PETITIONER: NATIONAL INSURANCE CO. LTD. Vs. RESPONDENT: SUJIR GANESH NAYAK & CO. & ANR. DATE OF JUDGMENT: 21/03/1997 BENCH: K.S. PARIPOORNAN, SUJATA V. MANOHAR ACT: HEADNOTE: JUDGMENT:
J D G M E N T
AHMADI, CJI:
Special Leave granted.
The respondent No.1 Sujir Ganesh Nayak & Company is a
registered partnership with its head office at Quilon
carrying on business in import and export of Cashew. It has
four factories at Kunnikode, Mulavana, perumpuzha and
Ayathil for processing cashew. The respondent No.1 obtained
two fire policies from the appellant Insurance Company
dated 5.1.1976 and 2.5.1977 both for a period of twelve
months, and for the amount of Rs. 6,00,000/- and Rs.
1,20,000/- respectively. Both the policies had a Riot and
strike Endorsement to the following effect:
“Riot & Strike Endorsement-In
consideration of the payment of the
sum of Rs…. additional premium,
it is hereby agreed and declared
that notwithstanding anything in
the written policy contained to the
contrary the insurance under the
policy shall extend to cover Riot
and strike damage which for the
purpose of this endorsement shall
mean (subject always to the special
conditions hereinafter contained).
Loss of or damage to the property
insured directly caused by:-
1. The act of any person taking
art together with others on any
disturbance of the public peace
(whether in connection with a
strike or lock-out or not) not
being an occurrence mentioned in
condition 6 of the special
condition thereof.
2. The action of any lawfully
constituted authority in
suppressing or attempting to
suppress any such disturbance or in
minimising the consequences of any
such disturbances.
3. The willful act of any striker
or locked out worker done in
furtherance of a strike or in
resistance to a lock-out.
4. The action of any lawfully
constituted authority in preventing
or attempting to prevent any such
act or in minimising the
consequences of any such act.”
The Special condition No.5 (i) (b) which is relevant
for the determination of the appellant’s case is as under:
“SPECIAL CONDITIONS
For the purposes of this
endorsement but not otherwise there
shall be substituted for the
respectively numbered Condition of
the policy the following:-
CONDITION 5.
(i) This insurance does not cover
:-
(a) ... ... ...
(b) Loss or damage resulting from
total or partial cessation of work
or the retarding or interruption or
cessation of any process or
operation.
(c) ... ... ...
(d) ... ... ...
(e) ... ... ...
The workers of the respondent No.1 raised a demand for
hike in wages during the period there was no work and this
demand led to a strike. The matter was taken up by the
District Labour officer for conciliation and was thereafter
dealt with by the Labour Commissioner as well as by the
Minster for Labour. The striking workers physically
obstructed the movement of goods . By a letter dated
28.4.1977, the respondent No.1 informed the appellant that
the staff members and labour in its factories have gone on
strike from 26.3.1977 and that the striking workers have
restricted the movement of the goods lying in the baskets
are exposed to the risk of deterioration and damage. By a
letter dated 10.5.1977, the appellant communicated to the
respondent No.1 that the loss sustained by the respondent
No.1 was not covered by the policy. The respondent No.1 by a
letter dated 17.8.1977 asked the appellant for an advance
Payment of Rs. 4,00,000/- and by another letter dated
25.8.1977 asked for payment of Rs. 4,28,827.01p. By the
letter dated 22.9.1977, appellant reiterated that in view of
condition 5(i)(b) of the Riot and strike Endorsement, the
Insurance Company had no liability for the loss incurred by
the respondent No.1. On 25.10.1978, the respondent No.1
served a legal notice. The suit for recovery of the claim
was filed on 2.6.1980.
The appellants contested the suit inter alia on the
ground that the suit was barred by limitation as well as by
condition No. 19 of the policy and on the ground that the
claim made by the respondent No.1 was not covered by the
policy. Condition 19 of the policy which was set up by way
of defence runs as under:
“Condition No. 19 – In no case
whatever shall the company be
liable for any loss or damage after
the expiration of 12 months from
the happening of loss or the damage
unless the claim is the subject of
pending action or arbitration.”
