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CASE NO.: Appeal (civil)  6028 of 2002

PETITIONER: Chairman, Life Insurance Corporation & Ors.                                                           

RESPONDENT: Rajiv Kumar Bhasker                                              

DATE OF JUDGMENT: 28/07/2005

BENCH: Ashok Bhan & S.B. Sinha

JUDGMENT: J U D G M E N T WITH

CIVIL   APPEAL NOS. 6029 OF  2002, 2357 OF 2003, 4463, 4620, 5470-71, 6820 OF 2003,   4313 OF 2004 &  1405 OF 2005  AND  CIVIL APPEAL NOS.4558,4557 and 4559 OF 2005 [@ S.L.P. (CIVIL) NOS. 8230,  18958  OF 2003 & 48 OF 2005]

S.B. SINHA, J :  

       Leave granted in S.L.Ps.

These appeals involving common questions of fact and law were  taken up for hearing together and are being disposed of by this common  judgment.

The basic fact of the matter is as under:

The Life Insurance Corporation (for short "the Corporation") was  created under the Life Insurance Corporation Act, 1956 (for short "the Act").   It floated a "Salary Savings Scheme" which envisaged a life insurance  policy for the salaried class employees a proposal wherefor was made to the  concerned employers.  Although the Scheme as such is not on records of the  case, the same has been referred to at some detail in the judgment of this  Court in Delhi Electric Supply Undertaking Vs. Basanti Devi and Another  [(1999) 8 SCC 229] and we intend to refer thereto in extenso as it throws  considerable light on the issue which falls for our determination.

The Corporation issued a brochure in relation to the said Scheme  wherein it was stated:

"It is a simple, economical plan whereby your  employees may obtain life insurance protection for  their families and retirement income for  themselves under advantageous conditions which  might not be available to them otherwise. This it  accomplishes by savings automatically deducted  from their pay and remitted to us once a month. This is not a group insurance. Each employee  owns his policy individually, is entitled to all its  benefits and can continue the policy in the event of  any change in employment. Under this plan, you as an employer give facilities  to the representatives of LIC to contact your  employees to offer life insurance cover to them.

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Premium amounts, if an employee agrees to insure  under this plan, are to be deducted every month  from the employee’s salary, in the same manner as  the employee’s provident fund. All the amounts so  collected are paid to the Corporation by one  cheque by the employer. This ensures for the  employee regular payment, monthly, of his  premiums at concessional rates. Deduction of  premium from the salary or wages of an employee  and its remittance to the Life Insurance  Corporation is so beneficial that the recently  amended Payment of Wages Act and the Minimum  Wages Act make it legally permissible for an  employer to do so. On your part, all that the plan  involves is a little extra accounting which you will  surely consider worthwhile because of the...."

The employer concerned in terms of the said scheme was addressed a  letter by the Corporation which is as under:

"Dear Mr Employer, The Salary Savings Scheme of Life Insurance  Corporation has proved of considerable value to  many organisations and which we believe will be  of keen interest to you and your employees. The general need on the part of the average  employee for more adequate protection of his  dependants is recognised as well as the desirability  of his adequate provision for his own retirement. The Scheme is very simple. All that we need is the  cooperation by your Payroll Department. They  have to make the deductions of the premium on the  employee policy-holder’s authorisation and remit  them regularly to LIC along with a reconciliation  statement. Your employee will, I am confident, appreciate the  benefits of your Salary Savings Scheme. It will be  a practical demonstration of your personal interest  in the welfare of those who help to make your  company successful. Moreover, it is in tune with  the present social trend. May I discuss the matter with you with a view to  working out details?         Yours very truly,         sd/-         (Branch Manager)"                                 [Emphasis supplied]

In the event, the employer and the employee agreed to the said offer  made by the Corporation, the former would express its agreement thereto in  the following terms:

"Dear Sir, Re: Salary Savings Scheme   PA Code No. ...  In order to make the benefits of your Salary  Savings Scheme available to our employees, we  agree to make the payroll deductions authorised in  writing by our employees, in amounts sufficient to  pay the premiums included under your Salary  Savings Scheme. 2.      *       *       * 3. It is also understood that no form of individual

