SASKEN COMMUNICATION TECHNOLOGIES LTD. vs THE NEW INDIA ASSURANCE COMPANY LTD.

THE complainant -company, which is engaged in the business of developing and/or licensing software components to its clients in several countries obtained, on 15 -09 -2003, a Techno -Industry Errors & Omissions Insurance policy for the amount of Rs. 23,00,00,000/ - for the period from 09 -09 -2003 to 08 -09 -2004. The retroactive date, however, was agreed to be 09 -09 -2002, meaning thereby that the insurance coverage became applicable with effect from that date.

ON 16 -02 -2001, the complainant -company entered into a license agreement with an overseas client namely 3G.Com (UK) Ltd., to deliver and license software to the said buyer. The agreement came to be amended on 12 -02 -2002. The overseas buyer of the software asked the complainant -company for a free upgrade which the complainant -company declined. On 21 -11 -2003, 3G.Com invoked the arbitration clause contained in its agreement with the complainant. The aforesaid arbitration clause envisaged reference of the disputes between the parties to London Court of International Arbitration (LCIA) for adjudication. After the complainant had filed its reply to the claim of the overseas buyer as well as its counter claim, an arbitrator came to be appointed by LCIA on 12 -07 -2004. The aforesaid development was brought by the complainant to the notice of the opposite party -New India Assurance Co. Ltd. on 25 -08 -2004. The claim, which the complainant -company had lodged with the opposite party, came to be repudiated on 26 -05 -2005. On 23 -12 -2005, the arbitral tribunal rendered an award against the complainant comprising damages as well as legal and arbitration costs. Being aggrieved from rejection of its claim, the complainant is before this Commission seeking the following reliefs: "(A) award a compensation of Rs. 7,65,64,220/ - against the opposite parties and in favour of the complainant being the amount awarded by the LCIA Arbitral Tribunal and paid by the complainant to 3G.Com pursuant thereto;

(B) award a compensation of Rs. 5,91,01,119/ - against the opposite parties and in favour of the complainant being the defence costs incurred by the complainant to defend itself against the claim of 3G.Com (UK) Ltd.;

(C) award interest against the opposite parties and in favour of the complainant at the rate 18% p.a. on Rs. 7,65,64,220/ - from the date of payment to 3G.Com till the date of payment by the opposite parties and on Rs. 5,91,01,119/ - from the date of claim till the date of payment by the opposite parties;

(D) award a compensation of Rs. 5,00,000/ - by way of compensation for arbitrarily repudiating the insurance claim and undue harassment in favour of the complainant and against the opposite parties;

(E) award the costs of the litigation in favour of the complainant and against the opposite parties."

The complaint has been contested by the opposite party inter alia on the grounds that the incident which led to the passing of the arbitral award is not a risk covered by the insurance policy, which covered only the acts of negligence, errors or omissions, whereas the award came to be passed due to wilful breach of the contract committed by the complainant -company. It is also stated in the reply that the complainant, instead of providing Single Multi Modal Protocol Stack as required under the agreement with 3G.Com had offered, to them, a Multi Mode Protocol Stack thereby intentionally breaching the agreement which led to reference of disputes to the LCAI. Attention is drawn to the finding recorded in para 105 and 170 of the award rendered by the arbitral tribunal. It is also claimed in the reply that the claim for defence cost incurred being attributable to or a consequence of a wilful breach of contract by the complainant is not payable, as stipulated in para 4.11 in Section (B) of the policy. It is also stated in the reply that the complainant incurred defence cost without written consent of the insurance company, in violation of clause 5.15.1 of the insurance policy and the opposite party is not liable to reimburse the complainant for the said costs. Yet another plea taken in the reply is that since the complainant did not give proper intimation to the insurance company, it could not exercise its right under clause 5.15.2 of the insurance policy to conduct the defence. This is also the case of the opposite party that had the complainant notified the claim initially, they might not have contested the same unless there was a legal advice to the contrary. This is also the case of the opposite party that the complainant did not make full and frank disclosure of all the material facts while obtaining the insurance cover. Reliance in this regard is placed on condition No. 4.5 of the insurance policy. The plea taken in this regard is that though disputes and differences between the complainant and 3G.Com had arisen much earlier than the insurance policy was taken, the said disputes were not disclosed to the insurance company.

