New India Assurance Company vs The Food Corporation of India and Others

Govardhan, J.—Sixth defendant is the appellant.

The suit is for recovery of a sum of Rs. 44,014 payable by the first defendant and interest for the above amount at 11% per annum from the

date of receipt of recovery order by the first defendant viz., 20-4-1971 and for costs. The fifth defendant has been impleaded as it had issued a

fidelity insurance guarantee for the due performance of the contract between the plaintiff and the first defendant. It had undertook to indemnify the

plaintiff to the extent of Rs. 25,000 against the loss. The fifth defendant has been impleaded on account of the default of the first defendant and

since the fifth defendant had not made good the loss sustained by the plaintiff even after the receipt of the notice issued to them on 19.6.1971

followed by a reminder on 14.7.1971. The sixth defendant has been subsequently impleaded as the fifth defendant had merged with the sixth

defendant. The claim is resisted by the sixth defendant in their written statement contending that the policy was in force upto 12.2.1971 and the

plaintiff has no right of claim under the policy after the expiry of six months from 12.2.1971 among other grounds.

The trial Court has granted a decree in favour of the plaintiff and against the defendants 1,2 and 6 as prayed for. An additional issue has been

framed as to whether fifth or sixth defendant is liable to pay the insured amount of Rs. 25,000 and whether the claim is in time. On this issue, the

trial Court has given a finding to the effect that when once a demand is made within the time and the same is not complied with, the plaintiff can

enforce his claim within three years from the date of its demand and that even otherwise, the liability of the Insurance Company is co-extensive and

co-terminus with that of the first defendant subject to the terms in the guarantee and that the suit is in time against the 5th defendant and therefore,

the plaintiff is entitled to recover Rs. 25,000 from the Insurance Company.

Aggrieved over the same, the sixth defendant has come forward with this appeal.

The short point that arises for consideration in this appeal is whether the trial Court has committed an error in granting a decree in favour of the

plaintiff when once contract of insurance has come to an end on 12.2.1971 and the suit has been filed after the period six months from the date of

the termination of the contract of insurance viz., 12.2.1971. In the grounds of appeal, it has been raised by the appellant that the trial Court has not

adverted to the submissions in the written statement that the suit filed by the plaintiff after the expiry of six months from the date of termination of

the contract is not maintainable and the learned Judge has failed to note that the Policy refers to an agreement i.e., the agreement between the

Food Corporation of India and the Miller and also refers to the termination of the contract which refers to the policy contract. This plea has been

taken by the sixth defendant with whom the fifth defendant has merged and since the fifth defendant had issued a fidelity insurance guarantee for the

due performance of the contract between the plaintiff and the first defendant which was in force only upto 12.2.1971 and on the ground that the

plaintiff has no right to make any claim under the Policy after the expiry of six months from 12.2.1971. A similar matter came up before the

Supreme Court for the consideration of the Supreme Court in the case reported in The The Food Corporation of India Vs. The New India

Assurance Co. Ltd. and others, between the Food Corporation of India and the New India Assurance Company Ltd., who are before us now. In

the above case, on similar facts, the trial Court has held even though it was mentioned in the guarantee agreement that the appellant would loose all

the claims as against the Insurance Company, if it was not claimed within six months from the date of expiry of contract of fidelity and the

agreement also terminated on 15.2.1971 and calculating six months from that date, the claim was barred but not filing of suit within six months did

not mean that the suit was barred by limitation. The suit was decreed in the trial Court both against the Miller and the Insurance Company. In the

High Court, the appeal of Miller was dismissed and it has become final. But the appeal of the Insurance Company was allowed and it was held that

as the policy had no force after expiry of six months from the date of termination of the contract, no liability could be fastened on the Insurance

Company. Against the judgment of this Court dated 29.4.1981 in C.A.178/1977, the matter was taken up to the Supreme Court. Their Lordships

have rendered the above decision. The Hon''ble Mr. Justice R. M. Sahai has observed that even though he respectfully agrees with the brother

Venkatachala J, that the order of the Madras High Court allowing the appeal of the Insurance Guarantor and dismissed the suit of the appellant

Corporation for recovery of the money is not liable to be maintained, yet considering the importance of the legal issue involved in that appeal

arising in day to day commercial dealings and absence of authoritative pronouncement of the Supreme especially when the High Court has

traversed wide field, it appears appropriate to add a few words of his own.

In the above judgment of the Apex Court, it has been held that fidelity guarantee is different from contingency guarantee and the Supreme Court

has observed as follows:

The insurance under it is for honesty, against negligence or for being faithful and loyal. The protection afforded is different from normal insurance

policies. Its consequences and enforcement are also not the same. The employer or the principal has first to be satisfied about the breach. No

action can be taken on suspicion. In contingency insurance the cause of action arises immediately whereas in Fidelity Guarantee it has to be

ascertained and verified.

Since the foundation of such guarantee is protection against dishonesty the law should be construed so as to promote honesty and fairness and

frustrate dishonesty. If the appellant informed within six months of termination of contract that the agent was not acting honestly, then it had

discharged its obligation under the bond. A right under an agreement or a Statute may be enforced in the manner provided. The right of the

appellant under the agreement was to recover all dues against miller, directly, from the company. That was never in dispute.

From the agreement it is clear that it does not contain any clause which could be said to be contrary to Section 28 of the Contract Act, nor it

imposes any restriction to file a suit within six months from the date of determination of the contract as claimed by the company and held by the

High Court. What was agreed was that the appellant would not have any right under bond after the expiry of six months from the date of the

termination of the contract. This cannot be construed as curtailing the normal period of limitation provided for filing of the suit. If it is construed so,

it may run the risk of being violative of Section 28 of the Contract Act. It only puts embargo on the right of the appellant to make its claim known

not later than six months from the date of termination of contract. It is in keeping with the principle which has been explained in English decisions

and by our own Court that the insurance companies should not be kept in dark for long and they must be apprised of their liabilities immediately

both for facility and certainty.

Assertion of right is one thing, than enforcing it in a court of law. The agreement does not anywhere deal with enforcement of right in a court of law.

It only deals with assertion of right. The assertion of right, therefore, was governed by the agreement and it is imperative as well that the party

concerned must put the other side on notice by asserting their right within a particular time as provided in the agreement, to enable the other side

not only to comply with the demand, but also to put on guard that in case it is not complied, it may have to face proceedings in the Court of law.

Since admittedly, the Corporation did issue notice prior to expiry of six months from the termination of contract, it was in accordance with the

Fidelity Insurance clause and, therefore, the suit filed by the appellant was within time.

The above observations of the Supreme Court throws considerable light on the question before us. In the present case, it is no doubt true that the

contract of insurance came to an end on 12.2.1971. The notice has been issued to the Insurance Company by the plaintiff under Ex.A-28 dated

12.7.1971. The demand has been made within six months of the date of termination of the contract therefore cannot be disputed. When the

demand has been made within six months, from the date of termination, as per the decision of the Supreme Court referred above, it shows that the

plaintiff has put the sixth defendant on guard about the claim and in case it is not complied with, the sixth defendant may have to face proceedings

in the Court of law. The suit has been filed within three years from the demand and it is in time as per the Limitation Act. Therefore, the contention

of the appellant in the grounds of appeal, that the suit is barred by virtue of the clause and the trial Court has committed an error in granting a

decree is therefore not a tenable one. In that view, I am of opinion that the appeal is without merits and is liable to be dismissed.

In the result, the appeal is dismissed. In the circumstances of the case, no order as to costs.