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premium due notice or receipt will be issued by  you. 4. It is also understood that the employee policy- holders shall have the right to discontinue  participation in the Scheme at any time. If an  employee exercises this right or if he is terminated,  we will notify you in writing at the office where  the remittance is forwarded and thereafter will not  be responsible for collecting his premiums. 5.      *       *       * 6.      *       *       * 7. In all transactions made by us pertaining to this  Scheme and any policies issued by you thereunder,  we shall act as the agent of our employees and not  as your agent for any purpose.                                 Yours truly                                         sd/-                         Signature of employer"                                                 [Emphasis supplied]

The acceptance letter issued by the concerned Branch Manager of the  Corporation envisaged that it was for the employer to deduct premium from  the salary of the employee and to remit the same to the Corporation.  In  other words, the responsibility for collection of the premium by deducting  the same from the salary of the employee and making over the same to the  Corporation was of the employer.  Some of the clauses of the letter of  acceptance are as under:

"(a) The employer will receive list of premiums to  be deducted called as demand invoice in duplicate  each month on the specified date. (b) One copy of the invoice is to be returned along  with the remittance. The second copy is to be  retained by the employer for his record. (c) It is necessary to inform LIC when an  employee leaves the service or is transferred from  one department to another. (d) Reconciliation statement in a specified form to  be supplied by LIC will accompany the statement. (e) The Corporation will make changes in the  invoice based on the information received from the  employer regarding transfer in, transfer out and  exits. (f) Deductions made in each month will have to be  remitted to us within a week from the date of  making deductions along with a copy of invoice  and a reconciliation statement. Make your cheque  payable to the Life Insurance Corporation of India  and send it along with the copy of invoice with  reconciliation statement drawn in the form  suggested in (d) above to the appropriate Branch  Office. While checking out statement if you find  that an item cannot be paid, rule through the item  on the original statement and note the reason for  non-payment against the item in the remark  column. If you find that an addition is to be made,  make the addition at the end of the statement  giving policy number, name, amount and the  reason for addition. If the employee is transferred  from one department to another, the names of the  departments concerned and code number must be  stated. (g) In order to bring the invoices up to date, it is  desirable that the employer informs us of all the  changes in the staff immediately as soon as they

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occur. The employer need not wait to incorporate  those in the invoice. The changes communicated to  us through invoice are received date (sic) and the  names of employees continue to appear in the  wrong invoice in the meanwhile."

The employer thereafter addressed a letter to each of the employee  informing him of the Scheme stating:

"Realising that an adequate savings and  protection scheme will mean so much to you and  your family we have arranged for the benefits of  the Salary Savings Scheme of the Life Insurance  Corporation of India for all employees who desire  its privilege. The premium will be automatically  deducted from your salary once a month and  remitted to the Life Insurance Corporation."

The employer, thus, accepted the sole responsibility to collect the  premium from its employees and remit the same by means of one cheque to  the Corporation.  It is also evident from the tenor of the correspondences  passed between the Corporation and the employer that the Scheme was as  much as that of the employer as that of  the Corporation.  

It is not in dispute that for the said purpose a reconciliation statement  was sent in the form prescribed by the Corporation and no individual  premium notice was required to be sent to any employee and, furthermore,  no receipt was to be given therefor.  It was also for the employer to inform  the Corporation about the changes in the staff as soon as they occured  including the factum of cessation of employment.  The concerned employee  was never made aware of the correspondence between the Corporation and  the employer.   

A circular titled "Salary Savings Scheme Endorsement" was also  issued which is in the following terms:

"This policy having been issued under the  Corporation’s Salary Savings Scheme, it is hereby  declared that the instalment premium shall be  payable at the rate shown in the schedule of the  policy so long only as the life assured continues to  be an employee of his present employer, whose  name is stated in proposal and premiums are  collected by the said employer out of the salary of  the employee and remitted to the Corporation  without any charge. In the event of the life assured  leaving the employment of the said employer or  the premium ceasing to be so collected and/or  remitted to the Corporation, the life assured must  intimate the fact to the Corporation and in the  event of the Salary Savings Scheme being  withdrawn from the said employer, the  Corporation shall intimate the fact to the life  assured and all premiums falling due on and after  the date of his leaving employment of the said  employer, or cessation of collection of the  premiums and remittance thereof in the manner  aforesaid, or withdrawal of the Salary Savings  Scheme as the case may be, shall stand increased  by the imposition of the additional charges for the  monthly payment that has been waived under the  Salary Savings Scheme at 5% of the premium  exclusive of any premium charged for double