THE insurance policy, to the extent it is relevant for the purpose of this complaint provided as under: "1.1 ''New India'' agrees to indemnify the insured against legal liability for any claims in respect of negligent acts, errors or omissions whatsoever and howsoever incurred in the provision of information and communication technology including loss of internet services of the insured due to risks covered within the policy excluding property damage & consequential loss which are:

a. first made against the insured during the period of insurance; and

b. notified to ''New India'' during the notification period; and

c. not excluded under Section C (Exclusion).

4.5 In relation only to Section A (Errors and Omissions) any claim:

a. *****

b. directly or indirectly based upon, attributable to, or in consequence of any fact or circumstance;

i. *****

ii. of which the insured first became aware prior to the period of insurance and which the insured knew or ought reasonably to have known had the potential to give rise to a claim under this policy.

4.11 Directly or indirectly based upon, attributable to, or in consequence of:

a. any actual or alleged fraudulent, criminal or malicious act, error or omission of any insured or their consultants, subcontractors, or agents; or

b. any act, error or omission of any insured or their consultants, sub -contractors, or agents committed or alleged to have been committed with a reckless disregard for the consequences thereof; or

c. wilful breach of any statute, contract or duty by any insured or their consultants, sub -contractors or agents.

APPLYING only to Section A (Errors and Omissions): a. The insured must give to ''New India'' written notice of any claim as soon as practicable after it is made against the insured (this does not alter the requirement to notify during the Notification Period):

and

b. if, during the period of insurance, the insured becomes aware of any fact or circumstance that might give rise to a claim under this policy and elects to give notice in writing to ''New India'' of such fact or circumstance during the Notification period, then any claim which may subsequently arise out of such fact or circumstance will be deemed to be a claim made during the notification period.

Notice of claim or occurrence must be given in writing to ''New India'' and delivered to;

Senior Divisional Manager

The New India Assurance Company Limited, Divisional Office, Brigade Plaza, N -202, North Wing, Subedar Chatram Road, Ananda Rao Circle, Bangalore - 560009.

5.15.1 The insured agrees not to settle any claim, incur any defence costs, make any admission, offer or payment or otherwise assume any contractual obligation with respect to any claim without ''new India'' s written consent, such consent not to be unreasonably withheld. ''New India'' will not be liable for any settlement, defence costs, admission, offer of payment, or assumed obligation to which it has not consented.

5.15.2 ''New India'' will be entitled at any time to conduct, in the name of the insured, the defence or settlement of any claim and, subject to any other provision of this policy, will have full discretion as to the manner in which the defence or settlement is conducted.

5.21 If the insured fails to comply with any term, condition or provision of this policy, ''New India'' may refuse to pay a claim."

A perusal of the award rendered by the arbitral tribunal would show that the complainant and 3G.com entered into a test instrumentation capital license agreement on 16 -02 -2001. The said agreement came to be amended on 12 -02 -2002. Clause 3(a) of the amendment read as under:

"3. Grant of license:

(a) Sasken shall supply 3G.com with its single mode UMTS protocol stack, updates and upgrades as per the Sasken roadmap (the "protocol Stack"). This obligation shall include, but shall be limited in any way to, a duty on a Sasken to supply to 3G.Com immediately after the execution of this Amendment, the most current Update documents, the RPS source (SASKEN release 2.0x), the Network Simulator object that supports and test the RPS, and the release notes."

