland holiday and tourist centres and
businesses in some sports and games and other seasonal
trades may earn a year’s profit in 6 months or even less
but it does not follow that a maximum indemnity period of
6 months is adequate for their needs .The deciding factor
is the length of time which it would take to restore the
earnings of the business to normal . If a serious incident
were to occur immediately after the end of the busy
season a maximum indemnity period of six months
would expire before the start of the next season. The
turnover during that first six months of the period of
interruption, say, October to march, would be
O.M.P. No.1036/2012 Page 107 of 196
compared with turnover in the same out of season
months in the preceding year and little if any
diminution would be shown . The premises might still be
closed during the following summer season but the
maximum indemnity period, i.e. 6 months from the date of
incident would have expired. The result would be that
although an insured might suffer the loss of a year’s
earnings the insurance would contribute little or nothing
towards that loss. (Emphasis Supplied)
In fact , if an incident occurred at almost any time in the
off season at least part of the benefit under a 6 months
indemnity period would be lost because it would relate to
a period when there would normally be little or no trading.
In the above context, it should be noted that the other
circumstance clause would not be applicable as there is
nothing unusual about the position, the business being
always of a seasonal character. The failure of the
insurance to recompense the insured would be due
entirely to the fact that too short a maximum indemnity
period had been selected.
Based on the above it should be evident that a seasonal
business needs at least a minimum 12 month maximum
indemnity period, even just to address the problem posed
by reinstatement of the physical damage. However, even
a 12 month maximum indemnity period may be insufficient
when consideration is given to the build up period. Some
seasonal businesses have regular clientele. An incident
could occur when the property is being prepared just prior
to the peak season. Regular clientele would have to make
last minute alternative arrangements for the coming
season and there is no guarantee that they would then
return the following year.”
From the reading of the afore noted observations of the
author including the example which the author has given which is
that in the policies containing a shorter indemnity period say for 6
months, the occurrence of the incident after the end of the busy
O.M.P. No.1036/2012 Page 108 of 196
season when the effect of the loss on the business is really going
to be realized upon the expiry of the 6 months when the season
shall recommence would contribute little or nothing towards
indemnity, it can clearly said that greater degree of care and
caution is required while opting for the indemnity period in the
cases relating to the seasonal nature of the business and the said
considerations are available with the insured as he can opt for the
indemnity period after ascertaining the nature of the business and
term of the business cycle.
The loss of profits which are payable under the business
interruption insurance are proximately caused by the peril
insured – This principle of causa proxima or proximate cause
which is often applied in marine insurance cases is no exception
when its comes to its applicability in business interruption
insurance policy cases. Thus the losses “which are in
consequence of” or “direct result of the incident” or the wordings
analogous there to used in the policies are payable only when
they are proximately by the peril insured and not otherwise.
There has to be established a causal connection between the
losses suffered and damage caused by the incident and only
such losses are payable by the business interruption policies.
The reason is very simple and plain which is that the policy is
aimed to indemnify the losses for the peril insured. Thus, the
losses which is direct consequence of the damage or peril shall
be payable and not the remote ones. Riley on business
interruption recognizes the applicability of the said principle to
O.M.P. No.1036/2012 Page 109 of 196
the business interruption insurances policies by observing in the
following manner :
“3-11 Prolongation – delays in restoration of business
(extraneous causes and proximate cause)
A distinction must be drawn, however, between the
circumstances which would have affected the trading
results had there been no interference with the
business caused by an incident, as stated in the
preceding paragraph 3.10 and those which prolong the
period of the interruption. For example, bad weather,
worldwide shortage of materials or industrial action in
the building industry might delay the restoration of
damaged premises.
As such a contingency could not have affected the
insured business had it not happened during a period of
rehabilitation following the incident, insurers regard the
incident as the prime cause of an insured loss for which
they have accepted premium. They therefore hold
themselves liable for the lengthened period of
interruption upto the maximum indemnity period limit.
This is not to say that the doctrine of proximate
cause should not apply. The model ABI policy
wording refers to losses, “in consequence of the
incident” but some other policies use the phrase,
“as a direct result of the incident”. In fact there is
no legal distinction between these phrases, both of
which will be construed as meaning “proximately
caused by” (See Liverpool and London War Risks v.
Ocean S.S. Co. [1948] ….” (Emphasis supplied).
In view of the above, it can be said that the doctrine of the
proximate cause has clear applicability in the cases involving
business interruption policies while assessing the remoteness or
directness of the losses and only those kind of losses are
payable which have the causal connection with the peril insured
O.M.P. No.1036/2012 Page 110 of 196
vis a vis its effect on the business of the insured and not any
other kind of losses.
These were certain concepts which are relevant to the
present case and are generally required to be kept in mind
besides the terms of the policy while determining the desirability
of the mode/ method of assessments of the loss of the profits on
account of the damage caused as a result of the fire/ incident
insured. I shall be discussing the case laws under the next head
while answering the submissions advanced by the parties after
applying the said concepts to the facts of the present case.
43. Let me now apply the said concepts as discussed above to the
facts in hand in order to ascertain as to which of the method of
assessment of the loss of the profits is desirable in the present case.
The same is done as follows:
a) Option to convert to output option – I have already discussed
above that there exists a possibility wherein the option can be
given at the hands of the insured to convert and insist the
method of the computation of the loss of profits on the output
basis instead of the turnover basis but only in those cases where
the language of the policy document permits the same. The
wordings used in the insurance policy in the present case read
“wherever found necessary” and the same do not leave any
option solely at the hands of the respondent to decide to switch
over or insist the operation of the alternative basis clause.
Therefore, the necessity of the operation of the alternate basis
O.M.P. No.1036/2012 Page 111 of 196
clause shall be either be determine on the basis of the
consensus or satisfaction of both the parties and if the parties
the dispute the said position, the said determination shall be
done by the court/ tribunal or any authority seized of the dispute
by adopting the judicious approach on the basis of the sound
judicial principles and keeping the terms of the policy and legal
position in mind. On facts of the case, I do not find that the
wordings in the policy document permits any such option in the
hands of the respondent to insist the calculation to be done by
alternative basis clause as provided in specification J appended
to be policy.
b) Indemnity period – I have already discussed the significance of
the indemnity period when I explained the concepts above in
detail by placing reliance on Riley on Business interruption
insurance. I have also arrived at the conclusion that the
indemnity period is required ascertained after reading the
definition of the indemnity period under the policy document
which varies from case to case and in that context also quoted
the definition of the indemnity period and maximum indemnity
period in UK. It is also discussed above in detail that the insured
has to give due consideration to the duration of the indemnity
period while applying for the policy when the nature of the
business is seasonal in nature or cyclical in nature as otherwise
undertaking an insurance policy for a six months indemnity
period when the effect on the business is ultimately to be
realized in the next season which is after the expiry of 6 months
O.M.P. No.1036/2012 Page 112 of 196
would contribute little or nothing as per the discussion done in
Riley on Business Interruption Insurance which is an authority on
the subject and has been quoted by the parties before the
tribunal and also by various common law courts including
Supreme Court of Queensland in Australia in the case of Coalex
(supra) while deciding the cases relating to business interruption
insurance.
Accordingly, one has to really see on the facts of the
present case the definition of the indemnity period and how the
said definition is required to be interpreted. The said definition of
the indemnity period reads as under:
Indemnity period – The period beginning with the
occurrence of the damage and ending not later than 6
months thereafter during which the results of the
business shall be affected in consequence of the
damage.
44. Upon the reading of the definition of the indemnity period, the
following position emerges:
I. The indemnity period commences with the occurrence of the
damage which is the date of the incident which is between
th th
29 October, 2007 to 28 April, 2008.
II. The indemnity period will last for the period of 6 months from
the date of damage. The said position in undisputed between
the parties.
III. The language used in the definition of the indemnity period is
“during which the results of the business shall affected in
O.M.P. No.1036/2012 Page 113 of 196
consequence of the damage” – The use of the said language
in the definition of the indemnity period is noteworthy as the
same is the clear indicator that the results of the business are
required to be affected during the said indemnity period which
is the 6 months from the date of the occurrence of the
incident. The language used under the definition clearly
states that not merely some anticipated loss/ future loss is to
be shown during the indemnity period but the results of the
business shall be affected during the said indemnity period of
6 months only. This is significant in the light of the nature of
the policy which is the indemnity towards business
interference or interruption caused on account of damage as
a result of the peril insured. Therefore, what one is looking for
is the business interference or results of the business being
affected during the indemnity period of 6 months and not
some anticipated loss in future which may not have any effect
on the business during the relevant indemnity period.
The import of this definition of the indemnity period
has to be further examined in depth especially in the light of
the submission/ plea of the respondent which is that the
gross profit/ loss of profits under the policy is required to be
calculated on loss of output basis as the business of the
respondent is cyclical in nature but the sales of the
respondent are erratic and the same cannot be predicted. If
one examines the said position taken by the respondent
and tests the tenability of the same while reading the
O.M.P. No.1036/2012 Page 114 of 196
definition of the indemnity period, the answer
straightaway comes that the method of assessment of
loss of profits suggested by the respondent which is
output basis in alternative to reduction in turnover basis
is clearly inapplicable and undesirable in view of the
respondent’s own position/ stand which is that the
business of the respondent is cyclical in nature and
sales cannot be predicted . This is due to the following
reasons:
a) Firstly, the definition of the indemnity period use the
wordings “during which the results of the business shall
be affected” which means that while computing the gross
profit/ lost profits as mentioned in specification C (that
also uses the expression “indemnity period” in the
formula), it should be kept in mind that the said loss of
profits as computed has to have affect on the results of
the business during the indemnity period. There has to
be a causal connection between the loss of profits
computed and the results on the business and both
events should occur within the indemnity period .
Only then the computation of the gross profit/ lost profit
or loss of profit shall be termed as per the policy. This
can be discerned from the combined reading of the
specification C point (a) read with the definition of the
indemnity period. (Emphasis supplied)
O.M.P. No.1036/2012 Page 115 of 196
b) The alternative basis clause mentioned in specification J
appended to the policy provides “wherever found
necessary” “the term output may be substituted with the
term turnover”. The said substitution of the term “output”
with that of the “turnover” in the clause is qualified by the
words “wherever found necessary”. Thus, prior to making
such substitution, one has to first ask the question as to
whether it is really desirable to substitute the term
“output” with that of the “turnover” in the given facts of
the case. The existence of such alternative clause in
the policy does not imply that merely one can
substitute the expression “Output” with that of
“turnover” in the formula provided in specification C
and proceed to claim or state as a matter of
consequence that the said computation leads to the
gross profit/ lost profit during the indemnity period
without becoming mindful of the fact that the
definition of indemnity period requires the
establishment of effect on the results of the
business during the same very period . Thus, the
formula provided in the specification C and the
alternative basis clause provided in specification J
appended to the policy are merely the tools to arrive at
the computation of loss of profits and are broad
guidelines for computation of the said losses. However,
one has to ultimately test the desirability or the
appropriateness of the mode of computation of loss of
O.M.P. No.1036/2012 Page 116 of 196
profits/ gross profits during the indemnity period on case
to case basis by looking at the terms of the policy and
facts and circumstances of the case.
c) In the terms of the policy in the present case, the formula
mentioned in specification C provides for the
computation of the loss of profits on the basis of
shortfall in turnover during the indemnity period . The
collective reading of the definition of indemnity
period alongside point (a) in the formula of
specification C and the substitution of the term
“output” in lieu of “turnover” as per specification J
would reveal that the gross profit would be
calculated by applying the rate of the gross profit to
the amount by which the output during the period of
6 months from the date of occurrence of damage fell
short of the standard output so that the results of the
business are affected in that period . Thus, For
output basis to apply in the formula, twin events
should occur either simultaneously or uptil the end
of the indemnity period which are that falling short of
the output than of the standard output and its
consequential effect on the business. Doing of the
computation on this basis would allow output basis to be
truly workable within its sweep by taking into
consideration only that output/ produce which would
have bearing on the business results within the
O.M.P. No.1036/2012 Page 117 of 196
indemnity period as against simply multiplying all the
produce/ shortage of the output with the rate of gross
profit without realizing when it would have bearing on
business either within the indemnity period or beyond the
same which would give different results and would
include lost profits for which cover is not provided by the
policy and would lead to wrong computation as per
policy. In the present case, the respondent surveyor
Mr. Srivatsan and the respondent itself are doing the
computation of loss of profits by adopting the later
approach which is by taking into consideration the
entire shortage of output and multiplying the same
with the rate of gross profit and terming it as gross
profit/ lost gross profit when as a matter of fact, it is
not the gross profit/ lost gross profit during the
indemnity period as it has no causal connection with
the affect on the results of the business within the
indemnity period and thereby leading wrong
computation of loss of profits making the claim
hypothetical and speculative dependent future
events. This is due to the reason that it is the
respondent’s own case that the sales of the output
are cyclical, erratic and are not forseeable but there
shall be sale of output in future no matter in
whatever time period. Once, the sales of the
respondent are not forseeable within the indemnity
period or even later than that as per the respondent
O.M.P. No.1036/2012 Page 118 of 196
own saying, then it passes human comprehension
as to how the output method is applicable and
desirable at all in the present case as the shortage of
the output has no nexus with its likely effect on the
business during the indemnity period.
(Emphasis Supplied)
d) I have also gone through the authorities and literature
cited by the respondent which states that the output
method of assessment of loss of profits is desirable in
cases wherein the business is such where there exists
no immediate effect on turnover but the production
activity continues/ increases or where the sales are
seasonal in nature or where the demand and supply has
no correlation etc. I do not deny the correctness of the
said eventualities giving rise to the applicability of
the output method for assessment of loss of profits
in a given case subject to the terms of the policy
accommodating the computation by the output
method. However, in such cases where sales are
seasonal in nature or demand has no nexus with
supply, the wordings of the policy should be such
which should sufficient cover the said events within
its ambit giving rise to a valid claim under the policy.
Like in a case where there is a cyclical nature of
business, if the indemnity period is of one year/ 12
months and the results of the business are likely to
O.M.P. No.1036/2012 Page 119 of 196
be effected in last 6 months though the damage
occur in the first 6 months, the policy in such a case
is flexible enough to provide indemnity period of 12
months wherein one can foresee the likely effect of
the production done vis a vis a sale or upon the
business within the entire indemnity period. In such a
case, output method is workable and the literature cited
by respondent may hold good and applicable. However,
in the present case, the terms of the policy provide
for 6 months time period from the date of the
occurrence of the damage during which the results
of the business shall have to be affected. The case of
the respondent is that though the produce/ output is
increasing as per the past practice but the sales are
cyclical and erratic with no foreseeability in future.