On behalf of the respondent No.1, it was contended that
Condition No. 19 was hit by section 28 of the contract act
Inasmuch as it seeks to shorten the time within which legal
action can be commenced from that provided under the law of
limitation. Further, the respondent No. 1 reiterated that
the claim was covered by the two policies. The Trial Court,
vide its judgment dated 30th June, 1986, observed that
condition No. 19 was not hit by section 28 of the contract
Act and further that the suit was otherwise barred by
limitation as the claim was repudiated by the letter dated
10.5.1977 and the suit filed on 2.6.1980 was after a lapse
of more than three years from the date of such repudiation .
The Trial Court also found that the damage was not covered
by the Insurance Policy in view of the special Condition
5(i)(b) of the Riot and Strike Endorsement. In appeal, the
High Court allowed the claim holding that the condition No.
19 could not limit the period during which the suit was to
be filed and that it simply required the respondent No.1
to make its claim known within the period of 12 months from
the happening of the loss or damage. It also reversed the
finding of the Trial Court that the claim was not covered by
the two policies. so far as limitation is concerned, the
High Court further observed that the letter dated 10.5.1977
could not be read as a letter of repudiation of claim as by
then no claim whatsoever was preferred by the respondent
No.1 and further that in any case the last date of three
years from 10.5.1977 fell within the summer vacation and the
suit filed on 2.6.1980 on reopening of the Court was within
limitation.
In the present appeal, the appellant contended that
condition No. 19 extinguishes the right of the assured as
the suit was not filed within 12 months from the day when
the loss or damage had occurred. It is further reiterated in
the appeal that special Condition 5(i)(b) of the Riot and
Strike Endorsement excludes the claim of the respondent No.1
from the scope of two Insurance Policies.
Section 28 of the contract Act may be quoted now before
going into further discussion :
“Section 28. Every agreement, by
which any party thereto is
restricted absolutely from
enforcing his rights under or in
respect of any contract, by the
usual legal proceedings in the
ordinary tribunals, or which limits
the time within which he may thus
enforce his rights, is void to that
extent.”
On a plain reading of the relevant part of this
provision it seems clear that if the agreement seeks to
shorten the time from that prescribed by law, it would fall
within the mischief of this provision. Before the High
Court, the appellant relied on a full Bench decision of the
Punjab High Court in Pearl Insurance Company V. Atmaram (AIR
1960 Punjab 236) Where in it was held that such a clause did
not limit the time within which the insured shall enforce
his rights but only limited the period during which the
contract will remain alive and hence such a clause was not
hit by section 28 of the contract Act. The respondent No.1
on the other hand placed reliance on Secretary, Taluka
Agricultural Produce Cooperative Marketing Society Ltd. V.
New India Assurance Company Limited(1989 ACJ 26) wherein the
High Court of Karnataka held that the period of limitation
despite such a Condition of twelve months was three Years as
provided for in Article 44 of the Limitation Act. The High
Court followed the decision of this court in Food
Corporation of India V. New India Assurance Co. (19994) 3
sec 324, wherein the real nature of the restriction placed
by section 28 was examined and the effect of such a clause
in reducing the period of limitation was considered. Before
us, two other decisions cited were, The Vulcan Insurance Co.
Ltd. V. Maharaj Singh and Another, (1976) 1 SCC 943; and The
Baroda spinning & Weaving Co. Ltd. V. The Satyanarayan
Marine & Fire Insurance Co. Ltd., 1913(15) Bombay Law
Reporter 948. In the letter case, the Clause in question
read thus:
“12. Forfeiture — If the claim be
made and rejected and an action or
suit be not commenced within three
months after such refection all
benefit under this policy shall be
forfeited.”
The clause meant nothing more than this, namely, if the
suit is not filed within three months of rejection of the
claim, the rights under policy will be forfeited. The Bombay
High Court following certain English decisions held that the
contract Act as the Clause did not restrict the limitation
but merely extinguished the right.
In Baroda Spinning & Weaving Co. Ltd. (supra), in the
High Court of Bombay the five insurance policies provided
that ‘if the claim be made and rejected and action or suit
cannot be commenced within three months after such refection
all benefits under the policy shall be forfeited’. On the
suit being filed three months after the rejection of the
claim the High Court held that the said condition was not
within the scope of section 28 of the contract Act since
that section spoke about enforcement of a subsisting right
and not a right which stood extinguished on the repudiation
of the claim and the action not having been commenced within
a period of three months. In taking this view the High Court
referred to an earlier decision in Hirabhai v. Manufacturers
Life Insurance Company (1912) 14 B.L.R 741 wherein the
clause was:
“No suit shall be brought against
the company in connection with the
said policy later than one year
after the time when the cause of
action accrues.”
