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TMI Blog1994 (2) TMI 314X X X X Extracts X X X X X X X X Extracts X X X X ..... delity Insurance Guarantee under which the latter had undertaken to indemnify and keep indemnified the appellant, the Food Corporation of India, hereinafter referred to as 'the Corporation', in money against any loss caused to or suffered by it for Miller's breach of performance of the terms and conditions of the agreement entered into by it with the appellant. Such Fidelity Insurance Guarantee empowered the Food Corporation of India to make its claim directly against the concerned Insurance Company to recover the amount of loss. The material clauses in all the contracts of Fidelity Insurance Guarantees with which we are concerned being similar except for dates and names of parties, we propose to determine the question arising for consideration in these appeals with reference to such clauses in the contract of Fidelity Insurance Guarantee concerned in Civil Appeal No. 1799 of 1982, which read thus: ...We agree to pay the corporation on demand any sum which may become payable to the corporation under the said agreement and in respect of which we The ANAND INSURANCE COMPANY LTD. hereby give this guarantee for payment. We THE ANAND INSURANCE COMPANY LIMITED agree that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f first appeals was filed by the concerned Rice Millers, another set of first appeals was filed by the concerned Insurance Companies. The High Court of Judicature at Madras, before which the said appeals were filed, while dismissed the appeals of the Rice Millers, allowed the appeals of the Insurance Companies. The High Court allowed the appeals of the Insurance Companies, on its view that the terms of the Fidelity Insurance Guarantee concerned in each appeal did not entitle the Corporation to file suits against the concerned Insurance Companies after the expiry of 'six months' period from the date of termination of respective contracts entered into between the Corporation and the Rice Millers. It is the sustainability of the said view of the High Court which arises for determination in the present appeals filed by the Corporation, as is indicated in the question which we have set out in the beginning of this judgment. 4. The learned Counsel for the Corporation, the common appellant in these appeals, submitted that the High Court had misread the clause in the contract of Fidelity Insurance Guarantee relating to period within which claim or demand against the Insurance Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ner provided for in the clauses of the bond itself, as could be seen therefrom. Therefore, what is envisaged by the 'restriction' is that the Corporation, if wants to exercise or enforce the rights given to it under the Fidelity Insurance Guarantee Bond, it could present before the Insurance Company, the claim for its loss under the contract entered into with the Rice Miller even upto the period of six months from the date of termination of the contract and not beyond. None of the clauses nor the restriction in the bond, to which we have adverted, require that a suit or legal proceeding should be instituted by the Corporation for enforcing its right under the bond against the Insurance Company within a period of six months from the date of termination of the contract. Therefore, the restriction adverted to in the clauses of the bond, envisages the need for the Corporation to lodge a claim based on the bond, before the Insurance Company within a period of six months from the date of termination of the contract as becomes clear from the express language of the clause in which that restriction is imposed and the express language of the clauses which have preceded it. In fact t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all have no rights under this bond after the expiry of (period) six months from the date of the termination of the contract. What does it mean? Does it restrict the right of the appellant precluding it from filing suit for recovery of money from the insurance company within six months from the date of termination of the contract or it is the outer limit for exercising the right or making the demand? What is the impact of Section 28 of the Contract Act on such clause? Since no factual dispute survives, and even if there was any it has been ironed out by the two courts below, the skeleton facts and findings as are necessary shall be referred as and where necessary for appreciating the legal issue. The appellant, as principal, appointed millers for procuring, hulling and supplying rice on certain conditions. To ensure its compliance the insurance company on behalf of the millers, executed Fidelity Insurance Guarantee in favour of the appellant guaranteeing honest accounting and refund of money received by the millers for supplying rice to the appellant. The appellant was given right under the Guarantee to indemnify for any loss, directly, from the company. The exact words were, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ithin the agreed time. Since by agreement time for recovery cannot be circumscribed against the provisions of the Limitation Act the suit could not be held to be barred by limitation. The suit was thus decreed both against the miller and the Insurance Company. In the High Court the appeal of miller was dismissed. And that order has become final. But the appeal of the company was allowed. It was held that as the policy has no force after expiry of six months from the date of termination of the contract no liability could be fastened on the insurance company. The court observed that the enforceability of the contract ceased after six months from the date of termination of contract which admittedly was 15th March 1971. The High Court found that a mere demand made by the