Alstom Projects India Ltd. And ... vs Oriental Insurance Company ...
2011 Latest Caselaw 2096 Del

    IN THE HIGH COURT OF DELHI AT NEW DELHI

               W.P. (C) 13522/2009 & CMs 15068/09 (for stay) and
                          3998/2010 (for delay)

                                    Reserved on: March 23, 2011
                                    Decision on: April 20, 2011


       ALSTOM PROJECTS INDIA LTD.             ..... Petitioners
       AND ANR.     Through: Mr. Rajiv Nayar, Senior
                    Advocate with Mr. Sulabh Tewari,
                    Advocate.

                         Versus

       ORIENTAL INSURANCE COMPANY ..... Respondents
       LIMITED      Through: Mr. Vishnu Mehra, Advocate.


        CORAM: JUSTICE S. MURALIDHAR

       1. Whether Reporters of local papers may be
           allowed to see the judgment?                      No
       2. To be referred to the Reporter or not?             Yes
       3. Whether the judgment should be reported in Digest? Yes

                             JUDGMENT

20.04.2011

1. The petitioners challenge a demand raised by the Respondent

Oriental Insurance Company Ltd. (OICL) on Petitioner No.1 Alstom

Projects India Ltd. (APIL) for an additional premium in the sum of

Rs.1,49,88,732/- and applicable service tax in relation to an Erection

All Risk Insurance (EARI) cover policy issued by OICL.

Background facts

2. APIL, having its registered office at Mumbai, is stated to be

engaged in the business of design, manufacture, installation and

servicing of power generation equipments in India and abroad.

Petitioner No. 2 is stated to be a shareholder and Director of APIL.

APIL and the Gujarat State Electricity Corporation Ltd. (GSECL)

entered into an Agreement dated 27th April, 2007 for Onshore

Services under which APIL was required to design, engineer,

procure equipment, materials, supplies and carry out erection,

conduct testing and commissioning of a 370 MW combined cycle

power plant in Surat, Gujarat. Alstom Switzerland Ltd. (ASL)

entered into an agreement on the same date with GSECL for

Offshore Equipment and Spare Parts Supply (CIF) under which ASL

was required to design, engineer, procure and manufacture, carry out

testing, shop assembly, pack, and transport the equipment, materials,

supplies on a CIF basis pertaining to the power plant. Work for the

power plant commenced on 29th May 2007 and the reliability run at

the site was completed on 18th November 2009.

3. APIL invited bids from OICL, M/s. United India Insurance

Company Ltd. (UIIL) and M/s. ICICI Lombard General Insurance

Company Ltd. (ILGICL) through its insurance broker, M/s. Aon

Global Insurance Brokers Pvt. Ltd. (`Aon Global') for taking an

EARI cover for covering material damage, third party liability and

other add on covers as well as a Marine Insurance cover for the

power plant. The requirements of APL were communicated to each

of the aforementioned insurance companies by Aon Global by quote

slips on 4th October 2007 and invitation for final quotes was sent on

6th November 2007. It is stated that while OICL submitted a quote of

Rs.6,64,88,287/-, UIIL submitted a quote of Rs.6,13,96,316/- and

ILGICL a quote of Rs.6,82,74,471. OICL by its letter dated 7th

November, 2007 offered to provide EARI cover at a premium of

Rs.6,25,42,060/- and Marine Insurance cover at a premium of

Rs.39,46,227/- to be paid in specified instalments. APIL states that

although OICL's offer was not the lowest, APIL accepted it in view

of the long standing relationship between the parties and the

representation and assurance of OICL that it would provide the best

standards of services under the policy to be concluded between the

parties. Upon APIL's acceptance of OICL's offer, OICL issued both

a Marine Policy as well as an EARI Policy. OICL was the lead

insurer with a share of 50% in the sum insured and in the premium

whereas UIIL and ILGICL were the other insurers with a share of

25% each in the sum insured and in the premium. The EARI Policy

stipulated in the collective insurance clause that OICL would be

responsible for issuing and administering the policy and the

remaining insurers agreed to follow OICL on all issues concerning

policy interpretation and indemnification. The policy was extended

by a further period of three months by way of endorsement dated 12th

October, 2009. The EARI Policy was valid till 7th January, 2010.