To this effect, the answers to the cross examination of
the respondent witness Mr. Alok Banerjee which shows
the understanding of the respondent is reproduced
below:
“Q 28 In planning your production do you take
into account any business trend analysis
industrywise?
A. I am not aware of this.
Q 29 Is your business subject to cyclical ups and
downs?
A. Yes
O.M.P. No.1036/2012 Page 120 of 196
Q 30 In such a scenario is it not proper to
conduct trend analysis?
A. I cannot comment on this.
Q 34 What is the period of indemnity under the
policy?
A. Six months from the date of incidence.
Q 35 Who opts for the indemnity period whether
the Insurer or the insured?
A. Insured.
Q 46 When in your opinion turnover basis or
output basis is adopted?
A. In the business like us where the business
is cyclical, output basis is applicable where
the production is almost static but the sales
is cyclical and the goods produced are not
perishable.
Q 82 What are the ups and downs in the sales of
products as mentioned in para 5 of your
affidavit?
A. As I have explained earlier the business
ups and downs cyclical. The sales move
up and down erratically.
Q 83 Based on your company experience are
such ups and downs not foreseeable?
A Our experience shows that it is not
foreseeable and since the movement are
erratic and do not follow any set pattern.
Q 84 In such a contingency how do you plan
your inventory?
A Our production is static and we keep
manufacturing our products. The finished
products are stored till they are sold off.
O.M.P. No.1036/2012 Page 121 of 196
Our past experience is that in the due
course the finished products are sold out.
Q 89 Is it correct to presume that in as much as
you have taken the indemnity period to be
six months that your cyclical fluctuations
would not exceed beyond six months?
A No doubt one may assume that the
fluctuations will work out within six months,
that will be only be a guess and does not
ensure certainty.
Q 90 Do you agree that the insurance company
would not look beyond the indemnity period
of six months?
Ans : Yes
Q 105 Can you state the gap between to ups and
downs?
Ans This cannot be predicted, but we have
given the actual data with graph to the
actual surveyor.”
From the reading of the cross examination of the
respondent’s witness, it is clear that the respondent clearly
maintained the position that the sales of the output are not
foreseeable and there is no answer by the respondent in
evidence whether the respondents conduct business trend
analysis in order to forecast the length of the business cycle.
Rather, the respondent merely maintains the stand that the
sales are cyclical and erratic but are not foreseeable which
can be seen from answers to questions 82 to 84 and 89 and
90.
O.M.P. No.1036/2012 Page 122 of 196
Once it is the respondent’s own case that the sales of
the production are not forseeable or are erratic in nature and
there exists no cycle as such for sales. Further, there exists
no evidence on the record on the basis of which it can be
said that output produced is likely to be disposed of during
the said indemnity period, it cannot be said the literature
and the authorities cited by the respondent would aid the
case of the respondent in the peculiar facts of the
present case where the indemnity period is of 6 months
from the date of the damage coupled with the fact that
the respondent itself has taken the position that the
salability of the stock is not foreseeable in future and it
would be guess that the fluctuation of the business will
work out within the 6 months . In simple words, the
respondent is unable to show the results of its business
is affected during the indemnity period of 6 months from
the date of the damage due to occurrence of the
incidence of fire by merely computing a shortage of the
output during the period and multiplying the same with
the rate of the gross profit with certain adjustments as
per the formula terming it as if it is a lost gross profit for
the indemnity period. The said computation is contrary to
the respondent’s own case that the sales are not
forseeable and erratic in nature. Though, it is altogether
different matter that as per the respondent’s own saying
that the respondent could have produced more during
the indemnity period but for the incident of fire and the
O.M.P. No.1036/2012 Page 123 of 196
result in the business should have been realized in the
future when the production is sold of which is not
forseeable as per the respondent. But the insurance
policy shall not indemnify for the affect on the results of
business with no forseeable future which shall fall
outside the purview of the indemnity period. Thus, in the
given facts of the case, terms of the policy especially the
definition of the indemnity period and the position taken
by the respondent that the business of the respondent is
cyclical in nature, the claim of the respondent on the
output basis does not reflect that the results of the
business are affected during the indemnity period and
therefore the applicability of the alternative basis clause
is undesirable. (Emphasis Supplied)
e) Furthermore, as discussed in the previous head of
concepts that the seasonal nature of the business
requires a special consideration by the insured for the
selection of the duration of indemnity period which is
clear from reading of Rileys on Business interruption
insurance and that the insurance containing 6 months
indemnity period for seasonal nature of business when
the effect on the business is to be realized in the next six
months would contribute little or nothing. The same
principle is applicable to the present case afortiori
without any variance. The submission of the
respondent that it is upon the respondent’s
O.M.P. No.1036/2012 Page 124 of 196
insistence the clause relating to alternative basis of
the assessment of the loss of profits was added in
the insurance policy as per the communication dated
th
28 February, 2007 in view of the cyclical nature of
the business requires examination at this stage. If
the submission of the respondent is to be accepted
then the respondent was conscious of its nature of
the business and implication on the indemnification
of the loss arising from the occurrence of any
incident and thus could have equally insisted for the
larger indemnity period in the policy so as provide
adequate cover to the cyclical nature of the business
conducted by it as advised by the authorities on the
subject. Having not done so and keeping the
indemnity period intact which is 6 months from the
date of the occurrence of the damage, the
respondent with open eyes undertook the insurance
policy on its own peril and entered into such an
agreement . In such a case in order to claim the
indemnity under the policy, the respondent’s claim
has to fall within the ambit of the cover provided by
the policy which is by establishing the consequential
loss of profits by showing that the results of the
business is affected within in the indemnity period
and computing the lost gross profit during the
indemnity period and not by merely showing
shortage of the production unconnected with its
O.M.P. No.1036/2012 Page 125 of 196
likely affect on the business within the indemnity
period which would lead to the computation of loss
of profits outside the purview of the indemnity
period. The claim of the said nature would not be
indemnified by the insurance policy as the respondent
never took due care and consideration while opting for
indemnity period and consciously chosen the indemnity
period which delimits the liability of the insurance
company/ petitioner herein. (Emphasis supplied)
f) I have also gone through the evidence shown by the
respondent in order to support the plea the sales pattern
do not follow pattern but the production is more stable
which is mentioned in the form of details of the
production, sales, closing stock details including bar
charts for atleast 6 years. Even if all these evidences
are to be believed and the respondent position is to
be assumed as correct that the sales do not follow
any pattern and are not forseeable but the
production is more stable, still the manner in which
the policy of business interruption insurance in the
present is couched in the present case does not
permit the indemnification of the losses on the mere
shortage of the output without showing its
consequential effect on the sales/ business of the
respondent company within the indemnity period .
Such evidence of showing the causal link between the
O.M.P. No.1036/2012 Page 126 of 196
production and its affect on the results of the business is
clearly missing in the present case and thus even if the
respondent has shown such evidence to support the plea
of applicability of the output basis would not aid the case
of the respondent.
In view of the my reasoning and analysis done
above, It can be said that the computation of loss of
profits by alternative basis method or the output method
is clearly undesirable in the present case in the manner
suggested by the respondent as it would take into
consideration entire shortage of the output which has no
connection with the affect on the results of the business
within the indemnity period when the policy requires
otherwise.
IV. Loss of profits are payable under the business Interruption
Insurance which are proximately caused by the perils insured –
As I have discussed this concept in earlier head is that the
fundamental rule governing the law of the insurance relating to
perils be it marine or fire or the business interruption insurance
which is that the loss payable under the insurance is one which
is proximate cause of the peril insured. In simple words, the loss
has to be direct consequence of the peril insured and not the
remote one. In the present case, if one examines the terms of
the policy, it can be seen that the policy clearly provides that
what is payable is the loss resulting from business interference
or interruption in consequence of the damage to the property etc
O.M.P. No.1036/2012 Page 127 of 196
due to peril insured which is fire. Thus, the expression “in
consequence of” or “resulting from” has to be interpreted as
direct consequence of the peril as against the remote one.
Accordingly, the loss of profit which has the direct nexus with the
peril insured would be recoverable under the policy as against
any other loss. Applying the said principle to the facts of the
present case would show that the loss of profits which have the
affect on the results on the business within the indemnity period
as per the terms of the policy would be called as losses which
are direct consequences of the perils insured as per the policy
and are recoverable under the policy as they would be in real
sense of term the loss resulting from the business interruption as
a consequence of damage due to fire. On the contrary, the
losses which do not have the bearing on the business
during the validity of the policy or indemnity period but
would be dependent upon future events including the
demand in the market or business cycle would not be in the
peculiar terms of the present policy can be categorized as
the proximate cause of the perils insured and more so when
the definition of the indemnity period insist the showing the
affect on the results of the business . This is due to reason
that had this been within the contemplation of the parties to
cover such losses as direct consequences of the insured
events to the extent sought by the respondent, then the
policy period or indemnity period should have sufficient
covered such events within the terms of the policy which is
missing in the present case. Therefore, the computation of
O.M.P. No.1036/2012 Page 128 of 196
the lost profit on the basis of the reduction of turnover by
considering the reduced turnover during the indemnity
period which reflects the effect on the business during the
indemnity period are clearly recoverable under the policy as
a direct consequence of the business interruption due to
fire as against the losses based on the shortage of output/
produce which has no connection with the likely effect of
the same on the business within the indemnity period . This
is additional reasoning as to why the claim presented by the
respondent is hypothetical in nature and thus cannot be
considered in terms of the present policy. (Emphasis Supplied)
V. Testing the loss of profits on the principle of indemnity – It is also
noteworthy to mention that the business interruption insurance is
the contract of indemnity where the insured has to indemnify the
actual loss suffered. The use of the expressions “during which
the results of the business are affected” also indicate that there
has to be some harm or loss to the business as a consequence
to damage on account of incident of fire. Thus, the loss to fall
cause business interruption has to be in actuality or closer to
reality during the indemnity period in comparison to the previous
year business depending upon the definition of the indemnity
period.
It is also pertinent to mention that in the present case,
the damage has caused the loss in terms of the reduction in
turnover coupled with some kind of output loss which
would have likely effect on the business in future as per
O.M.P. No.1036/2012 Page 129 of 196
respondent’s case. It is not the case of the respondent that
its turnover was not at all affected during the indemnity
period. This is due to the reason that the respondent has
already been paid the interim payment about Rs. 6 Crores as
indemnification on the basis of the report of surveyor M/s
th
Adarsh and Associates on 8 January 2008 which was
premised on reduction of turnover basis towards FLOP and
material damage . On the contrary, the case of the respondent is
that due to certain factors which are like the sales of the
respondents business are fluctuating but the production is
constant and cyclical nature of business having no nexus with
that of the sales, the alternative mode of assessment of loss of
profits should be adopted . I have already arrived at the finding
above that the consideration of the entire shortage of the
output and multiplying the same with the rate of gross profit
would not give the lost gross profit during the indemnity
period but would include presumptive/ hypothetical loss of
profits without the insured making those sales in the
indemnity period or showing the effect of such lost output
on business in anticipation that the insured company is
likely to sell the products in future with no certain period
and thus the same will have no affect on the business of the
insured during the indemnity period which is a condition
precedent in the formula to be read with along with the
definition of indemnity period and the terms of the operative
clause of the policy. Now, if one weighs the computation of
loss of profits done on both these modes on the touchstone
O.M.P. No.1036/2012 Page 130 of 196
of the principle of indemnity and ascertain which of the loss
of profits would truly indemnify the insured in the given
terms of the policy and the facts and circumstances of the
case, the answer would again not be so difficult and would
lean towards the loss of profits on the reduction of turnover
basis which would atleast show some affect on the
business during indemnity period which is infact a kind of
loss recoverable in terms of the policy over and above the
output basis where the computation is made on
presumptuous basis . The reason is very simple and plain
which is again that the insurance including the business
interruption insurance is seeking to indemnify the loss and in the
case of business interruption insurance a loss of particular kind
which is a loss arising out of the business interruption in
consequence of the damage due to incident of fire. Thus, the
said loss has to have some nexus with the business
interruption and that is why the definition of indemnity
period insists the effect on the business during the said
period. Once, the said effect on the business is shown during
the indemnity period, then the loss computed as per formula
would become the loss arising out of the business interruption.
That is why, when in the case like the present one where we
have the computation of loss of profits on the basis of loss
of turnover available with us which has been done by the
surveyor M/s Adharsh and Associates, to which the
respondent does not dispute to the extent that the turnover
of the respondent did not fall at all during the indemnity
O.M.P. No.1036/2012 Page 131 of 196
period (but merely protest on some mistakes in the
calculation in the said report) which is a reflection on the
effect on the business during the indemnity period as
against another computation which though higher in sum
but does not reflect such picture on its likely effect on the
business, one has to prefer the approach which has the
effect on the business as against the one which has not for
obivious reasons which are that business interruption
insurance is a contract of indemnity and would indemnify
only those losses arising out of the business
interruption and given the terms of the policy only ones
which have the effect on the business during the indemnity
period (Emphasis supplied)
VI. The principle of loss mitigation: There is another principle
which is applicable to insurance relating to perils either marine or
fire and also not uncommon to the business interruption
insurance which is that the insured has an obligation to mitigate
the loss at the time of the damage arising out of the incident. The
said breach of the duty to mitigate allows the insurers to insist
the reduction in the claim of insurance that the insured has not
complied with the duty to mitigate the loss. Therefore, when the
respondent in the present case with an insurance policy of lesser
indemnity period of 6 months insists that the loss of profits
should be computed on the alternative basis which is output
basis as against the turnover basis when the reduction in
turnover is recognized as tried and tested index for the business
O.M.P. No.1036/2012 Page 132 of 196
interruption and the said reduction of turnover is available in the
present case coupled with the fact that output basis takes into
consideration some loss of profits on the hypothetical basis that
whatever has been manufactured by the respondent has been
sold but not within the indemnity period but in uncertain future,
the adoption of the output basis in such circumstances
would also presume that the respondent has no capability
to increase the production of the output in the future and
reduce the damage caused and thus would lead to violation
of the rule of mitigation of losses . All this would mean that
the respondent as an insured could not have increased the
production in future so as to reduce the anticipated loss but
keep on producing otherwise within the same pace having
uncertain future of its selling. The said choice of
methodology over and above the actual reduction of the
turnover which is available and reflects the business
interruption in actuality during the indemnity period besides
being violative of several principles of public policy
including law relating to insurance also commercially
sounds unviable and accommodates too many presumptive
approaches which are not reasonable in the facts of the
present case . This is more so when the trend shows that the
total stock available at the time of commencement of the of
st
indemnity period as on 1 November, 2007 was 51,598 MT
(metric tones) and the total stock at the end of the indemnity
period was 33,950 metric tones. Thus, the sale of the production
during the indemnity period is minimal and in such
O.M.P. No.1036/2012 Page 133 of 196
circumstances, it cannot be said that the production which the
respondent could have increased during the indemnity period
would have likely to affect on the business soon when as per the
respondent own case the same cannot be forecasted. Further,
the said production could have been increased or decreased as
per the respondent’s own philosophy as per respondent’s own
saying. In such an event, the choice of ouput basis over the
turnover basis in relation to assessment of the loss is not
warranted and desirable.
