Holding

A clause that limits the time to assert a claim under a fidelity insurance guarantee does not curtail the statutory limitation period and is not void under Section 28 of the Contract Act.

Summary

The Food Corporation of India (FCI) entered into fidelity insurance guarantees with several insurance companies to cover losses caused by rice millers' breach of contract. The guarantees stipulated that FCI would have no rights under the bond after six months from the termination of the millers' contracts. After the millers defaulted, FCI made demands within the six‑month period, which the insurers refused, leading FCI to sue them. The insurers contended that the suit was barred because the guarantee limited the time to claim to six months, allegedly violating Section 28 of the Indian Contract Act. The Supreme Court held that the six‑month clause merely required the assertion of the claim within that period, not the filing of a suit, and therefore did not curtail the statutory limitation period; consequently the clause is not void under Section 28 and the suit was not time‑barred. The Court allowed FCI’s appeals, set aside the Madras High Court’s judgment, and restored the trial courts’ decrees.

Issues considered

Whether a clause in a fidelity insurance guarantee that the corporation shall have no rights after six months from contract termination curtails the statutory limitation period under Section 28 of the Contract Act.
Whether the six‑month period restricts the right to assert a claim or the right to file a suit.
Whether the suit filed after the six‑month period is barred by limitation.
Whether the clause is void as contrary to public policy under Section 23 of the Contract Act.

Legislation cited

Indian Contract Act, 1872s. 23, s. 28

Subjects

Fidelity insurance guaranteeSection 28 Contract ActLimitation periodContractual restrictionPublic policyInsurance claim enforcementIndian Contract Act

Judgment

FOOD CORPORATION OF INDIA A
...l. v.
NEW INDIA ASSURANCE CO. LTD. AND ORS. ETC. ETC.

-· FEBRUARY 15, 1994

[R.M. SAHAI, S.P. BHARUCHA AND N. VENKATACHALA, JJ.) B

Contract Act, 1872: Sections 23 and 28-Fidelity Insurance Guaran-
_., tee-Clause restricting the rights of appellant to make its claim within six
months-Demand mad&-Re/ationship of creditor and debtor established-
Suits for recovery filed after expiry of six months-JVhether bamd by limita- c
tion--Held: Agreement curtailing the statutory period of Limitation is void.

Word5 and Phrases: 'Fidelity'-'Fidelity Insurance Guarantee'-Mean-
ingof

Appellant-Corporation entered into an agreement with some Rice D
Millers. On the strength of the agreement the appellant, as principal,
appointed the Rice Millers for procuring, hulling and supplying rice on

- certain conditions. To assure the appellant of their compliance, the rice
millers obtained a Fidelity Insurance Guarantee in favour of the appellant
from an Insurance company. Under this guarantee, the Insurance Com-
pany undertook to indemnify and keep indemnified the appellant in money
E
against any loss caused to or suffered by it due to any breach of terms and
condition!"> by the miller, of their agreement with the appellant. It was also
provided therein that the appellant could recover all the dues against the
-~ millers, directly from the Insurance company. The guarantee also con-
tained a recital to the effect that the appellant will lose all its rights under F
the said guarantee after the expiry of a period of six months from the date
of termination of the contract.
... , In course of its dealing with the millers the appellant, later on,
suffered loss due to the negligence of the millers and it had to get the paddy
G
hulled from other millers. For this loss the appellant placed its demands
with the concerned insurance companies, by w~y of demands well within
-( the stipulated period of six months. However, those demands were not
made good by the respondents.

The appellant, finding no other alternative, filed suits for recovery H
939
940 SUPREME COURT REPORTS [1994) 1 S.C.R.