The complainant -company however declined to supply updates and upgrades, in terms of the above referred clause, leading to 3G.Com invoking the arbitral clause contained in the agreement and seeking adjudication of those disputes by an arbitrator appointed in accordance with the rules of LCAI. The request by 3G.Com for arbitration was made on 24 -11 -2003 and after filing of answer and counter claim by the complainant on 16 -02 -2004, statement of case by 3G.Com on 06 -09 -2004, statement of defence and counter claim on 08 -11 -2004, the arbitrator came to be appointed on 12 -07 -2004. The arbitral tribunal inter alia held that there was an inadvertent omission of the word ''not'' between ''shall'' and ''be'' in clause 3(a) of the amendment and, therefore, the obligations of the complainant included but were not limited to supply inter alia of the most current updated documents. In para 73 of the award the tribunal concluded as under: "The foundation for that submission was primarily the express wording in the second sentence of those provisions that the Respondent''s obligation "shall be limited" in that way. However, such a construction is misconceived. In the Tribunal''s judgment, there is quite plainly an inadvertent omission of the word "not" between the words "shall" and "be". In the first place, the Respondent''s construction ignores the fact that the wording it relies on appears as part of the wider expression "This obligation shall include, but shall be limited in any way to....." The Respondent''s construction is inconsistent both with the preceding words, which are inclusory and not limiting; and also with the succeeding words, which otherwise make no sense and should read "in every way" rather than "in any way". Also, if the "roadmap" referred to in the first sentence of clause 3(a) is indeed a flexible and evolving concept indicative of the future development of the software, the Respondent''s construction would be inconsistent with that concept since it crystallizes the obligation to the supply to the Respondent''s 2.0x and 3.0x releases and would make the first sentence redundant. On the other hand, if the expression reads "This obligation shall include, but shall not be limited in any way to...", it makes perfect sense in the context of both clause 3(a) itself and the Amendment as a whole. Further, clause 4 of the Amendment contemplated the sale of the Claimant''s products which incorporated the Protocol Stack at least until the end of 2005 and it is unrealistic in the fast moving industry in which the parties were involved to suppose that they intended such sales to take place solely on the basis of releases 2.0x and 3.0x and ignoring later releases."

DEALING with the question of breach of clause 3(a) by the complainant, the arbitral tribunal inter alia noted that as per the evidence before it the decision of the complainant -company to discontinue the software stream of a Single Mode Stand Alone W -CDMA protocol stack was driven entirely by market realities and the strategic direction, the world was going in. It was noted that 3G.Com was not regarded as a significant customer and though the complainant derived no revenue stream from it and yet was providing it with upgrades and updates of its protocol stack. In para 91 of the award the tribunal concluded that the respondent had taken a conscious decision, because of the change in the market to focus its effort on dual mode and it had made a decision in 2003 to discontinue its Single Mode Protocol Stack and concentrate on producing dual mode protocol stacks. In para 105 of the award the arbitral tribunal held as under: "105. In the result, the Tribunal concludes that, by not having supplied the Claimant with the Respondent''s release of the single mode UMTS protocol stack as it was developed from time to time to accord with the updated and upgraded versions of Release 99, the respondent breached clause 3(a) of the Amendment.

WHILE computing the damages payable to 3G.Com, the arbitral tribunal in para 170 of the award held as under: "In the Tribunal''s judgment, the Respondent did intentionally breach clause 3(a) of the Amendment. The Tribunal refers to its analysis of the issue whether the Respondent breached those provisions. It fully understood that the failure to supply releases beyond 3.0x under a commercial licence placed it in breach. It nevertheless took a conscious decision not to supply releases beyond release 4.0x, no doubt in the hope either that the Claimant would let matter lie or that a settlement or eventual arbitration outcome would be a cheaper alternative to continuing to supply."

It would be seen from a perusal of clause 1.1 of the insurance policy that the opposite party is required to reimburse the complainant only for a claim arising out of a negligent act, error or omission which was not excluded under Section (C) of the policy. The liability of the complainant arising out of the intentional breach of an agreement, therefore, is not to be reimbursed by the insurance company. However, the award rendered by the arbitral tribunal, which the complainant -company did not challenge before an appropriate forum, clearly shows that the liability under the said award arose on account of a conscious breach of clause 3(a) of the amendment agreement between the complainant -company and 3G.Com and did not arise on account of any negligent act, error or omission on the part of the complainant. The award shows that though the obligation of the complainant -company included supply and release of Single Mode MTS protocol stack developed from time to time, to accord with the updated and upgraded versions of release 1999, considering the market realities and the direction in which the world was moving at that time, the complainant company took a conscious decision to focus its efforts on dual mode and decided in 2003, to discontinue its Single Mode Protocol Stack and concentrate on producing Dual Mode Protocol Stacks. Thus, despite its contractual obligation contained in clause 3(a) rendered above, the complainant -company chose to concentrate on producing dual mode protocol stacks and not provided the requisite updates and upgrades to 3G.Com, thereby committing a breach of its contractual obligation with the said buyer. The finding of the arbitral tribunal in para 88 of the award to the effect that by April 2003, the complainant had concluded that the amendment no longer constituted it and it was no longer going to abide by its terms shows that the failure of the complainant -company to supply the requisite upgrades and updates to 3G.Com was not an act of negligence, error or omission but was a deliberate decision taken by the company, taking its commercial interest into consideration. In para 105 of the award, the tribunal expressly held that the complainant was in breach of clause 3(a) of the amendment. The liability arising out of such a breach would clearly be out of the purview of clause 1.1. of the insurance policy.