45. In view of the above discussion referred in detail, it can be said
that the turnover basis of assessment of loss which would provide the
true indemnification of the loss of profits or business interruption
suffered by the respondent in the indemnity howsoever lesser or
higher it may be and not the output basis of computation of loss
which is undesirable in the facts of the present case and terms of the
policy. The abovesaid conclusion arrived by me is on the basis of the
facts of the present case and the application of the legal concepts
governing the law of business insurance as discussed above which
are relevant to the present case.
46. Let me now discuss the case titled as Coalex Pty. Ltd. v.
Commercial Union Assurance Company of Australia Ltd. decided
th
on 26 July 1986 - the facts of which are if not identical then similar
to the present case. The said case has been decided by Supreme
Court of New South Wales Common Law Division Commercial List by
Wood J as Single Judge. The facts of the said case were one claim
arising out of two insurance policies issued to the plaintiff by the
O.M.P. No.1036/2012 Page 134 of 196
defendant in respect of special risks and consequential laws but
related to different layers of insurance.
On facts, the policy terms provided
“ The relevant policy of provisions may be noted.
First, the policies called upon the Insurers "to
indemnify the Insured for Material Damage to the
Property Insured or Consequential Loss as hereafter
described". The Property Insured was defined in a
schedule to include: "S1 Industrial Special Risks All
property of every kind and description (not otherwise
excluded), owned, leased, acquired or hired by the
Insured or in respect of which the Insured may
acquire or assume an interest or is under any
obligation to insure including, ... S2 Consequential
Loss Loss of Gross Profit due to reduction in
turnover and increase in cost of working including
additional increased costs resulting from a peril
insured under S1." In relation to "S2 - Consequential
Loss", the policies provided: "Subject to the
Definitions, Conditions and Exclusions herein
contained, this Policy insures against damage
resulting from INTERRUPTION OF BUSINESS caused
by, or arising from, or out of Material Damage (as
insured under S1 of this Policy) occurring during the
Period of Insurance.”
Indemnity period in the said policy was defined as period
beginning with the occurrence of damage and ending not later
than 12 months thereafter during which the results of business
shall be affected in consequences of damage.
On facts of the case, it was stated by the plaintiff that the plaintiff
conducts a joint venture operation at Clarence Colliery involving
the extraction, processing and sale of coal. On November 82
during the period of insurance, the damage occurred to the belt
O.M.P. No.1036/2012 Page 135 of 196
of the main drift conveyor which constituted "material damage" to
property within the meaning of S1 of the policies of insurance.
The belt which was damaged was some 2,000 metres in length
and was used to convey run of the mine (ROM) coal to the pit
head. As a result of the material damage which the defendants
admitted had occurred, the plaintiffs' business was interrupted
between 22 November 1982 and 11 April 1983. During this
period, plaintiffs were unable to maintain full product of ROM
coal and the method of quantification of the loss of production
was in dispute.
One of the central issue in the said case was the applicability of
the mode of competition of assessment of loss whether to be
done on turnover basis or on loss of production basis. Whereas
the insured claimed that the computation should be done on the
basis of output/ loss of production basis, the insurer continued to
insist that the computation of assessment of loss is required to
be done on the basis of turnover which is selling price of the coal
at the relevant indemnity period / interruption period.
In the case also, there was an expert of insurance company/
defendant expert who also disagreed with the conclusion by way
of output formula. The said problems were discussed in the
submission recorded in the judgment which is as under:-
“The defendants' expert Mr. Morgan, disagreed with
these calculations for application of the output
formula. Two problems were identified by him. First,
the basis of valuing the opening and closing stocks,
which were not derived from the method used in the
O.M.P. No.1036/2012 Page 136 of 196
accounts but by re-evaluation referable to the
prevailing sales values at the respective dates. It was
argued that there was no justification for adjusting or
revaluing such stocks. In this regard reliance was
placed on the note within the definition of "gross
profit" requiring the opening and closing stocks to be
arrived at "in accordance with the Insured's normal
accounting methods with due provision for
depreciation." Substituting stock variations from the
annual accounts for the revalued opening and closing
stocks, Mr. Morgan came up with a gross profit ratio of
54.33 per cent for the year ended 30 June 1982, (in
place of Mr. Bracher's 58.2 per cent) and of 51.34 per
cent for the six months ended 31 December 1982.
These calculations were made as follows: For the year
ended 30 June 1982, the calculation was:
Output $60,345,461
Stock fluctuation 161,451
___________
60,506,912
less Specified working
expenses
27,722,945
__________
Gross Profit 32,783,967
Rate of Gross Profit
(32,783,967/60,345,461) x
100 = 54.33%
For the half year ended
31 December 1983 the
calculation was:
Output $41,557,216
Stock fluctuation 1,588,156
O.M.P. No.1036/2012 Page 137 of 196
___________ 43,145,372
less Specified working
expenses
21,809,142
__________
Gross Profit 21,336,230
Rate of Gross Profit (21,336,230/41,557,216) x 100 =
51.34%
The second problem identified was the application of
the formula to produce a gross profit ratio of 58.24
per cent without adjustment for the trend of the
business or for variations in or special circumstances
affecting it. The alternative calculations referable to
rates of gross profit of 52.8 per cent (for the year
ended 30 June 1982), and the preferred rate of 48.78
per cent (for the half year ending 31 December 1982),
Mr. Morgan saw as accepting the need for some
downward adjustment to reflect the trend of the
business. The ratio of 48.78 per sent selected by Mr.
Bracher to provide for the trends of the business had
the merit of incorporating opening and closing stock
values in accordance with normal accounting
methods, but in his view it did not fully reflect that
trend since the examination stopped too soon.
Applying the same methods adopted by Mr. Bracher
to calculate the rates of gross profit of 52.8 per cent
and 48.78 per cent (in reference to turnover for the
year ended 30 June 1982 and half year ended 31
December 1982 respectively) he calculated a further
downward trend into the next six months ending 30
June 1983, of 42.38 per cent:
Turnover 37,574,507
Stock fluctuation 1,730,273
O.M.P. No.1036/2012 Page 138 of 196
__________
39,304,780
less Specified working
23,380,700
expenses
__________
Gross profit 15,924,080
Gross Profit ratio (15,924,080/37,574,507) x 100 =
42.38%
here was some uncertainty as to whether the stock
fluctuation figure was correct by reason of the
possible deduction from closing stocks of 66,976
tonnes of coal borrowed from Clutha to which I will
refer later. Adjustment on this account, it was agreed,
would increase the weighted gross profit ratio to
46.91 per cent for that period.”
47. Thereafter, the discussion in the said case revolved around that
no actual loss has been suffered by the insured which has been
proved on record and it was stated that the actual loss might appear
to be outside the indemnity period and even if it is shown that the said
loss flows directly from the damage. This has been reproduced in the
submission of defendants in the following manner:-
“The primary submission of the defendants
remained, that no actual loss had been proved to
have been sustained. In this regard Mr. Morgan
expressed a view, which was explored in evidence,
that the actual loss might appear outside the
indemnity period and would be indemnified provided
it could be shown to flow directly from the damages.
O.M.P. No.1036/2012 Page 139 of 196
The plaintiffs elected, during the course of the
hearing, not to pursue any claim on this basis.
Some further factual matters require mention. In
February 1983 the plaintiffs borrowed from Clutha
Development Pty Limited, 76,260 tonnes of primary
coal to meet their contractual sales obligation. This
borrowing was repaid by the provision of primary
coal over a period concluded in September 1984.”
Thereafter, the Court delved into the inquiry that whether in
terms of policy what is payable is actual loss which is to be
indemnified and nothing else. The court observed that in terms of
the policy, there were ample indicators that what is payable in
terms of policy was the actual loss though in terms of the policy
the word actual loss has been stated in the policy and came to
conclusion that the business interruption insurance policy is a
policy of indemnity. The court observed thus :-
“ In relation to a policy of indemnity, as Windeyer J said
(at 104): "An assured is not entitled to recover the
amount specified in the policy unless it represents his
actual loss." The fundamental rule was stated in
Castellain v Preston (1882) 11 QBD at 350, by Brett LJ
at 386: "In order to give my opinion upon this case, I feel
obliged to revert to the very foundation of every rule
which has been promulgated and acted on by the Courts
with regard to insurance law. The very foundation, in my
opinion, of every rule which has been applied to
insurance law is this, namely, that the contract of
insurance contained in a marine or fire policy is a
contract of indemnity, and of indemnity only, and that this
contract means that the assured, in case of a loss
against which the policy has been made, shall be fully
indemnified, but shall never be more than fully
indemnified. That is the fundamental principle of
insurance, and if ever a proposition is brought forward
O.M.P. No.1036/2012 Page 140 of 196
which is at variance with it, that is to say, which either will
prevent the assured from obtaining a full indemnity, or
which will give to the assured more than a full indemnity,
that proposition must certainly be wrong.
The circumstances in which a policy might be construed
as a valued policy were examined in Wilson v Nelson
(1864) 33 LJ KB 220, from which it appears that, in
general, a clear intention will need to be conveyed by the
language of the policy before such a conclusion will be
reached.
Unmistakably, it appears to me, the present policies are
those of indemnity. Not only is the promise by the
insurers one "to indemnify" the insured for material
damage or consequential loss, but the property insured
is defined in terms of "loss of gross profit" and the
wording in S2 Item 1 relates to "Actual Loss sustained by
the Insured". There are other clear indications pointing to
this conclusion in the deduction from increased costs of
working of any sums saved (p17), the co-insurance
clause (p24) and the due diligence clause (p26).”
48. From the reading of above quoted observations of the learned
Single Judge sitting in Supreme Court of New South
Wales, it is clear in terms of the policy, learned Judge came to the
conclusion that the insurance policy relating to business interruption
was the policy of indemnity and the wordings used in the policy were
“actual loss” and “the loss in consequence of the damage” at several
places are all indicators in the policy revealing that what is payable in
the policy is the actual loss which is aimed at to indemnify the insured
and not the one by which the insured can profit out of the insurance.
The position of the case in Coalex (supra) is no different from the
instant case as in the present case also there are indicators to policy
document showing that insurance policy is aimed at to indemnify the
O.M.P. No.1036/2012 Page 141 of 196
loss in consequence of damage as a result of peril insured which is
incident of fire. The insurance policy also talks about the results of the
business being affected during the indemnity period. It also provides
other circumstances clause for making adjustments in the gross
profits in the formula to arrive at the figures as realistic as possible to
the loss as against the hypothetical loss. All these are clear indicators
towards the actual loss which is payable in the present case .Rather
the respondent maintains the same very position in answers re-
examination done by the respondent Advocate of Mr. Alok Banerjee
which reads as under:-
“Q. Please turn to question no. 91, can you tell the Hon’ble
Tribunal what do you mean by the term “more
beneficial”?
A. By the term “more beneficial” I meant that the company
should be reimbursed for the actual losses it has
incurred.
Likewise, Mr. R Srivatsan, respondent’s surveyor also
maintained the same position that the actual losses are
payable in terms of the policy in his cross examination
and the same reads as under:
Q Whether the loss you are talking about is the
loss of possible or potential increase in the
inventory of the insured?
No. It is only the actual loss of output sustained by
the insured following the fire accident.”
49. In view of the aforesaid position, it can be said that whether the
wordings “actual loss” were existing in the case of Coalex (supra)
and were defined therein and which is not present expressly in the
present case does not really alter the position so long as there are
O.M.P. No.1036/2012 Page 142 of 196
indicators in the policy document showing that the actual loss payable
under the policy and the respondent also maintains that what is
payable are actual losses. In that event, indemnity principle shall
continue to apply in the present case.
Further in Coalex (supra) Wood J. also observed that the
formula provided in the policy document cannot be equated with
the liability as the real purpose of policy is to indemnify the
insured for the actual loss sustained and therefore the loss of
gross profit and the reduction of turnover/ output through formula
are two different things. The said observations of Wood J. are as
under:-
“I agree with the plaintiffs' submission that the
meaning of "consequential loss" for the purpose
of the policies is to be gained from the definition
they provide namely loss of gross profit due to
reduction in turnover or output where appropriate,
and increase in cost of working. I also agree that
notion needs to be carried through to S2. It does
not, however, follow as the plaintiffs submitted,
that the loss of gross profit actually sustained is to
be equated with or derived from the formula. To
my mind the extent of the cover is to be divined
from the full wording in Item No 1 S2 (p17). That, to
my mind, is concerned first with stating the
liability to indemnify the insured for the actual loss
sustained, and secondly with establishing a limit
to that liability by reference to the formula.
Elevating the formula to a definition of the liability
(or property insured), is to overlook the structure
of the clause and the work it is designed to do.
What does emerge from the definition and the
clause, to my mind, is the concept that the loss of
gross profit and the reduction in turnover/output
O.M.P. No.1036/2012 Page 143 of 196
are two different things, and that it is necessary to
find a loss of gross profit resulting from reduction
in turnover/ output.” (Emphasis Supplied)
From the reading of the said observations of Wood J. which are
in consonance the conclusion arrived at by me in the present
case, it can be said that the formula in the policy document
provide guidelines/ tools to arrive at the assessment of loss of
gross profit during the indemnity period. But that does not
however mean that the said notional loss of profit should not be
compared with the reality situation so as to see as to whether the
business of the company is actually and really affected during
the indemnity period of not due to damage or not. This is due to
the reason that there are number of circumstances where
business of an enterprise can be affected which may or may not
include damage due to fire or peril insured but for other reasons
irrespective of the fact that enterprise has got ample output for
sale or even there exists no reduction of turnover comparing to
the last year but in fact there is financial crunch situation due to
which the business is not even able to maintain the previous
year’s turnover. Thus, one cannot say the figures arrived at by
the formula is equivalent to the liability and cannot really elevate
the formula with that of liability payable in the insurance policy
which is correctly held by Wood J. in Coalex ’s case (supra).