The period of 24 months of extended maintenance cover commenced

from 12th November, 2009 and was to be completed on 11th

November, 2011.

4. It is stated that APIL paid the requisite premium under the EARI

Policy in six agreed instalments, the last of which was paid before

the due date. The total premium of Rs.3,54,39,996/- was paid by the

Petitioner to OICL excluding the premium paid for extending the

EARI Policy of three months. After accounting for the payment

made by ASL, the balance premium of Rs.5,36,381/- and Swiss

Francs 99,098 were paid respectively by APIL and ASL on 8th

November, 2007.

5. On 6th July 2009 APIL was surprised to receive a notice dated 3rd

June, 2009 from the OICL raising a demand in the sum of

Rs.1,49,88,372/- on account of the Comptroller and Auditor General

(CAG) having objected to an alleged `excess discount' over and

above the permissible discount of 51.25% that had been given by the

OICL to APIL. OICL further demanded that the differential premium

amount should be paid at the earliest to enable OICL settle the CAG

query and that failure to do so would amount to violation of Section

64VB of the Insurance Act, 1938 and the claims of APIL would not

be admissible under the EARI Policy as per the regulations of the

Insurance Regulatory and Development Authority (IRDA). Along

with the impugned notice, OICL attached a copy of the letter issued

to it by the Audit Board II, Ministry of Finance, Department of

Financial Services, Government of India. The CAG pointed out that

OICL had allowed a discount of more than 51.25% which was the

maximum limit permitted by the IRDA. This had resulted in an

alleged short collection of the premium amounting to approximately

Rs.1.5 crores. OICL replied to the CAG in May, 2009. However, the

CAG found the explanation untenable and observed that non-

adherence to the IRDA guidelines/norms would be viewed as a

breach of Section 14(2) (i) of the IRDA Act, 1999. APIL claims that

at a meeting on 13th August, 2009 when APIL stated that the demand

for additional premium had no legal basis, OICL had stated that it

would confer internally and revert as to the tenability of its demand

for payment of additional premium. However, OICL sent a reminder

to APIL on 21st August, 2009 stating that the CAG was pressing hard

for immediate compliance and recovery of the differential premium

amount. It is stated that on OICL's request, the CAG had extended

the deadline till 10th September, 2009. On 9th September, 2009, the

OICL sent APIL the calculations that purportedly formed the basis of

the impugned notice and reiterated the claim for payment of the

differential premium. OICL wrote to APIL on 28th October, 2009

stating that in the event the payment of the differential premium

amount was not made before 30th October, 2009 OICL would be "off

cover". OICL wrote to APIL on 24th November, 2009 stating that

despite its best efforts the CAG query could not be dropped.

Accordingly, OCIL sent to APIL the impugned notice of cancellation

of the EARI Policy in the event that the differential premium amount

was not paid by 10th December 2009.

6. On 3rd December 2009, while issuing notice to OICL it was

directed by this Court that OCIL would not terminate the policy on

the ground of non-payment by APIL of the differential premium of

Rs.1,49,88,372/- along with service tax. However, APIL was

directed to furnish an undertaking that it would pay the said sum in

case the stay application/writ petition was dismissed. Thereafter

APIL filed an affidavit of undertaking in the above terms.

Stand of OCIL

7. In the counter affidavit it is first submitted that the writ

jurisdiction under Article 226 of the Constitution could not be

invoked as the disputes have arisen under a policy of insurance

which is in effect a contract between the insurer and the insured. It is

submitted that an efficacious alternative remedy was available to the

Petitioner. Secondly, it is submitted that under General Condition

No. X of the EARI Policy it was permissible for OCIL to cancel the

policy at any time by giving 15 days' notice to the insured.