A against the respondents in the Civil Courts. The respondents contested the
suits on the ground that the appellant had flied the suits in question after
the expiry of the stipulated period of six months from the date of termina-
tion of contract. The Trial Court decreed the suits in favour of the
appellant and held that even though it was mentioned in the guarantee
agreement that the appellant would lose all the claims as against the
B Insurance Companies if it was not claimed within six months as aforesaid
but non-filing of the suit within six months did not mean that the suit was
barred by limitation. It was further held that if law of limitation allows a
person to recover the amount within three years, the parties could not
agree to reduce the period of limitation.
c
Against these orders two sets of Appeals were preferred before the
High Court. One set was filed by the Rice Millers and the other was filed
by the respective insurance Companies. The High Court dismissed the
appeals filed by the Rice Millers and allow,~d the appeals filed by the
insurance companies. The High Court took the view that the terms of
D Fidelity Insurance guarantee extinguished the rights of the appellant,
under the bond, to make any claim after the expiry of six months period
from the date of termination of contracts entered into between the appel-
lant anrl the Rice Millers. It also held that a clause in the Fidelity
Insurance guarantee to the effect that no claim would be entertained after
-
E six months, was not contrary to sec. 28 of the Contract Act nor was against
the Public Policy under sec. 23 of the Contract Act. Hence these appeals.

It was the contention of the appellant Corporation that the High
Court misread the clause in the contract of Fidelity Insurance Guarantee
and equated the period within which claim or demand agains,t the in-
F surance Company was allowed to be made, with the period within which a
suit against the insurance company had to be filed.

Allowing the appeals, this Court

HELD: By the Court:
G
Though there is a clause in the Fidelity Insurance Guarantee >-
restricting the rights of the appellant-corporation to make its claims
within six months, the suits filed by the appellant-corporation after the
expiry of the said period of six months, are not barred by limitation.
H [948-CJ
r
FOOD CORPN. v. NEW INDIA ASSURANCE CO. 941

Per N. Venkatachala, J. (For himself and S.P. Bharucha, J.) A
1. Since the restriction says that the Corporation shall have no rights
under the bond after the expiry of six months from the date of termination
of the contract, the rights of the Corporation under the contract continue
to exist for six months beyond the period during which the contract could
be in force unless the dues of the Corporation under the contract are paid B
or satisfied in the manner 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 the loss under the contract entered c
into with the Rice Miller even upto its 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, requires that a suit or legal proceedings 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. [947-E-G] D
+

2. 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 E
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 F
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 th~ Corporation against the Insurance Company.
[974-H, 948-A-B]
3. The High Court was not right in holding that the 'restriction' in G
the clause of the bond did not enable the Corporation to file its suit against
the Insurance Company for non-honouring 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. [948-DJ H
942 SUPREME COURT REPORTS [1994] 1 S.C.R.
..J.__
A Per Sahai, J. (Concurring)

1. 'Fidelity' according to dictionary means faithfulness, loyalty. In
insurance terminology it is understood as assurance to indemnify against
loss consequent upon the dishonesty or default. Usually the assured and
the person whose fidelity is assured stand to each other in relation of
B employer and employee. As the use of the word 'fidelity' indicates, 'it is a
policy intended to protect the assured against the contingency of breach
of fidelity on part of a person in whom confidence has been placed.' It is ~·
a contract whereby, for a consideration, one agrees to indemnify another
against loss from the want of honesty, integrity on fidelity of an employee
c or other person holding a position of trust. [954-D-EJ

2. Fidelity Guarantee is different from contingency guarantee. The
insurance under it is for honesty, against negligence or for being faithful
and loyal. The protection afforded is different than normal insurance
policies. Its consequences and enforcement are also not the same. The
D +
employer or the principal has first to be satisfied about the breach. No
action can be taken on suspicion. In contingency insurance the cause of
action arises immediately whereas in Fidelity Guarantee it has to be
ascertained and verified. And on being satisfied the company must neces-
-·
sarily be informed of it to enable the principal to seek its remedy in the
E court of law. Such being the nature of Fidelity Insurance its enforceability
depends on satisfaction by the insured of dishonesty or negligence of the
other side and its intimation either during the contract period or within
I
·~
the time agreed from the termination of contract. [955-D-E]