IT was contended by the learned counsel for the complainant that the arbitral tribunal did not find any wilful breach of the agreement by the complainant -company and, therefore, clause 4.11 (c) of the policy would not be attracted. In our view, it would be immaterial whether the breach of the agreement by the complainant -company was wilful or intentional since in neither case it can be said that the liability of the complainant -company arose on account of any negligence, error or omission, on its part. An intentional breach of a contractual obligation, can never be an act of negligence, error or omission, since such a breach is result of a conscious decision on the part of the person committing the breach of the agreement. As rightly noted by the tribunal an intentional breach is a breach which in accordance with the ordinary and plain meaning of the words was the result of a deliberate or conscious decision by the guilty party not to perform the obligation breached. Since the claim lodged by the complainant -company with the opposite party arose on account of a deliberate and conscious breach of the contract it had with 3G.Com and not on account of any negligent act, error or omission, the insurance company was fully justified in repudiating the claim on this ground alone.

AS noted earlier, the arbitral tribunal concluded, in para 88 of the award, that the complainant -company had concluded, by April 2003, that it was no longer going to abide by the terms of the amendment. Admittedly, the insurance policy was taken by the complainant on 15 -09 -2003 though it was given a retro -active effect commencing 09 -09 -2002. It is, thus, evident that at the time of taking the policy, the complainant -company knew or atleast ought reasonably to have known that the said decision taken by it by April 2003 was likely to result in 3G.Com staking the claim against it for the breach of its contractual obligations and consequently the said decision had a potential to give rise to a claim under the insurance policy. Therefore, in view of the clause 4.5 (b)(ii) of the terms of the policy, the claim lodged by the complainant with the insurance company is clearly excluded. This was yet another valid ground for rejection of the claim. Clause 4.11 of the policy expressly excluded any claim directly or indirectly based upon attributable to or in consequence inter alia of any actual or alleged fraudulent act, error or omission of the insured. As rightly contended by the learned counsel by the opposite party, a contract of insurance is based upon utmost good faith and if the same is not observed by either party, the contract becomes voidable at the option of the other party. The insured, therefore, is under an obligation to disclose all material facts to the insurer at the time of taking the insurance cover and the said obligation continues throughout the currency of the insurance policy. The disclosure of all the material facts is necessary, in order to enable the insurance company to take an informed decision whether to enter into a particular contract of insurance in a particular case or not which inter alia incudes active concealment of a fact by one having knowledge or belief of the act. The failure to disclose a material fact to an insurance company either at the time of taking insurance cover or thereafter, during the currency of the insurance policy constitutes fraud within the meaning of Section 17 of the Indian Contract Act. If a contract is obtained by concealment of a material fact it is voidable at the option of the party from whom the material fact has been withheld. Since the complainant -company obtained insurance policy without disclosing to the insurance company that it had decided, by April 2003, that it was not going to abide by the terms of its agreement with 3G.Com, the insurance policy was obtained by playing a fraud on the insurance company and in view of the provisions contained in Section 19 of the Indian Contract Act, the said contract is voidable at the option of the insurance company.

CLAUSE 5.1.1 of the policy mandated the complainant to give written notice of a claim to the insurance company as soon as practicable after such a claim is made. Admittedly, the request for arbitration was made by 3G.Com on 24 -11 -2003. Even if it is assumed that no claim was made by 3G.Com prior to that date, the complainant -company ought to have given notice of the said claim to the insurance company soon after that date. However, admittedly the first intimation to the insurance company was given by the complainant on 25 -08 -2004 i.e. nine months after it had come to know of the said claim. The complainant thereby committed breach of clause 5.1.1 of the insurance policy. It was contended by the learned counsel for the complainant that they informed the insurance company soon after the arbitrator was appointed on 12 -07 -2004. In our view, the complainant -company was not justified in waiting till appointment of an arbitrator by the LCIA. It was mandated, by the provisions of the insurance policy to give notice of the claim soon after it had come to know of it from 3G.Com. Since the complainant committed breach of a mandatory condition of the policy, the insurance company, as provided in clause 5.21 of the policy, was entitled to refuse to pay the claim on this ground alone.