Referring to the decision of the Supreme Court in General

Assurance Society Ltd. v. Chandmull Jain AIR 1966 SC 1644 it is

submitted that such a condition was a reasonable one and gave

sufficient discretion to OCIL not to continue the EARI policy on the

ground of the failure by APIL to make payment of the differential

premium. Further the failure on the part of APIL to make payment of

the differential premium was a violation of Section 64VB of the

Insurance Act, 1938 (as amended).

8. Thirdly it is submitted by OICL that Aon Global was fully

conversant with the provisions of the Insurance Regulatory

Development Authority (Brokers Regulations) 2002. The

negotiations for working out better terms of premium with APIL

were going on since March, 2007. It is stated that in the context of

the tariff regime which was undergoing constant change from 1 st

January, 2007 till October, 2007, the movement in the insurance

market was closely watched by insurance brokers and through them

the insured themselves. By a circular dated 25th June 2007, IRDA

announced that "Effective from 1st September, 2007, the control on

rates with regard to fire, engineering and workmen's compensation

insurance classes of business shall be totally removed." In circular

dated 13th August, 2007 of the IRDA, it was stated that "subject to

insurers achieving a satisfactory state of compliance within the

month of August, 2007 and filing any revised rates schedules or

approach note as applicable, the relaxation of control on pricing can

be given effect to from 1 November 2007." It is stated that on 29th

October, 2007, the IRDA advised the insurers not to implement the

rates fixed by the OICL and to follow rates that were agreed to and

communicated by its earlier circular dated 13th March, 2007. It is

stated that the differential premium amount became payable on

account of the statutory nature of the demand and, therefore, was

permissible in law. It is maintained that there was nothing unusual

in the letter dated 6th July, 2009 of the OICL calling upon APIL to

pay a sum of Rs.1,49,88,372/- as the differential premium amount.

Submissions of Counsel

9. Mr. Rajiv Nayar, learned senior counsel appearing for the

Petitioners submitted that once the insurance policy was issued, it

constituted a complete contract incorporating the terms and

conditions including the premium amount. It could not be

subsequently altered by either party to the contract. None of the

conditions spelt out in Clause X of the Insurance Policy were

attracted. In other words, the insurance policy could not be cancelled

or revoked on account of non-payment of the additional premium,

the demand for which was raised after the insurance contract had

been concluded. According to him, there is no clause in the EARI

policy permitting the raising of such demand for additional premium.

He submits that this is a classic case of an arbitrary action on the part

of OICL, which was amenable to Article 226 of the Constitution.

Relying on the passages in the decision of the Supreme Court in

ABL International Ltd. v. Export Credit Guarantee Corporation of

India Ltd. (2004) 3 SCC 553, it is submitted that against an arbitrary

action under Article 14 of the Constitution, a writ petition would lie,

notwithstanding the fact that dispute arose out of a contract. He also

places reliance on the judgments of this Court in Pioneer Publicity

Corporation v. Delhi Transport Corporation 2003 (2) RAJ 132 and

Atlas Interactive (India) Pvt. Ltd. v. Bharat Sanchar Nigam

Limited 2005 (40) RAJ 585. He also relied upon the observations in

United India Insurance Company Limited v. Manubhai

Dharmasinhbhai Gajera (2008) 10 SCC 404.

10. Mr. Vishnu Mehra, learned counsel appearing for the

Respondent-OICL submitted that the facts in ABL International

Ltd. (supra) were distinguishable. He submitted that the decision of

the Supreme Court in General Assurance Society Ltd. (supra) would

apply. He also placed reliance on the judgments of this Court in G.

Ram v. Delhi Development Authority 98 (2002) DLT 800 and Dr.

Sanjay Gupta v. Dr. Shroff's Charity Eye Hospital 2002 (4) SLR

788. Adverting to Regulation 3 of the IRDA (Brokers Regulations)

2002, Mr. Mehra submitted that Aon Global was fully aware of the

possibility of there being an enhanced premium demand and,

therefore, APIL could not be said to have been taken by surprise by

the demand. He submitted that OICL was constrained to raise the

demand only on account of CAG's observations and had no option in

the matter. In the circumstances, the impugned demand for

additional premium could not be said to be arbitrary or unreasonable.