The view taken was that the clause was intended to
convey that if no suit was instituted within a year than
neither party shall be regarded as having any subsisting
right against the other to enforce the contract. The
correctness of this view was doubted as it was felt that the
clause did not operate as a release of forfeiture of the
rights of the assured but was intended to limit the time for
filing of the suit and fell within the mischief of section
28 of the contract Act and was therefore void. Batchelor J.
who was party to the decision in Hirabhai’s case also agreed
that the view taken in that case was difficult to sustain.
It would seem from these two decisions that unless the
language of the clause in a contract is susceptible of the
meaning that it releases or forfeits the rights on the
expiry of the stipulated period the same would fall within
the net of section 28 if the clause merely restricts the
period within which action should be commenced.
However, strong reliance was placed on the decision of
this Court in Vulcan Insurance Case (supra) in which clause
19 of the policy was verbatim the same as in the present
case. Relying on that clause this Court observed in
paragraph 23 as under:
“We do not propose, as it is not
necessary, to decide whether the
action commenced by respondent No.1
under section 20 of the Act for the
filling of the arbitration
agreement and for appointment of
the arbitration agreement and for
appointment of arbitrators was
barred under clause 19 of the
policy. It has been repeatedly held
that such a clause is not hit by
section 28 of the contract Act and
is valid”.
Counsel for the respondent contended that the
observation was clearly in the nature of an obiter dicta and
did not lay down the correct law. That was a case in which
respondent No.1 had entered into a contract with respondent
No.2 for taking advances of the security of the factory
Premises, plant, machinery, stock-in-trade, etc. A mortgage
was executed by him in favour of the respondent-bank. The
bank insured the mortgage properties from time to time with
the appellant-company under different insurance policies,
the terms whereof being same . Afire broke out in the
factory premises and the insurance company was duly informed
. The surveyor estimated the loss at Rs. 4620/- without
prejudice to the terms and conditions of the policy . After
some correspondence, the appellant-insurance company
repudiated the claim under the terms of the policy.
Thereupon respondent No.1 wrote to the insurance company
that since it had repudiated the claim , a difference had
arisen between the parties and appointed a sole arbitrator
to decide the dispute. At the same time it mentioned that if
the insurance company desired to nominate an arbitrator it
may do so . The insurance company however took the stand
that since it had repudiated the claim, the arbitration
clause in the policy was rendered inoperative and no
arbitration proceedings could legally be initiated. This led
to the respondent No.1 filing an application under section
20 of the Arbitration Act, 1940. The application was
contested. The trial court held that on the repudiation of
the claim under clause 13, the dispute fell within the scope
of the arbitration clause 18 but was barred by limitation in
view of clause 19. on appeal, the Delhi High Court held that
clause 18 was restricted in its scope and did not attract
all kinds of disputes and differences yet reference to he
arbitration is not ousted and the arbitration clause remains
operative unless barred by clause 19 and in the instant case
it was not barred since respondent No.1 had commenced the
arbitration process which was pending when the time ran out.
The High Court, therefore, reversed the trial court order
and remanded the case for appointment of arbitrators. The
insurance company carried the matter to this court. While
dealing with the submissions at the Bar, this court
paragraph 8 of the judgment observed that only one point
need be decided, namely, whether in view of the repudiation
of the liability under clause 13, a dispute was raised which
could be referred to arbitration ? It also said that
incidentally reference will be made to the other question as
to whether the proceedings were barred by clause 19 of the
policy? This court answered the first point in the negative
and hence no decision was necessary on the second point but
the court answered it only incidentally. This is also clear
from the observation extracted earlier.
