1994 (2) TMI 314 - SC - Companies Law

Fidelity insurance six-month claim restriction doesn't bar suits filed after period expires

The Food Corporation of India Versus The New India Assurance Co. Ltd. and others

The SC held that contractual clauses in a fidelity insurance guarantee bond requiring claims to be lodged within six months of contract termination do not ... Period of limitation for filing a suit against a guarantor under a Fidelity Insurance Guarantee contract - Interpretation of the clauses in the contract, restricting the period for making claims - impact of Section 28 of the Contract Act on such clause - 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. N.G. Venkatachala, J. - HELD THAT:- 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 the period of limitation for filing a suit or instituting a legal proceeding by the Corporation for recovery of the claim made against the Insurance Company could also be regarded as commencing from the date when the Insurance Company expressly refuses to honour the claim or from a date when its conduct amounts to refusal to honour the claim, in that, such default could also give rise to the cause of action for the institution of the suit or legal proceeding by the Corporation against the Insurance Company. Hence, it would not be correct to say that suits filed by the Corporation out of which the present appeals arise were barred under the restriction adverted to, in that, they were not filed within six months envisaged in that restriction. From this, it follows that the High Court was not right in holding that the 'restriction' in the clause of the bond did not enable the Corporation to file its suit against the Insurance Company for non-honoring of its claims, after the lapse of the period of six months from the date of termination of the contract and consequently in setting aside the decrees of the Trial Courts on that account. In the result, we allow these appeals, set aside the decrees of the High Court appealed against and restore the decrees made in the suits by the Trial Courts against which the First Appeals had been filed in the High Court. However, in the circumstances of these appeals, we make no orders as to costs. R.M. Sahai, J. - HELD THAT:- 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 had 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. Since the period is provided under the agreement the appellant had to move within this period asserting its right and apprising the company of the breach or violation by the miller to enable it either to pay or to persuade the miller to pay itself. It does not directly or indirectly curtail the period of limitation nor does it anywhere provide that the corporation shall be precluded from 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. In the result, these appeals succeed and are allowed. The judgment and order of the Madras High Court are set aside and the decree passed by the Trial Court shall stand restored. Order - For reasons given by us in our separate but concurring orders (Sahai, J. and Venkatachala, J.) the appeals are allowed. The judgment and decree of the High Court are set aside and that of the Trial Court is restored. Issues Involved:1. Period of limitation for filing a suit against a guarantor under a Fidelity Insurance Guarantee contract.2. Interpretation of the clause restricting the period for making claims under the Fidelity Insurance Guarantee.3. Applicability of Section 28 of the Contract Act on the clause restricting the period for making claims.Detailed Analysis:1. Period of Limitation for Filing a Suit Against a Guarantor:The primary issue in these appeals was to determine the period of limitation within which a suit against a guarantor under a Fidelity Insurance Guarantee contract could be brought. The Corporation found that the Rice Millers breached the terms of their contracts, leading to financial losses. The Corporation made claims against the Insurance Companies within six months of the contract termination, as required by the Fidelity Insurance Guarantee. However, the Insurance Companies did not honor these claims, prompting the Corporation to file suits for recovery. The High Court ruled that the suits were barred as they were filed after the six-month period from the contract termination date. The Supreme Court, however, held that the High Court misinterpreted the clause, which only required claims to be lodged within six months, not that suits be filed within this period.2. Interpretation of the Clause Restricting the Period for Making Claims:The clause in question stated 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.' The Supreme Court clarified that this clause meant the Corporation had to lodge a claim within six months from the termination date, not file a suit. The Court emphasized that the period of limitation for filing a suit could commence from the date the Insurance Company refused to honor the claim. Therefore, the High Court's interpretation that the suits were barred was incorrect.3. Applicability of Section 28 of the Contract Act:Section 28 of the Contract Act invalidates any agreement that restricts a party from enforcing their rights through usual legal proceedings or limits the time for doing so. The Supreme Court noted that the clause in the Fidelity Insurance Guarantee did not restrict the Corporation from filing a suit but merely required the claim to be lodged within six months. The clause did not curtail the statutory period of limitation for filing a suit. The Court referred to various precedents and legal principles, emphasizing that agreements should be construed to keep remedies alive and not restrict statutory rights. Consequently, the clause was not found to be in violation of Section 28.Conclusion:The Supreme Court allowed the appeals, setting aside the High Court's decrees and restoring the Trial Court's decrees. The Court held that the clause requiring claims to be lodged within six months did not bar the filing of suits after this period, and the suits were within the statutory period of limitation. The appeals were allowed without any order as to costs.Separate Judgments:N.G. Venkatachala, J.: Delivered the main judgment, emphasizing the correct interpretation of the clause and the period of limitation for filing suits.R.M. Sahai, J.: Concurred with the main judgment but added observations on the legal issue's importance and the applicability of Section 28 of the Contract Act, reinforcing that the clause did not restrict the filing of suits within six months.Order: The appeals were allowed, the High Court's judgment and decree were set aside, and the Trial Court's decree was restored, with no order as to costs.