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accident benefits or extended permanent disability  benefits and any other extra premiums charged. During the period in which premium is remitted to  the Corporation through the employer, the  instalment premium will be deemed to fall due on  the 20th day of each month instead of the due date  within mentioned."

For one reason or the other, the employers did not deduct the premium  from the salary of the concerned employee.   

Upon the death of the concerned employee, his heirs and legal  representatives either filed writ petition in the High Court or filed  applications before the District Consumer Forum constituted under the  Consumer Protection Act, 1986.   

The High Court in the writ petition in the case of Rajiv Kumar  Bhasker which is subject matter of Civil Appeal No. 6028 of 2002 and  District Forum, State Commission or National Commission in other cases  following the decision of this Court in Basanti Devi (supra) allowed the  same.   

In C. Shakuntala & Anr. [Civil Appeal No. 2357 of 2003], the District  Forum held that both the Corporation and the employer were jointly and  severally liable to pay the assured amount to the concerned employee in  view of the deficiency in service. The said order having been set aside by the  State Commission, the Corporation as also the Employer (BHEL) preferred  appeals before the National Commission which in view of the decision of  this Court in Basanti Devi (supra) set aside the order of the State  Commission.  A Special Leave Petition was filed by Deputy Manager  (Finance Adv.), BHEL being Civil Appeal No. 2357 of 2003 wherein a  memorandum of cross objection has been filed by the Corporation.

The contentions of Mr. G.L. Sanghi, learned senior counsel appearing  on behalf of the Corporation are as under:

(i)     The employer, in view of the Scheme, not being the agent of the  Corporation, Basanti Devi (supra) requires reconsideration.     (ii)    As the policy was issued in the name of the individual employees, in  the event of non-payment of the requisite premium either by the employee or  the employer, the same would result in lapse of the policy.  The claimants \026  Respondents were, therefore, not entitled to the sum assured.   (iii)   The Corporation being only a commercial undertaking and as in  pursuance thereof, it had merely extended the facility of collection of  premium payable by the employees  through the employer, the same would  not make it liable to pay the assured sum in terms of the policy having  regard to the default in making payment of the amount of premium.   (iv)    The employer acted only as the agent of the employees and not that of  the Corporation for any purpose and, in that view of the matter, the  Corporation would not be liable to pay the assured amount.

Mr. L. Nageshwar Rao, learned senior counsel appearing on behalf of  the Appellant in Civil Appeal No. 2357 of 2003, would contend that having  regard to the decision of this Court in Basanti Devi (supra), the National  Commission must be held to have committed an apparent error in affirming  the judgment of the District Forum as the employer cannot be made liable to  pay the amount under the policy.

The Salary Savings Scheme, as noticed hereinbefore, provides for a  tripartite arrangement.   

The Corporation itself had approached the employers and they agreed  to such proposal; upon acceptance whereof by the Corporation, the employer   addressed a letter to the concerned employees giving details about the

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Scheme.  In the letter of the Corporation, it was projected that it was the  scheme of the employer itself.  The employers were, thus, allured to ask  their employees to agree to the proposal, on the premise that the same would  amount to a practical demonstration of their interest in the welfare of those  who help to make the companies successful and, furthermore, which would  also be in tune with the ’present social trend’.

The employers in terms of this tripartite arrangement accepted the  responsibility of deducting the premium from the salaries of the same and  send the same to the Corporation by one cheque.  As noticed hereinbefore,  the concerned employees would have no knowledge about the contents of  correspondence passed between the Corporation and their employers.   

Paragraph 3 of the employer’s letter to the Corporation indicates that  no form of individual premium due notice or receipt would be issued by the  Corporation which clearly shows that the entire responsibility was thrust  upon the employer by the Corporation.