appellant by notice sent on 7th June 1971 did not amount to enforceability. The High Court construed the Fidelity Insurance Guarantee offered by the Insurance Company to be effective only between 15th February 1970 to 15th February 1971. The High Court did not agree that once the notice was issued the relationship between the appellant and the Insurance Company was that of a creditor and debtor. It relied on a number o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsurance Co. Limited , ILR 38 Bom 344, the Agreement providing, 'if the claim to be made and rejected, an action or suit be not commenced within three months after such rejection... all benefits under the policy shall be forfeited.' was construed as extinguishing right and not the remedy. Reliance for this was placed on numerous English decisions and the Court was of opinion that, 'what the plaintiff was forbidden to do under the Agreement was to limit the time within which he was to enforce the right but what he had actually done was to limit the time within which he was to have any rights to enforce and that appears to be very different thing'. In Vulcan Insurance Co. v. Maharaj Singh, [1976]2SCR62 this Court, incidently, in a different context referred to the decisions in Baroda Spinning (supra) and observed that a clause like the one which provided that, 'In no case whatever shall the company be liable for any loss or damage after the expiration of twelve months from the happening of the loss or damage unless the claim is the subject of pending action or arbitration' was not hit by Section 28 of the Contract Act. Similar clause was considered in Pearl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er is necessary to be said as it shall be explained later that it was not necessary for the High Court to enter into this aspect at all. As regards the decision in South British Fire Marine Insurance Co. v. Brojo Nath Shaba , 1909 (36) Cal 576, on which reliance was placed by the High Court, it itself observed that it was not very relevant as the effect of Section 28 of the Contract Act on such Agreement was not expressly considered. Yet it placed reliance on observations to the effect 'it was conceded in argument that in England the agreement in Clause (18) would be perfectly valid; and it cannot, I think, be contended that insurance companies in India have less need than such companies in England of the protection afforded by an Agreement for the acceleration of legal proceedings to be brought against them. That being so, there is no less reason to suppose that the legislature intended Section 28 to have far reaching effect for which the plaintiff contended'. But what the High Court lost sight of that there was no provision like Section 28 of the Contract Act in English Law and, therefore, any Agreement curtailing the period of limitation than that was provided under t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce has been placed.' It is a contract whereby, for a consideration, one agrees to indemnify another against loss arising from the want of honesty, integrity or fidelity of an employee or other person holding a position of trust. In Black's Law Dictionary 'fidelity insurance' is explained as under: Fidelity Insurance - Form of insurance in which the insurer under takes to guaranty the fidelity of an officer, agent, or employee of the assured, or rather to indemnify the latter for losses caused by dishonesty or a want of fidelity on the part of such a person. In Halsbury's Laws of England, Vol. 25, 4th Ed. a Fidelity Guarantee Insurance is described as pecuniary loss insurance, not falling within normal class related to contingency but, for making payment in the event of a specified event occurring, the payment representing either the loss or the possibility of loss which that event entails.... A Fidelity Policy which insures the assured against losses which he may sustain by the default of his employee is a policy of pecuniary loss. It is a policy, intended to protect the assured against contingency of a breach of fidelity on the part of a person i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it shall continue to be enforceable till all the dues of the corporation under or by virtue of the said agreement has/have been fully paid and its claim satisfied or discharged or till the Regional Manager of the Food Corporation of India certified that the terms and conditions of the said agreement have been fully and properly carried out by the said miller and accordingly discharges the guarantee subject, however, that the corporation shall have no rights under this bond after the expiry of (period) six months from the date of the termination of the contract. 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. As has been explained in Halsbury's Laws of England the appellant could have taken action against the company not on suspicion but on satisfaction that the agent was not willing to act honestly and if the period of six months mentioned in the agreement is taken as time limit then it was only to put the company on notice. In other words if the appellant informed within six months of termination of contract that the agent was not acting honestly then it had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom filing suit after expiry of six months. It can utmost be construed as a condition precedent for filing of the suit that the appellant should have exercised the right within the period agreed to between the parties. The right was enforced under the agreement when notice was issued and the company was required to pay the amount. 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 the 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. 18. In the result, these appeals succee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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