Thereafter, Wood J. further made significant finding that
believing the plaintiff’s contention that what is payable is loss of
gross profit arising out of loss of output as defined in formula in
policy document would be overlooking the enquiry as to actual
O.M.P. No.1036/2012 Page 144 of 196
loss suffered by the insured. This has been observed by Wood J.
in the following words:-
“It appears to me erroneous within the policy terms to
equate the "Actual Loss Sustained" with a loss of
production or output. First, to do so is to read the
words "due to" as qualifying "actual loss" when in
truth they qualify "the loss of gross profit". That this
is so is indicated from a natural reading of the clause
and from the obviously different ways that "actual
loss" and "reduction in turnover/output" are used. If
they were the same there would be no occasion for
the stipulation of a causal relationship. Secondly, to
contend as the plaintiffs did that where there is a loss
of output the plaintiffs are entitled to a sum for a loss
of gross profit due thereto as defined in the formula,
involves something of a non sequitor since it
overlooks the need for inquiry for an actual loss.
Strictly applied the plaintiffs' contention requires an
inquiry for loss of output due to reduction in output
which makes little sense.”
Thereafter, in the case of Coalex (supra), there was further
evidence which was submitted by the insured in the said case to
the support the plea there was indeed a loss of profits in the form
of insured’s inability to fulfill contractual obligations/ shipments in
the year 1984 though the indemnity period was between 1982 to
1983. This has been recorded by the learned Judge in the
following manner:-
“The defendants submitted that while there was a
loss of production proved, no actual pecuniary loss
was established in respect of which the plaintiffs
were now entitled to be indemnified. In particular it
was submitted that the Kepco transaction which
came into consideration in December 1984, was well
O.M.P. No.1036/2012 Page 145 of 196
remote in time and could not be shown to be related
back to the loss in production between November
1982 and April 1983.
The plaintiffs did not suggest that there was any
other sale lost by reason of the damage to the
conveyor. The steps which they suggested found
their way towards establishing a causal connection
between the damage and an actual loss involved the
following facts which I find were established in the
evidence of Mr. Knight:
i) the borrowing of 76,260 tonnes of primary coal
from then existing, which was finally repaid by
September 1984;
ii) the borrowing in April 1984 of a further 46,000
tonnes which was replaced by December 1984;
iii) the purchase from Clutha in July 1984 of 18,000
tonnes of coal to meet a contractual shipment”
Defendants on the contrary contended in the case of
Coalex(supra) that there was no causal link/ connection
between the damage and loss of sales extending over to the
period of 19 months from April 1983 to December 1984, the
learned Judge agreed with the Defendants by finding that
there was no causal connection between the loss of
production vis a vis the plaintiffs inability to fullfil the orders in
the year 1984 and 1985 which is beyond the period of
indemnity. In the words of Wood J, it was observed thus:-
“It may be accepted that there is considerable
practical difficulty in proving a relationship of
cause and effect between an interruption
affecting production from November 1982 to April
1983, and a suggested loss of a sale in December
1984, and that what the Court is concerned with is
O.M.P. No.1036/2012 Page 146 of 196
a "commonsense cause" as explained by Lord
Sumner in Becker, Gray and Company v London
Assurance Corporation [1918] AC 101 at 112 to
114. As the evidence presently stands, I am
unable to conclude that there is such a link,
although I recognize that an examination of actual
production and sales, budgeted production and
sales, production difficulties, market conditions
and the like during the period in question may yet
establish it. In particular, it seems to me that it is
not possible to infer from the evidence of Mr.
Knight, which I accept, that there was insufficient
coal stockpiled or planned for production in
December 1984 for an emergency sale to Kepco,
and from the borrowings, that there was the
necessary causal relationship. The onus of
proving the connection rests upon the plaintiffs,
although by reason of the manner in which the
case was conducted by each party this aspect
became very much a side issue. This relates also
to the quantum of loss. Kepco inquired after
"additional tonnage", the plaintiffs offered 55,000
tonnes of coal from another source which was
outside the usual required specification, and
Kepco responded by indicating that it required
55,000 or 110,000 tonnes of coal within its
specification. A range of possible prices was
identified. Kepco's telegram referred to "1985
price"; the plaintiffs' reply referred to "C and F
price" on an understanding that the "provisional
FOBT price to be quality adjusted based on 1984
settlement EPDC for Kepco". The 1984 contract
price was $36.89 per tonne, the 1985 price was
then unknown although later it was negotiated at
$48.47 a tonne. In the result, I am presently left in
uncertainty as to the tonnage which would have
been sold and the price/profit to the plaintiffs for
the transaction, and as to whether a sale would
have been made had there been no
O.M.P. No.1036/2012 Page 147 of 196
production loss in the quantity I have
determined.” (Emphasis Supplied)
From the reading of the aforenoted observations of Wood
J. in the case of Coalex (supra), it can be seen that the
learned Judge also appreciated the evidence which was
available on record in the said case in relation to sustenance
of actual loss beyond the period of indemnity which was in the
year 1984 -85 when the indemnity period was between
November 1982 to April 1983. Learned Judge was of the
view that no causal connection can be established
between the losses carried out in the year 1984-85 vis-à-
vis the loss of production which was excess as per the
formula between the interruption period of 1982 to 1983.
In effect, the learned Judge found that the losses in the
year 1984-85 for which evidence was available on record
in the said case was not the direct consequence of losses
and as a result of damage there and was no evidence to
this effect on record. Applying the said principle to the
instant case, there exists no evidence at all that the actual
loss has been suffered by the respondent herein. The
respondent also contends the same that by putting the
values in the formula, the respondent should be entitled
to the sum claimed on the basis of loss of production
irrespective of the fact when such loss is actually is
sustained in future is unknown. The respondent in this
context claims that the business of the insured is cyclical
in nature where it is difficult to foresee as to when the
O.M.P. No.1036/2012 Page 148 of 196
production ought to have been made during the
interruption shall be sold . Thus, the present case of the
respondent becomes the case of lack of evidence where
the exists no evidence presented by the respondent so as
to show as to when the loss of productions shall be sold
in future so as to cause its affect on the business as
against the Coalex case [supra] where at least the Plaintiff
in the said case made endeavors to show the sufferance
of actual loss in the year 1984 -85 which was rejected by
the court. Though it is altogether different matter that in
the case of Coalex (supra) the court also found on facts
that the evidence furnished does not establish its cause
and effect relationship and thus rejected the same. The
case of Coalex (supra) also demonstrates the point that
the values derived from the formula are to be compared
with its actual effect of the business on the indemnity
period and thus respondent’s plea that the entitlement of
the loss of products is dependent upon the values
derived from formula are also addressed by the court in
Coalex (supra) by rejecting such plea/ submission of the
insured. (Emphasis Supplied)
The said case of Coalex (supra) was further taken up in
appeal before the Supreme Court of New South Wales,
presided over by the three Judges namely, Hope J., Samuels
rd
J. and Priestly J. on 23 February, 1988 affirming the order of
Wood J. under appeal which is titled as Coalex Pty. Ltd. v.
O.M.P. No.1036/2012 Page 149 of 196
Commercial Union Assurance of Company of Australia
Ltd. (1988) 5 ANZ Insurance Cases 60-858. Samuels J.
reexamined the entire issue after the judgment of Wood J.
which was put to severe criticism by the Coalex Pty. Ltd. in
appeal. Firstly, the Appellate Court Judge observed that the
business interruption insurances are contracts of indemnity
irrespective of the fact whether it is a valued policy or not
though the appellate court concurred with other comments of
Wood J. This is reflected from the findings of Samuels J
which are reproduced below:-
“Before indicating my reasons, which are much
the same as those of Wood J, I can dispose of the
argument debated, at the trial, that the contest can
be clarified by formulating it in terms of the
question whether the insurance was one of
indemnity, or was contained in a valued policy. To
express the matter in this way is, I think, to create
a false dichotomy. As the majority judgment in
British Traders Insurance Co Ltd v Monson (1964)
111 CLR 86 at 93 makes clear, a valued policy may
remain a contract of indemnity and in full
compliance with the well known statement of Brett
LJ in Castellain v Preston (1882) 11 QBD 350 at
386. As professor Hardy Ivamy observes in his
General Principles of Insurance Law 2nd Ed 1970
at 8:- "A contract of insurance, which is otherwise
a contract of indemnity, does not cease to be a
contract of indemnity because it is contained in a
'valued' policy, providing for payment of a
specified sum on the happening of the event. The
effect of the valuation is to dispense with proof of
the extent of the loss. The assured must still prove
that he has in fact sustained a loss." So, in the
present case, even if the appellants' contention
O.M.P. No.1036/2012 Page 150 of 196
were correct, the contract remains one of
indemnity; and the loss which must be proved is
the shortfall in output the value of which is then
established, however, by reference only to the
machinery provided in the formula. Little or no
assistance is to be derived from seeking to
categorise the policy in the manner suggested. An
answer to a misleading question will not provide
the solution to the problem which can be found
only by determining the true construction of the
policy”
Thereafter Samuels J. also rejected the contention of insured
who argued that the order of Wood J. is bad in law as actual loss was
defined in the policy as loss of gross of profit arising out of turnover /
output and no further inquiry as to actual loss is warranted except
what is covered in the definition and formula. The learned Judge also
dealt with the position whether the Court can consider the loss of
production which could have been sold in the year 1984-85 at the
prices subsequently negotiated for sale of insured. Samuels J.
approved this finding of Wood J. that there exists no causal
connection between the loss which could have been occurred on
account of deficient sales attributable to the loss of output during the
indemnity period. This has been done by Samuels J. by furthering the
discussion in the following manner:-
“The appellants' alternative submission was that, if
they were bound to prove an actual loss of gross
earnings, they had sustained it by reason of a lost
opportunity to sell a consignment to a regular
customer, Korean Electrical Power Company
("KEPCO") in December 1984. Put shortly, the
appellants' case was that they calculated their loss of
production at 90,398 tonnes, all of which could have
O.M.P. No.1036/2012 Page 151 of 196
been sold to KEPCO in December 1984 or January
1985, at the prices subsequently negotiated for sales in
1985. Evidence in support of this claim was led in April
1986. In his judgment delivered on 23 July 1986 Wood
J, noting that the appellants' case on actual loss had
not been fully investigated since it was, of course,
subsidiary to their principal contention, offered the
parties the opportunity to consider the question
further. The matter came before the Court again on 17
October when the appellants declined to call further
evidence but obtained leave to make further
submissions, adopting for that purpose the learned
judge's finding that their loss of output during the
period of interruption was 68,140 tonnes rather than
the larger figure originally advanced.”
“The learned judge found that he was unable to infer
from the material before him a causal connection
between the interruption, which ended on 11 April
1983, and the loss of an opportunity to sell coal to
KEPCO in December 1984, by reason of lack of stock,
when that organisation inquired about "an emergency
purchase". Wood J analysed the facts in both his
judgments, and I agree in his conclusion that the
necessary nexus cannot be inferred. I do not make my
own analysis because the appellants failed upon a
separate point also. In order to establish an actual loss
of gross profit the appellants must have proved the
rate of gross profit attributable to a sale in December
1984 or, perhaps, January 1985. But no such evidence
was led.” (Emphasis Supplied)
“This question was raised in the course of the appeal.
Counsel for the appellants frankly conceded that there
was no evidence of the rate of gross profit applicable
at the time the sale was notionally lost. He contended
that, as a matter of construction of the policy, the
actual loss was to be valued by reference to the
definition of rate of gross profit in the policy. But this,
as counsel agreed, is the rate earned on turnover
during the financial year immediately before the date of
O.M.P. No.1036/2012 Page 152 of 196
the damage i.e. immediately before November 1982,
and therefore presumably means the rate earned
during the year ended 30 June 1982. In any event, the
financial year relevant to the computation of rate of
gross profit for the purposes of a calculation under the
formula is remote from the financial year ended 30
June 1985 in which the sale to KEPCO would, or might,
have been made. The attempt to resort to the definition
of rate of gross profit in the policy, supported by the
dubious proposition that the loss is to be treated as if
it fell within the indemnity period and ought therefore
to be assessed according to factors current at that
time, is really a further attempt to establish the
difficulties said to attend the respondents'
construction of the document. That must be an
irrelevant exercise since it is performed in the course
of working a calculation entailed by the assumption
that the respondents' construction is correct.”
“I must say, with all respect, that I can see no reason
why the gross profit earned during the financial year
ended June 1985, and likely to have been earned upon
this transaction, had it come to fruition, could not have
been proved at the trial in the latter half of 1986.
Various elements necessary to the assessment of loss
under the policy depend upon recourse to the
insured's books e.g. turnover and gross profit, or
reliance upon the insured's accountancy methods e.g.
the amount of opening and closing stocks. Moreover,
Condition 4 (of the Conditions applying to s2) provides
that documentary evidence of accounting details
required for the purpose of investigating or verifying
claims may be certified by the insured's auditors and
that such a certificate shall be prima facie evidence of
the facts. Whatever the reasons for the omission to
produce the evidence in question they could not have
included difficulties presented by the form of the
policy or any obstacles to proof which it presented.
However that may be, the necessary material was not
offered and, as a result, whatever the probability of the
O.M.P. No.1036/2012 Page 153 of 196
sale to KEPCO (and I have said that I agree with the
learned judge that it was not established) the means of
transmuting it into financial loss were not available.
Thus the appellants' alternative claim fails.”
“I add that it was not argued that, even if the notional
sale were shown to have been causally linked to the
loss of output and its value supported by evidence, it
could not constitute a loss within the policy because
its occurrence would have fallen outside the indemnity
period. It may be that although the indemnity period
imposes a limit on the losses which may be regarded
for the purposes of the formula, it does not so apply to
the assessment of "actual loss sustained." That
concept is not expressly restricted as it would be in a
standard United States policy by use of language such
as "actual loss sustained....... resulting directly from
such interruption of business for only such length of
time as would be required....... to rebuild, repair or
replace...... However, as I have said the point was not
raised and I say no more about it.” (Emphasis Supplied)
50. From the reading of above both the judgments by Samuels J.
and Wood J. in the case of Coalex (supra), it is clear that both the
learned Judges were not inclined to apply the output basis for
assessment of loss of profits during the indemnity period as
there was no causal connection between the loss which was
shown to have occurred in the year 1985 vis-à-vis the indemnity
period which was between 1982-83. Another significant finding
in the case of Coalex [supra] was that the formula provided in
the policy was mere guidelines to assessment of loss of gross
profit . However, the said lost gross profit on the basis of loss of
production has to be measured after seeing its the effect on the
business of insured during the indemnity period and making the
necessary adjustments thereto, if any, considering the other
O.M.P. No.1036/2012 Page 154 of 196
circumstances in the business so as to arrive at the figures which are
as realistic as possible to indemnify the insured. Thus, merely
computing the loss on output basis or on turnover basis without
making an inquiry of suffering of actual loss and causally linking
with damage would be hypothetical exercise and would not
provide realistic figures which would be against the principle of
indemnification as enshrined in law relating to insurance
contracts . The said conclusion arrived at after analyzing the
judgment of Coalex (supra) is also in consonance with my
independent findings arrived at after applying the legal concepts
discussed above from Riley on Business Interruption Insurance which
leave no room for doubt that the view taken herein is widely accepted
by the authorities and the case laws in the common law jurisdictions.