An agency can be created expressly or by necessary implication.  It  may be true that the employers in response to the proposal made by the  Corporation stated that they would act as agents of their employees and not  that of the Corporation. But, the expression "agent" in such circumstances  may not mean to be one within the meaning of the Life Insurance  Corporation of India (Agents) Regulation, 1972 made in terms of  Section 49  of the Act; but would mean an agent in ordinary sense of the term.  An  employer would not be an agent in terms of the said Regulation on the  premise that it was not  appointed by the Corporation to solicit or procure  life insurance business.  The employers had no duty to discharge to the  Corporation either under the Act or the rules and regulations framed  thereunder but keeping in view  the fact that the Corporation did not make  any offer to the employees nor would directly make any communication  with them regarding payment or non-payment of the premium or any other  matter in relation thereto or connected therewith including the lapse of the  policy, if any, it cannot be said that the employer had no role to play on  behalf of the Corporation.   

In a plain and simple contract of insurance either the Corporation or  the agent, on the one hand, and the insured, on the other, is liable to comply  with their respective obligations thereunder.  In other words, when a contract  of insurance is entered into by and between the insurer and the insured no  third party would have any role to play, but the said principle would not  apply in a case of this nature.  In a scheme of this nature, the employers were  to make all endeavours to improve the service conditions of the employees  and discharge its social obligations towards them.  So far as the employees  are concerned,  they could not approach the insurer directly, and, thus, for all  intent and purport they were to treat their employers as ’agents’ of the  Corporation.  The Scheme clearly and unequivocally demonstrates that not  only the contract of insurance was entered into by and between the employee  and the insurer through the employer but even the terms and conditions of  the policy were to be performed only through the employer.    In that limited sense, the employers would be the agents of the insurer.   In Bowstead & Reynolds on Agency, Seventeenth Edition, at page 307, it is  stated:

"Where a person, by words or conduct, represents  or permits it to be represented that another person  has authority to act on his behalf, he is bound by  the acts of that other person with respect to anyone  dealing with him as an agent on the faith of any  such representation, to the same extent as if such  other person had the authority that he was  represented to have, even though he had no such  actual authority."

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Section 182 of the Indian Contract Act, 1872 reads as under:

"’Agent’ and ’principal’ defined \026 An ’agent’ is a  person employed to do any act for another, or to  represent another in dealings with third persons.   The person for whom such act is done, or who is  so represented, is called the ’principal’."

The definition of ’agent’ and ’principal’ is clear.  An agent would be a  person employed to do any act for another, or to represent other in dealings  with third parties and the person for whom such act is done or who is so  represented is called the principal.  It may not be obligatory on the part of  the Corporation to engage an agent in terms of the provisions of the Act and  the rules and regulations framed thereunder, but indisputably an agent can be  appointed for other purposes.  Once an agent is appointed, his authority may  be express or implied in terms of Section 186 of the Contract Act.   

For creating a contract of agency, in view of Section 185 of the Indian  Contract Act, even passing of the consideration is not necessary.  The  consideration, however, so far as the employers are concerned as evidenced  by the Scheme, was to project their better image before the employees.

It is well-settled that for the purpose of determining the legal nature of  the relationship between the alleged principal and agent, the use of or  omission of the word "agent" is not conclusive.  If the employee had reason  to believe that his employer was acting on behalf of the Corporation, a  contract of agency may be inferred.

In Basanti Devi (supra), this Court stated the law thus:

"\005Formation of the contract of insurance is  between LIC and the employee of DESU. Scheme  has been introduced by LIC purely on business  considerations and not for any particular benefit of  insurance conferred on the employee working in  an organisation. Though in the pro forma letter  written by DESU to LIC it is mentioned that  DESU would be an agent of its employee and not  that of LIC but this understanding between LIC  and DESU was not communicated or made known  to the employee. As far as the employee is  concerned he is told that premium will be deducted  from his salary every month and remitted by  DESU to LIC under an agreement between LIC  and DESU. For the employee of DESU, therefore,  DESU had implied authority as an agent of LIC to  collect premium on its behalf and then pay to LIC.  There is nothing on the record to show that Bhim  Singh was ever made aware of the fact that DESU  was not acting as an agent of LIC. Rather in the  nature of the Scheme, the employee was made to  believe that it is the duty of the employer though  gratuitously cast on him by LIC to collect premium  by deducting from the salary of each employee  covered under the Scheme every month and to  remit the same to LIC by means of one  consolidated cheque. Now it could be said that  DESU would not be liable as an agent of its  principal, i.e., LIC and also it was rendering  service of collecting the premium and remitting the  same to LIC free of any cost to the employee. As  to what is the arrangement between LIC and  DESU the employee is not concerned. In these  circumstances DESU cannot perhaps be held liable  under the Act\005"

