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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

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    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

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    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

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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

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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.

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    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

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    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

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    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.

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    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.