51. The resultant effect of the overall discussion is that the
st
impugned award dated 1 August, 2012 passed by the learned
arbitral tribunal is devoid of any judicious approach for finding out the
appropriateness of the mode of assessment of loss of profits when
the parties dispute the applicability of either of the said modes. The
reasons whatsoever are recorded by learned arbitral tribunal are all
contrary to settled principles of law of Insurance and concepts
governing the field including that merely because the valuation of the
loss of profits on the output basis is coming on higher side, then the
claim should be awarded in favour of the respondent as if the
insurance is meant to profit the insured which is contrary to the law
that insurance is contract of indemnity. The other reasons are cyclical
nature of business of respondent which I have already dealt with that
O.M.P. No.1036/2012 Page 155 of 196
it will not aid the case of the respondent as there exists no evidence
as to the period constituting the business cycle leading to no
forecasting of the effect of the anticipated loss of profits on the
business in the future and thus the said reasons are also contrary to
the legal position and well accepted principles of business
interruption insurances and the manner the losses are computed and
ascertained in the business interruption insurances. Thus, the said
reasons are no reasons in the eyes of law and contrary the public
policy which is governing law of insurance including like principle of
indemnity, principle of proximate cause and all the legal concepts
discussed above and enabling this court to interdict and interfere with
the impugned award.
52. Thus, the grant of impugned award in relation to claim 1 and
the reasons contained therein to support the application alternative
method of assessment of losses which is output basis in lieu of
turnover basis is clearly against the public policy of India in view of
the settled position on the law relating to insurance including principle
of indemnity amongst others. The said award of claim No. 1 thus
clearly falls within the ambit of the interference under the provisions
of the Section 34 of the Arbitration and Conciliation Act, 1996 as the
view adopted by the arbitral tribunal is not plausible one and no
reasonable person conversant with the legal position and legal
concepts governing the insurance contract would arrive at this
conclusion by awarding the hypothetical claims which have not
causal connection with the peril insured when there is no reasonable
forseeability of the salability of the output within the indemnity period
O.M.P. No.1036/2012 Page 156 of 196
and even after the expiry of the same. As a result, I find the impugned
award in relation to claim No. 1 so far as it necessitates the
applicability of the output basis and proceeds to apply the output
basis for the purposes of the computation of the loss of the profits for
the interruption period on account of the damage as as result of the
peril is liable to be interfered and as such set aside in view of the
reasoning provided by me in the preceding paragraphs of this
judgment that there is no necessity to switch over to the alternative
basis of the computation of the loss of profits as the same is not
desirable in the present case nor the same would provide the realistic
assessment of the loss of profits. As such, the turnover basis is the
appropriate basis as per the facts of the present case and by applying
the legal position to the facts in hand.
53. Now, the question remains in relation to the grant of sum
towards indemnification as per claim no. 1 in view of my clear finding
that the appropriate mode of assessment of the loss of profits in the
present case is the turnover basis which atleast reflects the realistic
loss of profits during the indemnity period howsoever lower or higher
side they may be depending upon the circumstances of the business
done during the indemnity period. To this effect, one has to see the
report of the surveyor M/s Adarsh and Associates who has computed
the loss of profits as per turnover basis. There was some
th
recommendation of 8 January, 2008 (not on record) which
requested the interim payment of the sum of Rs. 6 crores to the
respondent. The said recommendation is not on record but the
parties agree that the same was in the nature of the recommendation.
O.M.P. No.1036/2012 Page 157 of 196
th
The first report of the surveyor Adarsh and associates is dated 24
June, 2009. The said surveyor report deals with the submissions
advanced/ claim put forward by the respondent in support of the
adoption of the output basis in lieu of the turnover basis for
assessment of losses. The said report provides the following
response to the respondent’s contentions which is more or less
similar to my independent analysis done above and the same is worth
mentioning below :
“(f) That the business interruption policy, both on turn
over or output basis, can indemnify only the loss of gross
profit, which other wise could be earned by them, during
indemnity period, had the loss not occurred and that the
gross profit can only be earned after the output is ultimately
sold. Thus, the assessment of loss carried out by us, we
have taken in to account the above facts, which is the
requirement of LOP policy.
(g) Further the insured is under the impression that loss on
the basis of ‘output’ can be computed simply by
considering the gross profit on the sale value of difference
of output, during the actual indemnity period and period of
standard output, without actual realization of value from
sales, which is a primary requirement/objective of LOP
policy, while computing financial loss or gain during any
period.
Because of above reasons, it is obvious that had the said
incident not occurred, the Insured would have been
compelled to either close down manufacturing of various
products or reduce output from various plants i.e. CP-1 to
CP-5, as followed by them prior to and during actual
Indemnity period. Further, no business activity can survive
by continuous production and accumulating stocks, without
proper off take/sale of finished goods simultaneously.
O.M.P. No.1036/2012 Page 158 of 196
It was observed that though there was shortfall in turn over
as well as output during Indemnity period, when compared
with the period standard ‘turn over’ as well as ‘output’, but
without actually suffering any financial loss on this account
in the given circumstances, particularly keeping in view of
various facts and provisions under ‘other circumstances
clause’. It is important to note that at any time during
indemnity period, the accumulated stocks in hand, which
were available with Insured at the time of commencement
of Indemnity period/prior to the incident, did not
diminish/extinguish to Nil and therefore, Insured’s
argument that they had suffered loss due to decline in
output or turnover because there was no output from plant
CP-2 and 3, due to said incident, did not hold good by any
standard and thus Insured’s repeated insistence to carry
out assessment of loss on output basis had no merit/logic.
Further the assessment of loss on any basis would be the
same as per the assessment of loss as carried out by us in
later part of the report.”
“9.3.1.1 Insured also acknowledged that there is no
direct correlation of output with turnover in their industry,
which is a generic statement and holds good for most of
the industry/business activities, particularly where/when
market demand is commensurate with the output.
The indemnity period available under the policy is only for 6
months and therefore, various consideration i.e. market
trend etc have to be confined only for the period of 6
months which have been duly examined by us for
assessment of loss. We have considered actual results,
both on turn over & output basis, during entire indemnity
period, during which Insured down ward trend prevailed, as
also experience by Insured in past during previous 6 years
for which graph was submitted by the Insured. Further, we
are of the firm opinion that the cycle/trend spanning over 2
to 3 years can not be considered of any advantage to
Insured, as argued by the Insured. Irrespective of nature
of industry, particularly when the indemnity period, opted
under the policy is 6 months, during which the industry has
suffered the down trend.
O.M.P. No.1036/2012 Page 159 of 196
Had the Insured been aware of such facts in advance, they
would have arranged the captioned LOP policy with
sufficient indemnity period, say even for 3 years and also
policy could have been arranged on output basis.
9.3.1.2 We also examined the trend of turnover
reflected from the quarterly published results of the other
industries furnished by the Insured, we observed general
downward trend during the period of last two quarters of
financial year 2007-08 during the corresponding indemnity
period of the Insured, when compared with the results of
corresponding period in previous year of individual
industry. Further, are of the opinion that the data
pertaining to quarterly results of the other POY industries
can not be comparable with the Insured because each
industry operates within different parameters i.e. catering
to different market segments, range of products and buyers
etc.
Thus, we did not find any merit in Insured’s argument that
polyester industry is cyclic in nature and accumulated
stocks are sold once market improves, even if the same
exceeds the Indemnity period opted under policy, which his
precisely the case in this particular incident.
Conclusion : Therefore, we did not find any merit in
Insured’s arguments that loss should be assessed on
‘output basis’ in view of the alternative basis clause
attached with policy and further in given circumstances the
assessment of loss, as carried out by us on the basis of
‘turnover’, as primarily provided in the policy, also holds
good on output basis.
Note : However still, where ever possible, we have
parallely examined the results of output, during the
standard and actual Indemnity period, along with the
results of turnover as well as other considerations taken
into account to carry out assessment of loss, as discussed
in later part of the report.”
O.M.P. No.1036/2012 Page 160 of 196
54. From the reading of the aforementioned excerpts of the report
of surveyor M/s Adarsh and Associates, it can be seen that the
reasons provided by the surveyor in his report especially ones
reproduced above are much in consonance with the legal position, I
have discussed above. The surveyor has rightly stated that the loss
of profits are recoverable either on turnover or output basis only
which could otherwise be earned by them during the indemnity
period, had the loss not occurred and that the gross profit can only be
earned after the output is ultimately sold at point (f). Likewise, the
reasoning at paragraph 9.3.1.1 about the short indemnity period of 6
is also in consonance with the discussion I have done after quoting
Riley on Business Interruption Insurance which specifically deals with
seasonal or cyclical nature of the business and recommends longer
indemnity period to provide ample covers. All this would mean that
the logic and reasoning provided by the surveryor Adarsh and
Associates were rational in nature and goes in sync with the legal
position though there are computation errors as discussed
hereinafter.
55. The Surveyor M/s Adarsh and Associates thereafter proceeded
to compute the loss of profits on the basis of the turnover method by
taking into consideration the maintenance of turnover through the
accumulated stocks and proceeding to make the necessary
adjustment thereof. As per the surveyor, the total stock in hand as on
st
1 November, 2007 was 51,598 MT and after making adjustments,
the surveyor came to the conclusion that the shortage of the net
quantity of the accumulated stocks due to the sale in the indemnity
period is 7028 MT. The rate of the gross profit is arrived by the
O.M.P. No.1036/2012 Page 161 of 196
surveyor is 10.0325% after seeing the gross profit for financial year
2007-2008. The shortfall in the turnover during the indemnity period
was shown to be Rs.82,15,69,184-/ and the loss of gross profit on the
same was computed to be Rs.8,24,23,928-/ by the surveyor.
However, as per the surveyor M/s Adarsh and Associates, the
insured/ respondent could not maintain the desired turnover by
disposing off the inventory in hand amount 51,598 MT available at the
time of the commencement of the indemnity period. Therefore, the
shortage/ reduction of turnover, as worked out as Rs.82,15,69,184/-
was not attributable to have occurred due to the incident or damage
caused by the incident but due to poor off take/ market conditions,
prevailing during the actual/ full indemnity period of 6 months. Thus,
as per the surveyor, the shortage of the turnover as per formula
which is Rs.82,15,69,184/- did not match with the real business
condition of the respondent in as much as the respondent could not
even sold its existing stock during the indemnity period which means
that there were lack of sales and the reduction in turnover is thus due
to lack of sales and crunch in the market and not due to the business
interruption caused by the damage due to the incident of fire. Thus,
the surveyor came to the conclusion that the actual turnover
realized from sale of 1,96,663 MT of various polyester products
th
during the indemnity period commencing from 30 October,
th
2007 to 29 April, 2008 tantamount to standard turnover and
there was no reduction of turnover during the indemnity period
arising out of the incident. The surveyor came to the opinion
that the loss of profit suffered by insured during the actual
indemnity period is only in respect of the quantity of the stocks
O.M.P. No.1036/2012 Page 162 of 196
sold from the accumulated stocks i.e. difference in quantity of
the closing stocks held at the time of the commencement and
expiry of the indemnity period asnd the insured is placed in the
same condition, as it was prior to the said incident and hence
fully indemnified .
Thereafter the assessment of loss has been done by the
surveyor by conducting the computation in the following manner:
The total shortage of various products from
accumulated stocks, due to sale during
indemnity period as worked out in table under
para at sl. No.9.3.3 above
7028 MT
Total qty of various products, converted on
Common denier sold during the indemnity
period ref Annexure – A-3
1,96,663 MT
Total realization, net of excise duty, discounts,
brokerage and commissions from sale of
various products during indemnity period
Rs.1164,39,49,548
The unit net realized cost from sale of above
qty on weighted average basis
Rs.59,207,63/- MT
Therefore, net realizable cost of 7,028 MT of
various products, depleted from accumulated
stocks during indemnity period @
Rs.59,207,63/MT
Rs.41,61,11,224.00
Loss of gross profit @ 10.0325% of above Rs.4,17,46,359.00
==============
th
The loss of gross profit as per the surveyor’s report dated 24
June, 2009 was sum of Rs.4,17,46,359.00 towards the claim no. 1
which is payable by the insurer. This assessment has been done by
the surveryor after considering the concerns of the respondents/
O.M.P. No.1036/2012 Page 163 of 196
insured as per its emails and communications exchanged between
th
them uptil the submission of report dated 24 June, 2009.
56. There were certain communications which the respondent/
insured wrote to surveyor M/s Adarsh and Associates immediately
rd
prior to the submission of report which is email dated 23 June, 2009
th th
and later communication dated 6 July, 2009 and 30 July, 2009
whereby the respondent communicated its objections on the mode of
assessment of the loss of profits by the turnover basis and
simultaneously pressed for the application of output basis for the
rd
computation of loss of profits. The respondent’s email dated 23
June 2009 reads as under:
“From : Laxmi P Soni [malto; laxmip, sonl@indorama-
Ind.com ]
Sent : 23 June 2009 09:55
To : ‘Adarsh Gupta’
Cc : ‘Ravindra S Singhvi’; ‘S K Rustagi’; ‘Umesh Mathur’; ‘
Alok Banerjee’
Subject : RE: Final assessment against Your claim under
LOP policy, due to fire in control panel room of plant CP-2
& 3, at your Butipuri plant, Loss dtd. 29.10.2007-
RESPONSE FROM INDORAMA
Dear Mr Gupta,
th
We refer your email dated 19 June, 2009 addressed to
our Mr.Umesh Mathur and we have taken note of your
views.
We did not receive any communication so far with reasons
thereof for your basis of holding our claim bill erroneous :
O.M.P. No.1036/2012 Page 164 of 196
We had submitted all the data and pattern of production,
closing stock and sales turnover on monthly basis for Indo
Rama for 6 years and for the POY industry as well.
