Arbitration in Essar Oil’s claim for Vadinar refinery begins

Arbitration in Essar Oil’s claim for Vadinar refinery begins

New Delhi/Mumbai: Monday marked the beginning of arbitration proceedings to decide one of the largest insurance claims in India, Essar Oil Ltd’s claim for Rs3,020 crore from United India Insurance Co. Ltd.

The case, delayed primarily due to reinsurers, could, if resolved, mean a windfall for Essar, which wants United India to pay for losses sustained by the delay in the opening of its oil refinery at Vadinar, near Jamnagar, off the Gujarat coast. The delay was due to the June 1998 cyclone that hit Gujarat’s Kathiawad region.

Also Read | A big, broken contract

The case has a tumultuous seven-year history: Essar took United India to court in 2003 because the latter decided not to pay the claim. Essar’s insurance policy covered lost recovery, third-party liabilities and advance loss of profit, which entitles the company to the losses sustained in the delayed opening of the refinery.

“This is a very old case based on the 1998 cyclone that delayed our Vadinar refinery construction. After reaching various stages of litigation, the case is finally set for arbitration. The arbitration proceeding is progressing. This would have a positive impact on Essar Oil, if we get a favourable award," a senior Essar group executive said, requesting anonymity.

“The case was based on the advance loss of profit, or ALoP scheme. This was the unique policy designed by United India Insurance Co. wherein Essar was its first client. The claim was made by Essar Oil after the cyclone hit the Kathiawad region in June 1998, asking for compensation for loss of profit owing to delays in the refinery construction due to the cyclone," said a second Essar group executive, who also did not want to be identified.

Essar’s corporate communications manager Swastayan Roy declined comment.

In 2003, the company’s claim was valued at Rs866 crore. The matter was taken to the Gujarat high court. In 2008, both parties decided before the Lok Adalat in Vadodara to settle the case through arbitration. Interest on the claim had by then compounded to Rs1,757 crore, according to executives and previous media reports. An executive at United India, who did not want to be identified, said much of the claim is interest, compounded annually at the rate of 20%.

United India’s reasons for not honouring the claim are believed to be the points of conflict in the dispute. The lead insurer has put the risk associated with this project on the international market (or reinsured it) because, as one United India executive explained, “there is not enough capacity in the Indian market to bear such large risk". This person also did not want to be identified. “In India, our arbitration Act is in its infancy, and going to court takes a long time. This is being done as per international standards."

United India’s spokesperson and its chairman and managing director G. Srinivasan declined to comment on the matter, as it was still sub judice.

Essar’s Vadinar refinery was scheduled to become operational in 1999, but did so only in 2006 after a series of further delays, the details of which are crucial to the proceedings.

The matter will be closely watched. “Arbitration awards are not precedents and cannot be cited in a court of law. Somebody might try to do it for persuasive value, but I don’t think judges will allow such a thing," said Sumeet Kachwaha, a senior lawyer in New Delhi.

In 2001, The Times of India had reported that United India had agreed to pay Essar a claim amount of Rs299 crore. It also reported: “The company [Essar] claimed compensation for loss of earnings resulting in loss in net profit from delays in the refinery’s construction caused by the cyclone. It also claimed compensation for physical damage to equipment and structures besides salaries and debt servicing charges for the period by which the project was delayed."

Utpal Bhaskar and Manish Ranjan in New Delhi contributed to this story.