Maintainability of the petition

11. As regards the maintainability of the writ petition, the decision in

ABL International Ltd. is relevant and requires to be referred to at

some length. The facts of the said case were that Rassik Woodworth

Limited (RWL) entered into a contract with State-owned

Corporation of Kazakhstan (Kazakh Corporation) for supply of 3000

MT of tea. The payment for the tea exported was to be made by the

Kazakh Corporation by barter of goods mentioned in the schedule to

the said agreement within 120 days of the date of delivery by the

exporter. The payment was to be guaranteed by the Government of

Kazakhstan. As per the amendment to the agreement, it was provided

that if the contract of barter of goods could not be finalised for any

reason, then the Kazakh Corporation would pay to the exporter for

the goods received by it in US dollars within 120 days from the date

of the delivery. This amended agreement also provided for a

guarantee being given by the Ministry of Foreign Economic

Relations of Kazakhstan from prompt payment of such

consideration. RWL subsequently assign a part of the said export

contract with the Kazakh Corporation in favour of ABL International

Ltd. on the same terms. On a direction issued by the Reserve Bank

of India to cover the risk arising out of the export of tea made by the

appellants as per the assigned contract, ABL International Ltd.

approached Export Credit Guarantee Corporation of India Ltd.

(ECGCIL) to insure the risk of payment of consideration that was

involved in the said contract of export. Thereafter ECGCIL issued a

comprehensive risk policy effect from 23rd September, 1993 to 30th

September, 1995. On the failure of the Kazakh Corporation to pay

the balance consideration and the Kazakhstan Government to fulfill

its guarantee, ABL International Ltd. made a claim on ECGCIL.

This claim was repudiated by ECGCIL stating that ABL

International Ltd. had changed the terms of the contract without

consulting ECGCIL. Thereupon, a writ petition was filed in the

Calcutta High Court. After holding the writ petition to be

maintainable, the learned Single Judge of the Calcutta High Court

issued the directions, as prayed for requiring ECGCIL to honour the

claim. A Division Bench of the Calcutta High Court reversed the

judgment of the learned Single Judge holding that the petition raised

disputed questions of fact and could not have been adjudicated in

writ proceedings under Article 226 of the Constitution. The Supreme

Court allowed the appeal of ABL International Ltd. On the question

of maintainability of the writ petition under Article 226 of the

Constitution, after discussing the judgment of the Court in Kumari

Shrilekha Vidyarthi v. State of UP (1991) 1 SCC 212 and

distinguishing the judgment in VST Industries Ltd. v. Workers'

Union (2001) 1 SCC 298, the Supreme Court in ABL International

Ltd. observed as follows (SCC, p. 570):

".... once the State or an instrumentality of the State is a party of the contract, it has an obligation in law to act fairly, justly and reasonably which is the requirement of Article 14 of the Constitution of India. Therefore, if by the impugned repudiation of the claim of the appellants the first respondent as an instrumentality of the State has acted in contravention of the abovesaid requirement of Article 14, then we have no hesitation in holding that a writ court can issue suitable directions to set right the arbitrary actions of the first respondent."

12. The objection raised by OCIL as to maintainability of the present

petition is more or less similar to what has been answered in the

negative in the above decision. Consequently, this Court rejects the

preliminary objection raised by OCIL. However, the question

remains whether in the facts of the present case, OICL can be said to

have acted arbitrarily.

Is the impugned demand for additional premium arbitrary?

13. General Condition No. X of the EARI policy reads as under:

"....This insurance may also at any time be terminated at the option of the Insurer by 15 days notice to that effect being given to the Insured in which case the insurers shall be liable to repay on demand a rateable proportion of the premium for the unexpired term from the date of cancellation."