This pattern clearly speaks that Output basis loss
assessment only reflect true indemnity.
We hereby quote a few communication from your side as
under :-
th
Your mail dated 27 March, 2009-Point 3 reads as under :
With regard to your opinion for settlement of loss on
output basis, we confirm having apprised you that we
see no merit & justification on the alternate basis.
Further, please note that even if this basis is adopted,
the net result/the loss assessed still works out near to
the loss computed by us on turnover basis.
th
And in your mail dated 13 June – Para 2 reads as under –
WE confirm having apprised you that in the given
circumstances the assessment of loss, there is no
justification to carry out assessment of loss, on output
basis as there are no comparable parameters
available to adjust output during indemnity period, as
required under ‘other circumstances clause’. Further,
you are already aware of our opinion & reasons in
details. In this respect as well as on various other
points raised by you, from time to time. However,
where ever found reasonable, we have accepted
your views/arguments and considered in our
assessment.
th
And your third mail dated 19 June, 2009- Point 1 reads as
under –
We are of the firm opinion that the insurance policy is
a legal contract between Insured & Insurer and its
terms & conditions are equally applicable and binding
on both parties. Further, while you have desired
assessment of loss on output basis, under the
proviso ‘Alternative basis clause’, it is surprising that
O.M.P. No.1036/2012 Page 165 of 196
no concrete reasoning or basis to invoke this clause
has been provided by you, whereas the said clause
specifically states that the assessment on output
basis can be considered ‘if found necessary’.
If we read three mails together, the inference is –
A) The loss assessment in Turnover and Output basis
will be nearly the same.
THEN KINDLY GIVE ASSESSMENT TON OUT PUT
BASIS
B) You do not have comparable parameters available
to adjust output during indemnity period, as required under
‘other circumstance clause’ –
PLEASE LET US HAVE REQUIREMENT FOR THE SAME
ENABLING YOU TO ASSESS LOSS ON OUTPUT BASIS.
AS STATED ABOVE, ON OUR PART WE HAVE
PROVIDED ALL RELEVANT DATA AND PATTERNS.
C) WE HAVE NOT GIVEN ANY CONCRETE
REASONING OR BASIS TO INVOKE ALTERNATIVE
ACCORDING TO US NO REASONS IS REQUIRED TO
BE GIVEN FOR INVOKING ALTERNATIVE CLAUSE.
CLAUSE ATTACHED TO THE POLICY MENTIONS
INDEMNITY ON OUTPUT BASIS. HOWEVER STILL WE
HAD GIVEN YOU SIX YEAR DATA OF SALES/CLOSING
STOCK & PRODUCTION AND ALSO INDUSTRY DATA.
Though we are very clear that under the policy contract
issued to us we have rights to get the claim on output
basis, we hereby submit our observation on your basis of
settlement.
1. There is clear reduction of turnover during the
indemnity period from the Standard turnover period
you have selected. You have NOT considered this
reduced turnover mentioning that was large quantity of
stock in hand during the indemnity period. We would
like to clarify our position as under -
O.M.P. No.1036/2012 Page 166 of 196
A) There are 4 main products and hundreds of
varieties in each products. Sale is also dependent on
merge as well. We do not have sufficient stock of
desired denier and merge very time. Hence merely
stock inventory in aggregate will never give true
picture.
B) During the period (May 2007 to November
2007) closing stock had piled up and in that case
same logic of having very large quantity of stock for
sale should apply-in view of your stand.
C) You are aware that CP 4 was under
stabilization process during the period of standard
turnover (selected by you) and CP 5 also just
commenced production 2-3 months back. You will
appreciate that production can be doubled immediately
but sales takes some time.
D) These variation clearly indicate that there is
NO NATURAL justice in getting the loss settled on
Turnover basis.
You yourself have denied in your point 2.0 that turnover is
not the right indemnity basis considering the actual
turnover as standard turnover. Please note that stock
levels had risen during the standard turnover period
(selected by you) whereas the stock levels had reduced
during the indemnity period.
YOU HAVE ALSO TAKEN U TURN IN YOUR BASIS OF
SETTLEMENT FROM YOUR INTERIM REPORT FOR ON
ACCOUNT PAYMENT WHEREAS YOU HAVE
RECOMMENDED FOR REDUCTION OF TURNOVER
FOR NOV 06 AND DEC 06 AND NOW (WITHOUT ANY
CHANGE OF ANY FACTOR INCLUDING STOCK LEVEL)
YOU HAVE JUST NOT CONSIDERED THE REDUCTION
OF TURNOVER FROM STANDARD TURNOVER.
2. In calculating status of accumulating stock you have
reduced the closing stock for the brunt stock twice-
once in closing stock and again in point 4-refer table of
O.M.P. No.1036/2012 Page 167 of 196
Point 1.0. This will revise the stock Qty for sale to
19228 MT.
3. The Production of PSF 3 having higher cost of
production (more power and steam) and less sales
realization (the detailed note was submitted to you)
had not contributed to Gross Profit. Rs.6 lost in a
product with sales price of Rs.59.2 per KG is more
than Gross Profit rate derived by you and hence
cannot be reduced straightway with its adjustment.
4. The Alternative Clause attached with OUR policy
provides indemnity on Output basis which may be
substituted for the term Turnover basis. So it is clear
from this clause attached to the policy that basis of
indemnity granted in the policy is on Output basis.
This is further strengthen under Memo 1 attached to
the above clause.
Moreover we had been told by ITGI two three time that
they have asked to give loss assessment on three basis –
Turnover basis; turnover basis with stock accumulation
clause and on Output basis. We still await your working for
other two options-turnover and output.
We await your feedback and confirmation in this regard.
With Regards
L.P. Soni
Vice President (Finance)
Indo Rama Synthetics (I) Ltd.
Dr.Gopal Das Bhawan
26 Barakhamba Road
New Delhi-110001
India
M : 9313436485”
th
57. Further, the email dated 6 July 2009 written by respondent to
the Surveryor M/s Adarsh and Associates reads as under:
O.M.P. No.1036/2012 Page 168 of 196
“From : Umesh Mathur ( mailto:umesh mathur @Indorama-
Ind.com)
Sent : 06 July 2009 17 : 33
To : ‘Adarsh Gupta’
CC : ‘Ravindra S Singhvi’ : ‘Laxmi P Soni’; S K Rustagi
Subject : RE : Assessment of loss under LOP policy loss
dt. 29.10.2007 –A/c INDORAMA
Dear Mr. Gupta,
th
We acknowledge receipt of your recent mail dated 27
June 09 addressed to Mr.Soni with a copy to me & were
surprised on your comments like unwarranted time.
….
You are mentioning that you were compelled to divot lot of
unwarranted time in scrutining mammoth data. Pleas
enote that we have furnished the data as demanded by you
and it was givne to you almost 8 months back. So if it
mammoth data, it is as per your own demand. You should
have appreciated that we had compiled the daily
production and common denier for sales and production
data at least 2 – 3 times (especially for common denier)
since the same was not clear to you. Even the closing
th
stock of 33950 MT as on 30 April 2008 was never
th
submitted by us. The correct closing stock as on 30 April
2008 is 32370 MT. You were given this data after
adjusting 1580 MT burnt stock. But you have taken the
closing stock of 33950 MT and then deducted again 1580
MT. This simple wrong application of figure shows the
casual approach adopted by your office In assessing our
claim. This resulted in reducing our claim amount.
Further, most of the time, delay of months together has
taken place at your end after submission of data for one
reason or other and not for the change of consultants. So
far as your fees concerned we are not aware of the system
of payment of fees hence we refrain to make comment on
your observation. We know one thing that datas were
submitted to you in May 2008 and July 2008 and our claim
was lying unattended at your end for the reasons best
O.M.P. No.1036/2012 Page 169 of 196
known to you. Please note that your office is responsible
for such inordinate delay and we are entitle to receive
interest for the same.
However we hereunder give our response to your various
observations
1. kindly refer our mail dated 23.06.2009 viewing your
few communications, we await your observation for the
same. You had confirmed that claim on Output and
Turnover basis will be same and also stated that in
absence of comparable parameter you could assess the
loss on Output basis. Please note that we have submitted
all the required information/data to you and at no point of
time you have indicated that such information/data is
insufficient for computing the claim on output basis. On the
other hand, now you are saying that data submitted by us
is mammoth data.
2. We are very clear that no basis is required for opting
for Alternative clause and its invoking in the event of claim.
It is sole discretion of Insured whenever he finds it
necessary since he has opted it in the policy. Nevertheless
we had submitted all the data and pattern of production
closing stock and sales turnover on monthly basis for Indo
Rama for six years and for the POY industry as well.
This pattern clearly speaks that Output basis loss
assessment only reflect true Indemnity. So we had
provided you sufficient data for consideration of loss on
output basis.
Moreover Alternative basis clause attached to policy
provides indemnity on output basis (kindly re read the
attached clause of the subject policy given to us) & so we
had requested you to work out assessment on output
basis.
3. Alternative basis clause provides for sale value of
output & it does not specify actual realization from sale of
O.M.P. No.1036/2012 Page 170 of 196
output. The actual realization from sales is the turnover
and has no relation with output or sales value of output.
Hope that this difference is well understood by you/your
office.
4. You have again mentioned that computation either
on turnover or output basis would remain same. In that
case we had requested to you in our mail dated 23/06/09 to
give computation on output basis but you have ignored the
same.
5. You have mentioned that we have lately stated that
there is large variety of product range. Pl. Note that this is
untrue because you had asked denier wise data & you
were fully aware of range of products. Even we have
submitted daily production report denier wise for each
product for six months in the month of May 2008, this data
clearly indicate the variety of denier, merge and filaments
being produced in each CP line for each product. It clearly
negates your statement that you were not aware of large
variety of the product range.
We have given you the natural and factual statement that it
takes time to sell the products where the capacity has been
doubled in immediate past and hence the true indemnity
picture cannot be arrived at the turnover basis but on
output basis only. This also shows you are deliberately
considering only those data which reduces our claim and
not the complete data to arrive at a logical conclusion.
6. Thanks for considering the reduction of turnover for
the month of November and December for on account
payment of Rs.6 Crores which you have CONSIDERED
FIT AT THAT TIME. We feel that we have right to know
about whats specific parameters have made you change
your stand of rejecting the claim on reduction of turnover
altogether after completion of full indemnity period and
analyzing various data/information for the said period.
O.M.P. No.1036/2012 Page 171 of 196
7. We were told by ITGI executives that they have
asked you to submit all the 3 types of assessment i.e.
turnover basis, turnover with application of accumulation of
stock clause and on output basis. Since, your theory of
assessing the claim only on accumulated stock basis was
communicated to us in May 2009 itself we could not meet
and convince underwriters. In the month of January 2009
till April 2009 you have indicated in several meetings with
us and Insurance company (as impression given to us) that
claim has been settled on reduction of turnover.
Accumulation of stock clause will not be considered since
you were having the stock in hand during the entire
Indemnity period. Now in the month of May you have
again taken U-turn of assessing the loss for Consumption
of accumulated stocks only. These deviations indicate that
the loss assessment is not based on sound footings and as
per the provisions stated in the policy document given to
us.
In view of the above, you will appreciate that inspite of
submitting complete data/details our claim has not been
appropriately assessed by you.
Thanks & Regards
Umesh Mathur
IndoRama
New Delhi”
58. There was another communication dated July 30, 2009 written
by the respondent to the petitioner raising the concerns on the mode
of the assessment of losses adopted by the surveyor M/s Adarsh and
Associates. The said letter dated July 30, 2009 reads as under:
“July 30, 2009
Iffco Tokio General Insurance Co. Ltd.
Iffco Tower
th th
4 and 5 Floors
Plot No.3, Sector-29
O.M.P. No.1036/2012 Page 172 of 196
Gurgaon-122001
Kind Attn : Shri H.O. Suri, Executive Director
Reg : FLOP Claim dt. 29.10.2007
Dear Sir,
This is an reference to our various meetings on the above
subject matter with you and your team including the last
th
meeting on Friday 24 July 2000 wherein Shri Vishal
Lohia, Whole Time Director, Indo Rama and Shri
S.Narayana, MD, ITGI were also present.
In this regard, as discussed and desired we would like to
give our views/comments against Surveyor’s report
th
received through email on 30 June 2009 as under :
A) Basis for Assessment of Loss
Your office had issued Fire Loss Of Profit Policy (FLOP)
dated 28/02/2007 with six months Indemnity Period to our
Company. The said policy besides having normal clauses
had certain add-on clauses which are as under :
1. Return of premium clause
2. Alternative clause
3. Accumulation of stock clause
The abovesaid clauses were essentially included in the
Policy around 4/5 years ago by your company to meet our
specific requirements and risk profile of our business. Indo
Rama is a petrochemical plant & to meet our specific
requirement the policy document was tailor-made to suit
our business requirements. For the policy under
consideration the abovesaid clauses were inserted in the
policy based on our request communicated to ITGI wide
our renewal letter No.IRSL/BDB/INS/ dated 28/02/07 while
renewing the FLOP policy. Same was agreed by your
office by incorporating the abovesaid clauses in the Policy.
O.M.P. No.1036/2012 Page 173 of 196
As per abovesaid provisions Indo Rama had launched
th
interim claim bill dt. 7 Dec’ 07 for Rs.25 Crs. towards loss
for 2 months on Output basis for CP 2 and 3 requesting for
on account payment. The surveyor had recommended
interim payment of Rs.6 Crores being loss in Turnover for
the months of November and December 2007 vis a vis the
Standard Turnover (May to October 2007)
th
Subsequently we had lodged our Final Claim Bill dt. 28
July, 2008 on Output basis for Rs.72.94 Crs. after invoking
the alternative and departmental clauses for the loss
caused by fire in control panels of CP 2 & 3 with the
following justification as quoted therein –
“We have preferred our claim on Output basis which is the
alternative to the turnover basis. As the policy documents
has been issued by the insurer & alternative basis clause
has been added to as an attachment which confers
absolute rights on the insured to choose the methodology
of settlement for each and every claim under the policy.
The insurer/Surveyor does not have any authority to invoke
this clause and it is the sole prerogative of the insured.
Based on this the words “whenever found necessary”
should be interpreted to mean “whenever found necessary
by the insured”. This is as per well accepted principle of
“Rule of Contra Preferenium.”
Further, in order to substantial our view point we have
submitted a detailed explanation/justification along with
details of Production, Sales & Closing Stock details
including the Bar Chart etc. for the last 6 years (since
2003) to Surveyor. On perusal of all the said details
following points emerged :
1. Production is relatively much more stable during the
entire period even after increase in capacity in year
2007-08.