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We, with respect agree with the said observations and, thus, are  unable to accept the contention of Mr. Sanghi that the matter be referred to a  larger Bench.

We may, furthermore, observe that having induced the employer to  act as a model employer and discharge its social obligations vis-‘-vis its  employees it may not be permissible for a ’State’ within the meaning of  Article 12 of the Constitution to contend at this belated stage that in the  event of default on the part of the employer, it may get itself discharged  from its contractual obligations in such a cavalier manner.

The Scheme clearly provides that in the event of cessation of  employment the concerned employee if continues his employment under a  new employer, the former employer has to inform the Corporation  thereabout.  Furthermore, upon retirement or in situations other than taking  up of any job with any other employer, the employee would be entitled to  continue with the policy but therefor, he will have to pay a higher premium.   Even at that stage, the Corporation would have a duty to inform the  employee concerned towards his right.  Even in case of non-payment of  premium for any reason whatsoever, in view of the object the Scheme seeks  to achieve, it was the duty of the insurer to inform the employee about the  consequences of non-receipt of such premium from the employer.  The  Corporation has failed or neglected to do so.  In that view of the matter, we  do not find any reason to take a different view.

In terms of the Scheme, significantly the employee for all transactions  was required to contact his employer only.  In view of our findings  aforementioned, the Corporation, thus, cannot be permitted to take a  different stand so as to make the employee suffer the consequences  emanating from the default on the part of the employer.  If for some reasons,  the employer is unable to pay the salary to the employees, as for example, its  financial constraints, the employee may be held to have a legitimate  expectation to the effect that his employer would at least comply with its  solemn obligations.  Such obligations having been undertaken to be  performed by the employer at the behest of the Corporation as its agent  having the implied authority therefor, the Corporation cannot be permitted to  take advantage of its own wrong as also the wrong of its agent.  In any  event, the employer was obligated to inform the employee that for some  reason, he is not in a position to perform his obligation whereupon the latter  could have paid the premium directly to the Appellant herein.

       In South Sydney District Rugby League Football Club Ltd. vs. News  Ltd. and Others [177 ALR 611], a similar question came up for  consideration.  In that case there existed an exclusionary provision contained  in clause 2.2 in the agreement entered into by the parties thereto to the  following effect :

        "NRL will act solely as an independent contractor.   Nothing in this agreement will constitute, or be construed  to be or create, the relationship of employer and  employee, principal and agent, trustee and beneficiary,  joint venturers or partnership between the partners and  NRL."

       Construing the said clause it was held that by conduct of the parties a  relationship was designed in which, at the level at which NRL was to  perform its part in the operation of the business of the Appellant therein,  NRL represented the partnership’s business, and  invited participation

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therein by clubs etc.  The Court held that by reason thereof a fiduciary  relationship came into being which was in substance that of  an agency,  stating :

       "There are several ancillary matters to which I  should refer briefly.  First, I have  not referred directly to  an argument advanced by News and NRLI to the effect  that the recitals in the services agreement cannot in any  way be used to contradict cl. 2.2.  I do not for one  moment cast doubt on the long-established proposition  that in the construction of an instrument the recitals are  subordinate to the operative part so that where the  operative part is clear, it is treated as expressing the  intention of the parties and it prevails over any  suggestion of a contrary intention afforded by the recitals  : see 10 Halsbury’s Laws of England, 1st ed, 1909, para  803; Norton on Deeds, 2nd ed, 1928, p. 197.  The question   is not whether the intent of cl. 2.2 was clear.  It is  whether, in the context of the factual relation  consensually created, it was effective in its purpose.