14. As rightly pointed out by the learned counsel for the Respondent,

such a condition is legally valid and binding. In General Assurance

Society Ltd., it was held that a condition in an insurance policy

giving mutual rights to parties to terminate the insurance at any time

is a common condition and must be accepted as reasonable. It was

emphasized that "the right to terminate at will, cannot, by reason of

the circumstances be read as a right to terminate for a reasonable

cause." It was explained in para 19 of the said judgment that "the

reason of the rule appears to be that where parties agree upon certain

terms which are to regulate their relationship, it is not for the court to

make a new contract, however reasonable, if the parties have not

made it for themselves." It was further observed in para 20 that "the

cancellation was done at time when no one could say with any

degree of certainty that the houses were in such danger that the loss

had commenced or become inevitable.....The assurers were,

therefore, within their rights under condition 10 of the policy to

cancel it. As the policy was not ready, they were justified in

executing it and cancelling it. The right of the plaintiff to the policy

and to enforce it was lost by the legal action of cancellation."

15. The decision in United India Insurance Company Limited is

distinguishable on facts. The facts in the said case were not disputed

and in those circumstances it was held that a judicial review of the

impugned action of the insurance companies was permissible. The

insurance companies were held bound by the terms of the Mediclaim

Insurance. However, there, the insured persons had already

undergone the risk and their subsequent claims were rejected. In the

instant case the demand for additional premium has been raised by

OICL prior to any claim by APIL. The case in hand is more or less

similar to the facts in General Assurance Society Ltd.

16. The question, therefore, really boils down to this: whether in

making a demand for additional premium and in seeking to cancel

the policy on account of non-payment of such premium, the

Respondent has acted arbitrarily and unreasonably. The demand for

additional premium was not raised immediately upon the CAG

pointing out to OICL that the maximum discount which could be

offered would not be higher than 51.25% in terms of the IRDA's

norms. It is in this context that the provision of Section 64VB of the

Insurance Act, 1938 is relevant.

17. The OICL was undoubtedly required to function in terms of the

statutory framework. The IRDA Brokers Regulations and the Code

of Conduct under Regulation 21 applied to Aon Global the insurance

broker which negotiated the EARI policy on behalf of APIL.

Equally, the IRDA Regulations were binding on the OICL. How

much of a risk can be covered by the insurance company and how

much discount it can offer are obviously circumscribed by the IRDA

Regulations and norms announced from time to time. During the

price control regime, which was in force till 31st October 2007,

OICL did not have any option but to comply with such guidelines

and circulars.

18. The correspondence between the parties shows that OICL itself

took up the matter of dropping the CAG query. The letter dated 24th

November 2009 from OICL to APIL acknowledges this. It states

"However we regret to state that this being a CAG query, we have

not been able to get it dropped in spite of our best efforts and would

thus request you to please remit the additional premium to us." This

was also acknowledged earlier by APIL in a letter dated 30th

October, 2009 to OICL stating "We understand that pursuant to our

request in respect of withdrawal of demand for additional premium,

the senior officials from Oriental are pursuing the matter with the

Ministry of Finance for considering the tenability of the demand and

its withdrawal." The action of OICL in raising the demand for

additional premium was during the period when the de-tariff regime

had not come into existence. The Petitioner could not be said to be

unaware of statutory regime and the statutory constraints under

which the OICL had to work. In the above circumstances, it is not

possible for this Court to conclude that in raising the demand for

additional premium, which was necessitated on account of the note

of the CAG, OICL acted unreasonably or arbitrarily.

19. Consequently, this Court does not find any merit in the writ

petition and it is dismissed as such. All the pending applications

stand disposed of.

20. In terms of the affidavit of undertaking filed by the Petitioner in

this Court, it shall make payment of the impugned demand of

Rs.1,49,88,372/- along with service tax to the OICL within a period

of two weeks from today. The said amount will be paid together with

simple interest at the rate of 9% per annum for the period 10 th

November, 2009 till the date of payment.

S. MURALIDHAR, J APRIL 20, 2011 vk