2. Sales do not follow any pattern & follows the waives
which can be very steep. Sales are driven by various
factors & cannot be predicted. It does not have any
O.M.P. No.1036/2012 Page 174 of 196
relation with the inventory, season or any affinity to a
particular period in a year or fixed interval.
Even the Sales during the 6 months indemnity period-
Nov’ 07 to April’ 08 was varying. (Refer table & chart
below).
MONTH NET
PRODUCTION
NET SALE CHANGE IN
SALES OVER
PRECEDING
MONTH
(%AGE)
NOV-07 28688 34889 0
DEC-07 33095 25434 -27
JAN-08 30049 28050 10
FEB-08 28198 31667 14
MAR-08 29998 45760 44
APR-08 31172 32840 -28
3. Closing stock level was around 60000 MT in April
2003 when the capacity of plant was half to the current
O.M.P. No.1036/2012 Page 175 of 196
capacity but within next three months the stock level
was almost NIL. Further, Inventory level in the month
of January 2008 for more than 55000 MT when the
capacity was doubled as of April 2003 after expansion
& installation of CP 4 & 5, and thereafter also Stock
levels were reduced to less than 5000 MT after good
volume of sales in next couple of months.
The study/pattern of six years of abovesaid date clearly
indicate that –
Polyester industry is cyclic industry and not seasonal.
Whatever is produced is ultimately gets sold in due
course of time.
Sales are cyclic whereas production is relatively stable
The above facts and features clearly states that Output is
more consistent than sales and hence it is logical and
essentially correct to assess the loss on Output basis.
The claim lodged by us is as per department clause of the
policy as CP-wise profits-CP 2 & 3 per se are
ascertainable, and therefore, loss for CP 2 & 3 per se has
been claimed. We had also submitted CP-wise-product
wise production and sales etc. to support our claim.
Inspite of our giving all explanations, documentary
evidence and justifications to the surveyor that our loss
should be assessed on Output basis, the surveyor refused
to accept the same and finalized the loss assessment on
th
Turnover basis wide his report dt. 13 June’ 2009.
Unfortunately Surveyor has wrongly interpreted the policy
term & provisions and has denied the settlement on Output
basis in contravention to the underline spirit of policy.
In view of the above, it can be concluded that we have
been deprived off our rightful claim and surveyor has erred
in his approach by not accepting the settlement on Output
basis. Moreover, even by calculating loss on Turnover
basis, the Surveyor has not followed the established
practice & had even changed his stand. While doing
O.M.P. No.1036/2012 Page 176 of 196
interim loss assessment, shortfall in Turnover was the
basis to allow on-account payment while the same was not
considered in the final assessment.
2. OUR OBSERVATION ON ASSESSMENT ON
TURNOVER BASIS
Without prejudice to our right to get the claim on output
basis, we would like to bring to your notice the errors in the
loss assessment made by surveyor as under –
a. Surveyor had changed his stand in final assessment of
loss as against the interim assessment. Earlier
reduction of turnover was considered as the basis for
allowing interim/on account payment. (shortfall in
November and December 2007 from the Standard
Turnover – May 07 to October 07). Whereas, in final
assessment reduction in turnover (14300 MT apprx.)
during indemnity period (November 07 to April 08) has
not been considered while assessing the claim. Loss
was assessed on reduction of stock basis only.
b. Surveyor has assessed the Loss by considering
depletion of stock in hand during the indemnity period
for 7028 MT. Even while calculating the loss quantity
he had reduced the stock of 1580 MT (stock burnt on
02.01.2008) twice resulting in reduction in claim by
1580 MT. The closing stock figures considered our
already after adjustment of stock fire claim and we had
submitted all the requisite figure to him. Same are
reproduced again for your perusal as under :
MONTH OP
STOCK
NET
PRODUCTION
NET SALE CL.
STOCK
NOV-07 51597 28685 34889 45393
DEC-07 45393 33095 25434 53055
JAN-08 53055 30049 28050 55054
O.M.P. No.1036/2012 Page 177 of 196
FEB-08 55054 28196 31867 51382
MAR-08 51382 29996 45760 35618
APR-08 34038 31172 32840 32370
The above table clearly shows stock adjustment made in
st st
Closing stock as on 31 March & opening stock of 1 April’
08 by 1580 MT.
c. We were transparent in reducing our claim by 9040
MT towards the probable producing of RSF 3 after
repair of one panel. As the plant was run for few days
on half capacity, the production quantity was of sub-
standard quality (yellow) resulting in low realisation.
Moreover the operational cost-power, fuel etc and
waste was also very high loading to almost Nil
contribution. Since it was not economical to run the
plant at half capacity, the production was stopped.
These factors have cost us more than 10% (equal to
Gross Profit rate arrived by Surveyor) and hence it
was not economical to run the plant. All these facts
were informed to the Surveyor and he was convinced
about increase in cost for running of PSF but he did
not gave any rebate/relief for the same in his
assessment whereas surveyor has reduced 9040 MT
from the claim quantity while calculating the loss
assessment.
Moreover this line is giving trouble even till today and
the root cause is affect of fire heat, water and boot
damage and we are in a process to replace it.
We summarise our concern as under :
1. We had invoked Alternative clause under the
policy and had submitted our interim and final
claim bill on output basis for CP 2 and 3
department.
O.M.P. No.1036/2012 Page 178 of 196
2. Inspite of our submitting all the required
information, details, justification and documentary
evidence for assessing our claim on Output basis,
surveyor has erroneously assessed the loss on
turnover basis.
3. Surveyor in his loss assessment offer (on turnover
th
basis) dated 13 June 2009 had made following
errors –
Has changed his stand in final assessment
and gave his assessment on depletion of
stock in hand only. Shortfall in Turnover
(14300 MT apprx.) during indemnity period
was not considered whereas during interim
payment same basis was followed.
In his assessment he has wrongly deducted
1580 MT burnt stock twice
No allowance is given towards increased cost
of production and recued sale price of PSF 3
production (9040 MT) which exceeds even
the Gross Profit rate.
We have lodged the claim under the policy terms and
conditions. Output basis of settlement with
departmental clause (since profit of CP 2 & 3) is
ascertainable however, surveyor has not followed the
spirit and provisions of the policy and taken a different
views to assess the loss. We request you to look our
concerns and insure proper justice to our claim of
Rs.72.94 Crs. without further delay.
Hoping for an early resolution from your end.
Thanking you
Yours truly
For Indo Rama Synthetics (I) Ltd.
O.M.P. No.1036/2012 Page 179 of 196
Sd/-
L P Soni
Vice President – Finance.”
59. From the combined reading of the aforementioned
rd th th
communications dated 23 June, 2009, 6 July, 2009 and 30 July,
2009, broadly the concerns emerging from the respondent as regards
the computation done by the surveyor on turnover basis can be
summarized as under:
a) That the surveyor has changed his position towards considering
the reduction of turnover while computing losses at the time
grant of the interim payment towards the claim vis a vis the final
th
assessment report submitted on 24 June, 2009. This has been
explained by the respondent by stating that earlier the surveyor
had considered 14,300 MT as reduction of turnover (shortfall in
the month of November and December 2007 from the standard
turnover which was May 2007 to October 2007) and whereas in
the final assessment of losses, the said reduction of 14,300 MT
was considered and the loss was assessed on the basis of the
reduction of the accumulated stock only.
b) The surveyor has assessed the value of the stock sold during the
indemnity period as 7028 MT after making adjustment between
the stock in hand at time of the commencement of the indemnity
period and its expiry thereof. In the said calculation, the
reduction of 1580 MT of the stock which was burnt has been
deducted twice. Thus, the computation of losses as per the
th
report of the surveyor of 24 June 2009 was not correct as the
O.M.P. No.1036/2012 Page 180 of 196
assessment deducts the value of the burnt stock twice from the
accumulated stock.
c) No allowance was given towards the increased cost of
production and reduced sale price of PSF 3 production which is
9040 MT and on the contrary reduced 9040 MT of the stock on
the basis of the probable production of output by PSF 3 on the
basis that the said production remained stopped from the said
panel despite the repair.
d) That there are 4 main products and hundreds of varieties in each
products. Sale is also dependent on merge as well. We do not
have sufficient stock of desired denier and merge every time.
Hence, merely stock inventory in aggregate will never give true
picture.
e) The surveyor M/s Adarsh and Associates computed the loss of
profits on the premise whether the same are computer either on
turnover basis or output basis shall provide same results with
minor variation. The said point is not relevant in view of my
finding that it is turnover basis which is appropriately applicable
in the present case for assessment of loss of profits. Still, the
same is reproduced herein in order to enlist the concerns of the
respondent.
60. These were certain concerns which were raised by the
respondent qua the report of the surveyor while computing and
assessing loss of profits on the turnover basis as infirmities in his
report. Besides, the above infirmities, the respondent also
simultaneously in its communications kept on pressing for invocation
of output basis of computation of assessment of losses as against
O.M.P. No.1036/2012 Page 181 of 196
turnover basis on the same lines as discussed above whereby the
respondent took the position that the loss of the production would
give clear picture and there exists a time lag between the production
and sales and in the output method there is no need to see its
relation with the sales and the computation is done purely on output
which is incorrect and even the output method requires the
correlation of the manufacture with the sales during the indemnity
period as a result of the business are required to be affected during
the said period. The said pleas of the respondent have already been
answered by me under the head of the discussion relating to
desirability of the mode of the assessment of the loss of profits. At
this stage, I am considering the concerns relating to the turnover
basis of the assessment emerged from the respondent so as to
consider and evaluate the report of the surveyor M/s Adarsh and
Associates.
61. The said concerns of the respondent were tried to be
addressed by M/s Adarsh and associates by giving his addendum
th
report dated 10 September, 2009 whereby the surveyor had revised
the sum of loss to Rs. Rs.5,11,31,567-/ by impliedly admitting that the
surveyor had taken into consideration 1580 MT of the stock twice
while making the deductions in the calculation. The surveyor also
stated that he has taken into consideration the concerns of the
respondent wherever it deemed appropriate. I have gone through
both the reports of surveyor M/s Adarsh and Associates and the
reasoning stated by him in his report in order to answer and address
the concerns of the petitioner. Though certain reasonings and logic
contained in the report were sound and practicable as per the legal
O.M.P. No.1036/2012 Page 182 of 196
position, however I find that the closer look of the report would show
th
that while doing computation even in his report dated 24 June, 2009,
the surveyor assessed the reduction in turnover by considering the
standard turnover for the period May 2007 to October 2007 as
according to him standard turnover would be a period 6 months
immediately prior to the date of loss. On that basis, the surveyor
assessed the reduction in the turnover to be Rs.82,14,69,184-/.
Whereas as per the definition contained in the policy of standard
turnover in the formula, standard turnover means “the turnover during
that period in the twelve months immediately before the date of the
damage which corresponds with the indemnity period”. The said
definition has also been provided in the authorities on the subject
including in Riley on Business Interruption Insurance as the formula
provided in the policy is the hybrid policy based on the insurance
policies and formulas provided in UK. As per Riley, standard turnover
can be derived by looking at the period corresponding the indemnity
period in the previous year. In the words of the author, it has been
observed thus:
“3.9 Standard Turnover
The standard turnover, as its name implies, is the standard
against which comparison is to be made in order to
ascertain the shortage in turnover resulting from an
incident. It is the turnover during the period in the 12
months immediately before the date of the incident which
corresponds with the indemnity period, that is, which
corresponds with the period of interruption within the
selected maximum period.
For example, if the turnover were affected during the period
from the middle of February to the end of August the
O.M.P. No.1036/2012 Page 183 of 196
standard turnover would be that for the same six and a half
months in the preceding year. If turnover were affected
during the nine months September to the following
May inclusive, the standard turnover would be that for
the corresponding months of September to May, 12
months previously. This method of comparison
against the same calendar period in the 12 months
preceding the incident provides for the seasonal
fluctuations which in greater or less degree affect a
large proportion of businesses . It also uses the most up
–to-date pre incident figures suitable for purposes of
comparison and calculation of the loss of turnover. The
definition of standard turnover is, however, qualified by the
other “circumstances clause”, which provides for
adjustments to be made for trends of the business and for
variations in or other circumstances affecting the business
either before or after the incident.” (Emphasis supplied)
st
62. In the present case, the indemnity period was 1 November,
th
2007 to 30 April, 2008 as per surveyor, yet the surveyor chose the
standard turnover between May to October 2007 and thus made an
erroneous comparison to arrive at the reduction in turnover vis a vis
actual loss and leading to incorrect. The said computation is thus ex
facie unsustainable and cannot be upheld on the face of it as the
plain reading of the definition of the standard turnover in the policy
document does not permit such computation. In such an event, even
assuming at the highest that the concerns of the respondent has
been addressed on the report of the surveyor M/s Adarsh and
Associates, still the computations done by M/s Adarsh and
Associates do not reflect the results and lead to correct assessment
as per the policy terms. As such, the said computation and
assessment of the losses are required to be done again in order to
arrive at the correct figures of loss of profits payable to the
O.M.P. No.1036/2012 Page 184 of 196
respondent on turnover basis. That is the reason why I cannot simply
upheld the report of the surveyor M/s Adarsh and Associates even if I
try to reconcile the concerns of the respondents by answering them
on my own.
63. It is equally noteworthy to mention that I have found that the
turnover basis of assessment of loss of profits arising out the damage
resulting from the incident of fire is an appropriate mode for
assessment in the present case as it provides fair indemnification by
assessing the loss during the indemnity period. That by itself does not
mean that the report of the surveyor in a given case may not be
erroneous and in the alternative I have to follow the other report of
the surveyor Mr. Srinvatsan based on different methodology which is
output basis instead of the turnover basis. As the case of the
respondent was before the arbitral tribunal was also twofold, first
being that the output method is the appropriate mode of assessment
and secondly that the surveyor M/s Adarsh and Associates had not
made the correct computation of losses as per turnover basis,
therefore it was upon the respondent to provide the correct
computation of loss of profits on turnover basis as per formulae after
comparison with the actual sales which the respondent could have
done during the indemnity period and making other adjustments
including other circumstances clause etc as per the policy document.