CLAUSE 5.15.1 of the policy prohibited the complainant -company from incurring any defence cost with respect to any claim without written consent of the insurance company though the insurance company was also under an obligation not to unreasonably withhold such a consent. It is not in dispute that at least part of the defence cost were incurred by the complainant -company, before it notified the claim to the insurance company on 25 -08 -2004. A perusal of the award would show that after filing of request or arbitration by the claimant on 24 -11 -2003 the claimant filed answer and counter claim on 16 -02 -2004. Obviously some cost must have been incurred by the claimant on filing answer to the request or arbitration as well as its counter claim. It was contended by the learned counsel for the complainant that only a fraction of the defence cost was incurred by the company before giving intimation of the claim to the insurance company on 25 -08 -2004. This contention, however, was repelled by the learned counsel for the insurance company on the ground that the complainant -company had not placed requisite material on record to show what exactly was its contract with the law firm engaged by it and how much was the amount payable to the law firm/Attorneys under that agreement. We also find from a perusal of the letter dated 25 -08 -2004 that the said letter contains no request to the insurance company to permit the complainant -company to engage a law firm/Attorneys to contest the matter before the arbitrator. Therefore, it cannot be said that the insurance company had failed to convey any decision on the request of the complainant -company for permission to engage a law firm/legal counsel. Hence, in view of clause 5.15.1 of the insurance policy the opposite party is not liable to make any payment in respect of defence cost incurred by the complainant -company either without seeking or without waiting for the requisite written consent for a reasonable time. Under clause 5.15.2 of the insurance policy the opposite party was entitled to conduct the proceedings at any time, in the name of the insured. However, no such opportunity was given to the opposite party by the complainant -company since it had appointed a law firm even before notifying the claim to the insurance company. A perusal of the letter dated 25 -08 -2004 would show that the complainant had filed its reply to the claim and had also filed a counter claim through its attorneys, M/s. Clyde & Co. with advice from Fenwick & West. In view of the appointment of the aforesaid attorneys, no scope was left for the insurance company to exercise the option available to it under clause 5.15.2 of the policy, to conduct the defence in the name of the complainant -company. Any move by the insurance company to change the attorneys would have been counter productive since the fee payable to Clyde & Co. would in that event have been payable, in addition to the fee paid to the new attorney. It was pointed out by the learned counsel for the complainant that the insurance company did not even provide the confidentiality undertaking to them despite a request having been made in this regard, which clearly shows that they were not at all interested in exercising the option available to them under clause 5.15.2 of the policy. In our view, the failure of the opposite party to furnish the aforesaid undertaking does not wipe out the default on the part of the complainant in not giving an opportunity to the insurance company to conduct defence in terms of clause 5.15.2 of the insurance policy. It was, therefore, open to the insurance company, to refuse to pay the claim in terms of the clause 5.21 of the insurance policy.

IT was contended by the learned counsel for the complainant that the grounds taken by the opposite party in its written statement to the complaint having not been taken in the repudiation letter dated 26 -05 -2005 are an afterthought and cannot be considered. Reliance in this regard is placed upon the decision of the Honb''le Supreme Court in New India Assurance Company Limited v. Priya Blue Industries Private Limited, : (2011) 4 SCC 231, wherein the Hon''ble Supreme Court referring to a plea taken by the insurance company in its written statement observed that the said plea was raised for the first time in the written statement as an afterthought. However, the aforesaid observation would not apply to the present case for the simple reason that the repudiation letter came to be issued on 26 -05 -2005, whereas the grounds taken in the written statement came to the knowledge of the insurance company only on receipt of the copy of the award which came to be delivered on 23 -12 -2005 much after the claim had been repudiated. Therefore, the aforesaid grounds cannot be said to be an afterthought.

FOR the reasons stated hereinabove, we find no merit in the complaint and the same is hereby dismissed. However, in the facts and circumstances of the case there shall be no order as to costs.