       Secondly, having found NRL to be the  partnership’s agent, I do not thereby suggest that any  particular contract entered into by NRL did, or for that  matter did not, bind the partnership.  That question is one  of fact in each instance and raises issues that go far  beyond what is of present concern."

       A somewhat similar view was taken by the House of Lords in  Branwhite vs. Worcester Works Finance Ltd. [(1969) 1 AC 552] in the  following terms :

"In the Garnac case Lord Pearson with the concurrence  of the House, used these words :

"The relationship of principal and agent can  only be established by the consent of the principal  and the agent.  They will be held to have consented  if they have agreed to what amounts in law to such  a relationship, even if they do not recognize it  themselves and even if they have professed to  disclaim it\005But the consent must have been given  by each of them, either expressly or by implication  from their words and conduct."

The significant words, for the present purpose, are  "if they have agreed to what amounts in law to such a  relationship."  These I understand as pointing to the fact  that, while agency must ultimately derive from consent,  the consent need not necessarily be to the relationship of  principal and agent itself (indeed the existence of it may  be denied) but may be to a state of fact upon which the  law imposes the consequences which result from agency.  It is consensual, not contractual.  So interpreted, this  formulation allows the establishment of an agency  relationship in such cases as the present."          

       Yet again in Armagas Ltd. vs. Mundogas S.A. [(1986) AC 717], the  House of Lords pointed out that even in absence of any express contract of    agency in relation to the transaction made with the third party, ostensible  authority may be presumed,  stating :

"\005Ostensible authority comes about where the principal,

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by words or conduct, has represented that the agent has  the requisite actual authority, and the party dealing with  the agent has entered into a contract with him in reliance  on that representation.  The principal in these  circumstances is estopped from denying that actual  authority existed.  In the commonly encountered case, the  ostensible authority is general in character, arising when  the principal has placed the agent in a position which in  the outside world is generally regarded as carrying  authority to entered into transactions of the kind in  question.  Ostensible general authority may also arise  where the agent has had a course of dealing with a  particular contractor and the principal has acquiesced in  this course of dealing  and honoured transactions arising  out of it."

       In Gurtner and Others vs. Beaton and Others [(1993) 2 Lloyd’s  Rep.369] their Lordships quoted with approval the following dicta from  Freeman & Lockyer vs. Buckhurst Park Properties (Mangal) Ltd. [(1964) 2  QB 480]:     

       "The representation which creates "apparent"  authority may take a variety of forms of which the  commonest is representation by conduct, that is, by  permitting the agent to act in some way in the conduct of  the principal’s business with other persons."

It was further held:

       "In applying that principle the correct approach is  to consider the whole of the conduct of Cleanacres Ltd.  in the light of all the circumstances in order to determine  whether that conduct amounted to a holding out by them  of Mr. Beaton as having the necessary authority : see per  Lord Justice Browne-Wilkinson in The Raffaella at p. 41.   It is not right to concentrate on the use of the word  "usually" by Lord Justice Diplock in Freeman & Lockyer  at p. 503 and to treat it as decisive in this case on the  ground that an aviation manager cannot be regarded as  "usually" having authority to make a contract for air taxi  work when the aviation business of which he is manager  does not include such work."

Agency as is well-settled, is a legal concept which is employed by the  Court when it becomes necessary to explain and resolve the problems  created by certain fact situation.  In other words, when the existence of  an  agency relationship would help to decide an individual problem, and the  facts permits a court to conclude that such a relationship existed at a material  time, then whether or not any express or implied consent to the creation of  an agency may have been given by one party to another, the court is entitled  to conclude that such relationship was in existence at the time, and for the  purpose in question.  [See "Establishing Agency" by GHL Fridman \026 1968  (84) Law Quarterly Review 224 at p  231].

For the reasons aforementioned, the appeals preferred by the  Corporation including the cross objections filed by it in Civil Appeal No.

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2357 of 2003 are dismissed and Civil Appeal No. 2357 of 2003 is allowed.   However, in the facts and circumstances of the case, there shall be no order  as to costs.