Having not done so, the respondent cannot simply state that if the
report of M/s Adarsh and Associates is not correct, therefore the
report of the other surveyor should be upheld. Accordingly, the
calculation of the loss of profits as per turnover basis in the present
O.M.P. No.1036/2012 Page 185 of 196
case requires the examination of the competing stands of the parties
including the concerns pointed out by the respondent. The
computation of loss of profits is required to be done by the surveyor
M/s Adarsh and Associates yet another time after considering the
Annual turnover, standard turnover and gross profit as per the
definitions provided in the formula along with the other ingredients in
the policy document and proceed to make all other adjustments
permissible under the policy document and thereafter compare the
reduction of the turnover with the actual loss of profits which ought to
have been incurred during the indemnity period.
64. As the present case is a peculiar one wherein the calculation of
the losses presented before this court by one party’s surveyor is
found to be erroneous and the other party did not lead any evidence
to this effect by presenting the corresponding the computation on the
same turnover basis and kept on raising the concerns on the
computations done by the surveyor. I am left with no option but to
remand the case back to the learned arbitral tribunal to consider the
limited aspect of the computation of loss of profits on the turnover
basis on the basis of the computation of loss of profits to be
presented by both the parties before the tribunal.
65. It is well settled principle of law that the court acting under
Section 34 of the Act 1996 has the power to remand the award either
in part or in whole depending upon the facts as to whether the issues
on which the award rests are interlinked with the other aspects
involved or not. Wherever, the part of the award can be severed from
the other issues decided by the tribunal, which the court finds in
accordance with the law, the power of remand or setting aside is
O.M.P. No.1036/2012 Page 186 of 196
exercise only to the extent of the part of the award which is found to
be unsustainable.(Kindly see the judgment passed in the case of
Rajesh Tiwari v. Motilal Oswal Financial Services Ltd., Mumbai
and Another , (2013) 3 Mah LJ 523 : (2013) 2 AIR Bom R (NOC 26)
8 by Bombay High Court laying down the said position of law, and
also in Rajendra A. Shah (H.U.F.) (Constituent) v. Angel Capital
and Debt Market Ltd. , (2013) 1 Mah LJ 385 and Saroj Bala v Rajive
stock Brokers Ltd ., 2005 (4) AD (Delhi) 266 and Bhasin
Associates v. NBCC , ILR (2005) 2 Del 88 which lays down that
power to set aside an award when exercised by the Court would
leave a vacuum if the said power was not understood to include the
power to remand the matter back to the arbitrator).
66. In the present case, I find that the approach of the arbitral
tribunal so far as applying the legal principles in order to find
out the appropriate method as to assessment of loss of profits/
business interruption arising out damage resulting from fire was
totally flawed and patently illegal and contrary to well settled
principles of law. As such, I have chosen to discuss the
concepts and legal principles and applied the same to the facts
of the case in order to ascertain the appropriate method which is
applicable in the present case for assessment of loss of profits
in the present case is found to be turnover basis as the parties
disputed before the arbitral tribunal as well as before this court
as to the applicability of the basis/ mode of computation of the
loss of profits. This has been done so that atleast one issue as
to applicability of correct method of the assessment of loss of
profits as per the policy document should be put to rest .
O.M.P. No.1036/2012 Page 187 of 196
Thereafter, I have also found that on the issue of the computation of
loss of profits in claim No. 1, it is the petitioner’s surveyor who has
submitted its report presenting the computation of the loss of profits
on the turnover basis, the respondent merely disputed the said report
of surveyor M/s Adarsh and associates and on the contrary presented
the report of another surveyor computing the losses on the output
basis which may not be helpful in the present situation. The case of
the respondent was twofold before the tribunal first being that the
report of the petitioner surveyor is faulty and the appropriate method
of the assessment of loss of profits is output basis or alternative basis
clause. Yet, the respondent chose to present only one computation of
losses before the arbitral tribunal as per output method and could
have furnished the alternative computation on turnover basis as well.
In the absence of the same and considering that the respondent has
its own concerns on the report of the petitioner surveyor and I have
also found the computation errors in the report of the surveyor M/s
Adarsh and association, I am left with no option but to remit the case
back to the arbitral tribunal. Remitting back the case on the aspect of
the computation of loss of profit is essential as the computation of the
loss of profits on turnover basis also requires the addressing of the
concerns of the respondents after hearing the parties alongside
arriving at the correct computation of loss of profits during the
indemnity period on the basis of the consideration of stands of both
the parties. Therefore, no useful purpose would be served in the
exercise of the option to adjourn the matter under Section 34 (4) of
the Act in the present case as I am already setting aside the award
on merits in relation to claim No. 1 by interfering with the award as
O.M.P. No.1036/2012 Page 188 of 196
the impugned award was against the public policy and thus required
to be interfered with. It is only for the limited purpose of arriving at the
correct computation of loss of profits on turnover basis which is a
question interlinked with claim No. 1, I am remitting back the matter to
the arbitral tribunal so that the arbitral tribunal may arrive at the
correct computation after considering the computation of loss of
profits to be presented by both the parties on turnover basis.
Accordingly, the impugned award granting the sum of
Rs.34,70,55,231/- towards claim No. 1 is set aside holding that the
turnover basis of assessment of loss of profits is appropriate mode of
assessment of loss of profits in terms of the policy during the
indemnity period. The matter is further remitted back to the arbitral
tribunal for further consideration of the computation of the loss of
profits on turnover basis as per the fresh computations to be provided
by both the parties and/ or their respective surveyors. The parties are
at liberty to provide any additional evidences and documents in
support of the said computations. All the pleas are available to the
parties in relation to challenge the correctness or otherwise of the
said computation of loss of profits.
Claim No.2: Claim under the material damage policy
The claim No. 2 of the respondent comprised of the indemnity
arising out of the material damage arising out of the incident of fire.
The respondent made the provisional claim of Rs.6,99,51362-/. The
surveyor M/s Adarsh and Associates in his interim report requested
for the release of sum of Rs.6 crores to the respondent for the loss of
th
profit and material damage. On 26 September, 2009, the final
report was submitted by surveyor M/s Adarsh and Associates on the
O.M.P. No.1036/2012 Page 189 of 196
material damage policy. The surveyor has assessed the loss of
Rs.22,482332.00 which is payable by the petitioner to the
respondent. The said basis of assessment of the loss by the surveyor
was assailed by the respondent by contending that the surveyor has
unnecessarily not considered the following expenses while arriving at
the loss:
“80.6. The Surveyor declined to consider various
expenses incurred by the claimant.
i) Rs.1,15,85,025/- incurred for total 21 nos. electric (AC)
motors (i.e. 7 nos. each for 3 sets for 3 PSF draw
lines) of different capacities, replaced due to technical
consideration and which were not installed in the
control panel room and hence not damaged due to the
said incident.
ii) Rs.13,51,586/- for encoders/control panels, required
for the above digital motors.
iii) Rs.9,65,419/- for 3 set of ACB for PCC Panels, not
installed in the involved control panel room.
iv) Rs.5,14,537/- for control processor, installed in plant.
v) The cost of various other accessories including base
plates & couplings for installation and connecting
motors with drive rollers at each station, which were
not affected by the aforesaid incident and cable trays
etc., now provided over head instead of laying cables
in under ground trenches.”
67. Likewise, it was the case of the respondent that the surveyor in
his report had also deducted 32 % amount from the cost of the new
panels and equipments to adjust the improvement/ higher capacity o
the panels and for costs of spares including in cost of such
equipments. To this effect, the respondent appointed the surveyor Mr.
O.M.P. No.1036/2012 Page 190 of 196
R. Srivatsan, CW3. The said surveyor assessed the loss which is
payable by the petitioner to the respondent towards material damage
is to the tune of Rs.3,73,99,883. The arbitral tribunal after
appreciating the evidence of the parties came to the conclusion that
the surveyor M/s Adarsh and Associates and the witnesses
appearing on his behalf are not able to give the any explanation
justifying the deductions made in the loss. It has been observed by
the arbitral tribunal that the M/s Adarsh and Associates has made the
deduction in the assessment of the loss towards the cost of the
purchase of the 21 AC drives of Rs.1,15,85,025-/ which were earlier
DC drives on account of installation new cyclo-converters on account
of the replacement of plant and machinery. The said AC drives were
purchased on account of the change of technology of cyclo
convertors which earlier supplied by some M/s Toyo Denki of Japan
and now the said cyclo convertors were purchased from M/s
Siemens. Under these circumstances, the DC motors attached
thereto also required to be changed with that of the AC motors. As
per the surveyor M/s Adarsh and Associates, the said deduction/ non
consideration of the expense from the loss is done due to the reason
that the said loss/ expense caused to the respondent is not as a
direct consequence of the incident of fire but is a result of the change
in technology. Thus, the respondent was not obligated to purchase
the AC motors due to the incident of fire. On the contrary, the
respondent surveyor came to the conclusion that the said expense
was obligated to the respondent as the respondent changed the
machinery/ cyclo convertors made by one manufacturer to that of
other and the technological variation and compatibility as a
O.M.P. No.1036/2012 Page 191 of 196
consequence caused the expense to purchase the AC motors in lieu
of DC motors. The arbitral tribunal approved the version of the
respondents surveyor and held that the said deduction by the
surveyor M/s Adarsh and Associates is unwarranted. Therefore, the
arbitral tribunal proceeded to accept the loss assessment submitted
by the surveyor of the respondent to the tune of Rs.3,73,99,883-/.
68. Mr. Neeraj Kishan Kaul, learned Senior counsel for the
petitioner has challenged the award by reading out the grounds
contained in the petitioner which are merely disputed question of
facts. It has been argued by Mr. Kaul, the learned arbitral tribunal
accepted the report of the respondent who has given his report after
3 years of the loss and thus the said report ought not have been
given any credence. Likewise, it was argued that the equipment
which was purchased by the respondent was outside purview of the
cover provided by the policy and the said aspect has not been
appreciated by the tribunal and as such the impugned award so far
as the claim no. 2 is liable to be interfered with.
69. I have considered the submissions of Mr. Kaul on the challenge
in relation to the claim No. 2 and also gone through the written
submissions filed by the petitioner on the point. I have seen that the
challenge laid by the petitioner are all disputed question of facts and
the petitioner has failed to point out any infirmity in the impugned
award that leads to conclusion that while granting the award of claim
No. 2, the arbitral tribunal has contrary to the fundamental policy of
law or public policy. It can also not been said that the award of the
claim No.2 on material damage is so perverse in nature that no
reasonable man can arrive at the said view. The view taken by the
O.M.P. No.1036/2012 Page 192 of 196
arbitral tribunal by inclusion of the expense incurred by the
respondent towards the purchase of the AC motors on account of the
purchase of the new equipment containing new technology can be
said to be a consequence or obligation arising out of the loss due to
material damage arising out of the fire. It was due to the damage of
the earlier plant or machinery, which has the respondent to purchase
the new cyclo-convertors and inturn the AC motors. Thus, the cause
of the installation of the new technology cannot be altogether
divorced from the cause of the loss on account of the material
damage. The said causes are interlinked and related to each other.
Thus, the view adopted by the learned arbitral tribunal on this claim is
plausible and cannot be interfered with. Therefore, the award of Rs.
3,73,99,883 so far as the claim no. 2 is concerned is upheld and the
challenge laid by the petitioner in this respect is rejected.
Competence of Surveyor and Departmental Clause :
On both these aspects, the decision has been arrived at by the
arbitral tribunal in favour of the petitioner as in the view of the arbitral
tribunal that the competence of the surveyor of the petitioner cannot
be questioned and the departmental clause cannot be said to be
operational in the present case. The petitioner still chose to comment
on the appointment of the surveyor by the respondent in its written
submissions by stating that the said surveyor gave its report after 3
years of the loss and had also not carried out the site survey till that
time and thus this court should not consider his report. I find that the
said challenge by the petitioner at the stage is merely disputing the
position from the arbitral award. No arguments were addressed by
either counsel on the challenging the surveyor report of the
O.M.P. No.1036/2012 Page 193 of 196
respondent and thus the said comments in the written submissions of
general nature do not lay any serious challenge to the said findings of
the arbitral tribunal which allows this court to interfere with them.
Accordingly, the said challenge by the petitioner on the findings of the
arbitral tribunal to the extent of the competence of the surveyor is
also rejected as baseless.
Interest
The petitioner has also challenged the finding of the interest
which has been awarded by the arbitral tribunal to the tune of 9 % per
annum on both the loss of profits claim as well as the material
damage claim by contending the starting point of the accrual of the
st
interest was wrongly stated by the tribunal as 1 July, 2008 when the
th
liability of the petitioner company shall commence from 24 June,
2009 which was time, when the final report of the surveyor was
submitted. In the said circumstances, as per the petitioner, the arbitral
tribunal cannot proceed to award the interest on the sum awarded
from the date prior to the assessment of the sum of loss. I find that
what is payable by the petitioner to the respondent is the amount
towards the actual loss suffered by the respondent. As per the terms
of the policy, the petitioners surveyor was obligated to submit the
th
report earlier than the date of 24 June, 2009. This was due to the
reason that strictly going by the terms of the policy, the insurance
company was liable to any claim raised within the period of one year
from the incident. In such circumstances, the petitioner surveyor
himself took time to submit his final report towards the assessment of
losses causing delay in resolution of dispute. Thus, I find that the
O.M.P. No.1036/2012 Page 194 of 196
challenge of the petitioner to the award of the interest devoid of any
merit. As such, the said challenge is also rejected.
70. In view of the aforementioned discussion held under different
heads, the findings on the different claims can be summed up as
under:
A) The impugned award granting the sum of Rs.34,70,55,231/-
towards claim No.1 is set aside holding that the turnover
basis of assessment of loss of profits is appropriate mode of
assessment of loss of profits in terms of the policy during the
indemnity period. The matter is further remitted back to the
arbitral tribunal for further consideration of the computation of
the loss of profits on turnover basis as per the fresh
computations to be provided by both the parties and their
respective surveyors. The parties are at liberty to provide any
additional evidences and documents in support of the said
computations. All the pleas are available to the parties in
relation to challenge the correctness or otherwise of the said
computation of loss of profits.
B) The award of Rs.3,73,99,883/- so far as the claim No. 2 is
concerned is upheld and the challenge laid by the petitioner
in this respect is rejected.
C) The challenge so far as the award of interest of 9 % Per
st
annum from 1 July, 2008 as held by the arbitral tribunal is
also rejected.
71. The learned Tribunal is requested to dispose of the matter on
point (A) expeditiously, by giving full opportunity to the parties. Parties
O.M.P. No.1036/2012 Page 195 of 196
to take steps in accordance with law. The parties are also at liberty to
settle the matter.
(MANMOHAN SINGH)
JUDGE
JANUARY 20, 2015
O.M.P. No.1036/2012 Page 196 of 196