The next case we would like to notice is the Food
Corporation of India (supra); the abridged factual matrix is
that it, as principal, had appointed millers for procuring,
hulling and supplying rice on certain conditions. On behalf
of these millers the respondent insurance company executed
fidelity Insurance Guarantee in favour of the appellant
hereunder the former undertook to indemnify the latter for
any loss suffered by the appellant by reason of branch of
agreement. Under the terms of the guarantee when the
appellant found that it had suffered losses on account of
breach of terms and conditions of their respective contracts
by the millers it made demands on the insurance company to
indemnify it. These demands were made well before the expiry
of six months from the date of termination of the contract
with the concerned miller. The insurance company did not
satisfy the demands which led the appellants to file suits
to recover the losses. Those suits were decreed in favour of
the appellants against the respondents including the
insurance companies. The insurance companies filed appeals
in the High Court which were allowed holding that the terms
of the guarantee concerned in each case did not entitle the
appellant to sue the insurance companies after ‘six month’
period from the date of termination of the respective
contracts with the rice millers. The matter was therefore
carried in appeal to this Court.
Under the fidelity Insurance Guarantee the concerned
insurance company had undertaking to make good the loss upto
the specified limit when claimed by the appellant, of course
subject to the restriction “that the Corporation shall have
no rights under this bond after the expiry of (period) six
months from the date of termination of the contract, i.e.,
the contract with the rice miller. On a plan reading of this
restriction clause, it is clear that if the appellant
desired to enforce its rights under the contract, if should
do so within ‘six months’ of the termination of the contract
and if it failed to do so its right under the contract would
extinguish. It was therefore, imperative for the appellant
to lodge its claim with the insurance company within the
period of six months to assert its rights failing which the
right would stand forfeited. This Court, therefore, held
that the suits were barred under the restriction adverted to
since they where admittedly filed after the rights stood
extinguished on the expiry of six months after the insurance
company repudiated the demands.
Sahai, J. who wrote a separate but concurring judgment
extracted the clause of the Fidelity Insurance Guarantee
(which we have extracted earlier) and then posed the
question ‘what does it mean? What is the impact of Section
28 of the Contract act on such clause? pointing out the said
section 28 was a departure from the English law (there is no
such statutory bar in English law) the learned Judge
observation that:
“Even though the phraseology of
section 28 is explicit and strikes
at the very root by declaring any
agreement curtailing the normal
statutory period of limitation to
be void the courts have been
influended by the distinction drawn
by English Courts in extinction of
right by agreement and curtailment
of limitation”.
Referring to the language of the various terms of the
agreement, the learned judge holds in paragraph 8 thus:
“From the agreement i 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 impose any restriction t
file a suit within six months from
he 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 this
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 of contract. It is in
keeping with the principle with 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. The High Court
erroneously construed it as giving
up the right of enforceability of
its claim after six months.”
From the case law referred to above the legal position
that emerges is that an agreement which in effect seeks to
curtail the period of limitation and prescribes a shorter
period than that prescribed by law would be void as
offending section 28 of the Contract Act. That is because
such a an agreement would seek to restrict the party from
enforcing his right in Court after the period prescribed
under the agreement expires even though the period
prescribed by law for the enforcement of his right has yet
not expired. But there could be agreements which do not seek
to curtail the time for enforcement of the right but which
provides for the forfeiture or waiver of the right itself if
no action is commenced with in the period stipulated by the
agreement. Such a clause in the agreement would not fall
within the mischief of section 28 of the Contract Act. To
put it differently, curtailment of the period of limitation
is not permissible in view of Section 28 but extinction of
the right itself unless exercised within a specified time is
permissible and ca be enforced. If the policy of insurance
provides that if a claim is made and rejected and no action
is commenced within the time stated in the policy, the
benefits flowing from the policy shall stand extinguished
and any subsequent action would be time barred. Such a
clause would fall outside the scope of Section 28 of the
Contract Act. This, in Brief, seems to be the settled legal
position. We may now apply it to the facts of this case.
Now let us first notice the view expressed by the High
Court in the impugned judgment. The finding on this issue is
available in para 12 of the judgment which runs as under:
“In the instant case, clause 19 of
the contract of insurance only
states that the insured shall
enforce his claim before the
expiration of twelve months of the
date of happening of the damage. It
does not expressly prohibit the
insured from filing a suit beyond
that period. Under the Limitation
Act, there is a specific article
for filing a suit for damages due
under the contract of insurance.
Any clause in the contract of
insurance curtailing the period of
Limitation will be hit by Section
28 of the contract of insurance is
construed in such a way, it limits
the period of limitation to twelve
or damage and it would seriously
prejudice the rights of the
insured. The insurer can very well
defeat the claim of the insured by
rejecting the claim after the
period of 12 months from the date
of happening of the loss.”
The High Court started with the analysis as to whether
the clause restricts the period of limitation or
extinguishes the right but ultimately rest its conclusion
on the finding that the contract is unconscionable-a ground
which is not contended for by the parties. The high Court
further proceeds to say:
“Under Article 44(b) of the
Limitation Act, the period of
limitation runs from the date of
rejection of the claim. Thereafter,
it is clear that clause 19 of the
contract of insurance only
prescribes the period during which
the claim is to be preferred by the
insured before the insurance
company and it does not, in any
way, curtail the period of
limitation prescribed under the
Limitation Act for filing a suit of
the nature.”
The clause before this Court in Food Corporations case
extracted hereinbefore can instantly be compared with the
clause in the present case. The contract in that case said
that the right shall stand extinguished after six months
from the termination of the contract. The clause was found
valid because it did not proceed to say that to keep the
right alive the suit was also required to be filed within
six months. Accordingly, it was interpreted to mean that the
right was required to be asserted during hat period by
making a claim to the Insurance Company. It was therefore
held that the clause extinguished the right itself and was
therefore not hit by Section 28 of Contract Act. Such clause
are generally found in insurance contracts for the reason
the undue delay in preferring a claim may open up
possibilities of false claims which may be difficult of
verification with reasonable exactitude since memories may
have faded by then and even ground situation may have
changed. Lapse of time in such cases may prove to be quite
costly to the insurer and therefore it would not be
surprising that the insurer would insist that if the claim
is not made within a stipulated period, the right itself
would stand extinguished. Such a clause would not be hit by
Section 28 of the Contract.
Keeping the above legal distinction in mind we may not
consider the facts of the present case. The two insurance
policies were both for a period of twelve months and bore a
‘Riot and Strike’ endorsement convering damage caused by
riot and strike to the property of the insured. On account
of the strike in the unit from 26.3.1977, the production had
come to a halt and as the management was not allowed to
remove the goods the unit suffered heavy damage and loss for
which a claim was made which claim was rejected by the
insurer. The insured served notice and then filed a suit.
One of the grounds on which the suit was contested by the
insurance company was based on the language of clause 19 and
12 extracted earlier.
Clause 19 in terms said that in no case would the
insurer be liable for any loss or a damage after the
expiration of twelve months from the happening of loss or
damage unless the claim is subject of any pending action or
arbitration. Here the claim was not subject to any action or
arbitration proceedings. The clause says that if the claim
is not pressed within twelve months from the happening of
any loss of damage, the insurance company shall cease to be
liable. There is not dispute that no claim was made nor was
any arbitration proceeding pending during the said period of
twelve months. The clause therefore has the effect of
extinguishing the right itself and consequently the
liability also. Notice the facts of the present case. The
insurance company was informed about the strike by the
letter of 28.4.1977 and by letter dated 1.5.1977. The
insured was informed that under the policy it had not
liability. this was reiterated by letter dated 22.9.1977.
Even so more than twelve months after on 25.10.1977 the
notice of demand was issued and the suit was filed on
2.6.1980. It is precisely to avoid such delays and to
discourage such belated claims that such insurance policies
contain a clause like clause 19. That is for the reason that
if the claims are preferred with promptitude they can be
easily verified and settled but if it is the other way
round, we do not think it would be possible for the insurer
to verify the same since evidence may not be fully and
completely available and memories may have faded. The
forfeiture clause 12 also provides that if the claim is made
but rejected, an action or suit must be commenced within
three months after such rejection; failing which all
benefits under the policy would stand forfeited. So, looked
at from any point of view, the suit appears to be filed
after the right stood extinguished. That is the reason why
in Volcan Insurance case (supra) while interpreting a clause
couched in similar terms this court said: ” It has been
separately held that such a clause is not his by Section 28
of the Contract Act.” Even if the observations made are in
the nature of obiter dicta we think they proceed on a
correct reading of the clause.
For the foregoing reasons, we allow this appeal, set
aside the decree, order and judgments of the courts below
and direct that the suit shall stand dismissed with no order
as to costs throughout.