F 3. 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 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
G 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 than six months from the date of termination of contract. It is in
H keeping with the principle which has been explained in English decisions
r
FOOD CORPN. v. NEW INDIA ASSURANCE CO. 943

and by our own Court that the insurance companies should not be kept in A
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 t-fter six months. 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 B
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 limita-
tion 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. C
[957-A-E]
4. 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, there-
fore, was governed by the agreement and it is imperative as well that the D
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
E
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. [957-F-H]

Vulcan Insurance Co. v. Maharaj Singh, A.I.R. (1976) S.C. 287; Kasim
Ali Bu/bu/ v. New India Assurance Co., A.I.R. (1968) J & K 39; Pt. Prithvi F
Nath Malla v. Union of India, A.I.R. (1962) J & K 15; Pearl Insurance Co.
v. Atma Ram, A.I.R. (1960) Punjab 236; G. Rainey v. The Bunna Fire &
Marine Insurance Co. Ltd., A.l.R. (1926) Rangoon 3; Girdhari Lal Honuman
Bux v. Eagle Star and British Dominions Insurance Co. Ltd., A.l.R. (1924)
Cal.186; Rehmatunnisa Begum v. Price, A.l.R. (1917) P.C. 116; South British G
Fire & Marine Insurance Co. v. Brojo Nath Shaba, (1909) 3 Calcutta 576 and
The Baroda Spinning & Weaving Company Ltd. v. The Satyanarayan Marine
& Fire Insurance Co. Ltd., I.L.R. 38 Bombay 344, referred to.

Bank of England v. Vagliano Brothe1:1-. [1891] A.C. 107; Walker v.
Nevill, [1864) 3 H & C 403; Thimbley v. Banwz, [1838) 3 N & W 210 and H
1
944 SUPREME COURT REPORTS [1994) 1 S.C.R.

A Ford v. Baron, [1848] (11) Q.B. 871, referred to.

In Black's Law Dictionary. Halsbury's Law of England, Vol. 25, 4th
Ed. Porter's Law of Insurance, 65 Ed. p. 195, referred to.

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 1799 of
B 1982 etc. etc.

From the Judgment and Order dated 29.4.81 of the Madras High
Court in C.A. No. 178 of 1977. ........_

Y.P. Rao, K. Swamy and G.I. Gopalakrishnan for the Appellant.
c
K.K. Jain, AK. Jain, Prarnod Dayal and R. Aanada Padmanabhan
for the Respondents.

The Judgments of the Court were delivered by

D VENKATACHALA, J. Leave is granted in the S.L.P. +
1. The question requiring determination in these appeals relates to
the period of limitation within which a suit against a guarantor under the
concerned contract of Fidelity Insurance Guarantee could have been
E brought for enforcement of its obligation thereunder.

2. Facts necessary for determining the said question lie in a narrow
compass. Respondent-3 concerned in Civil Appeals Nos. 1799of1982 and
5354of1990 and Respondent-2 concerned in Civil Appeal No. 2267of1987
and Civil Appeal arising out of SLP No. 11864 of 1982 are, each of them
F a Rice Miller which had obtained from Respondent-1 concerned in each
of them, an Insurance Company a Fidelity 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 agree-
G ment entered into by it with the appellant. Such Fidelity Insurance Guaran-
tee empowered the Food Corporation of India to make its claim directly
agai,nst 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
H parties, we propose to determine the question arising for consideration in
FOOD CORPN. v. NEW INDIA ASSL'RANCE CO. [VENKATACHALA J.) 945

these appeals with reference to such clauses in the contract of Fidelity A
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 COM- B
PANY LTD. hereby give this guarantee for payment. We THE
ANAND INSURANCE COMPANY LIMITED agree that the
corporation shall. be the sole judge whether the said miller has
committed any breach or breaches of any of the terms and condi-
tions of the said agreement and the extent of loss, cost charges and C
expenses suffered or incurred by the Corporation on account
thereof. We THE ANAND INSURANCE COMPANY LIMITED
further agree that the guarantee herein contained shall remain in

-
full force and effective upto and inclusive of the 15-2-1971 the date
referred to above or the expiry of the extended period of time, if D
any, and that it shall continue lo 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 dis- E
charges 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 temiination of the contract. "

3. The Corporation, when found that each of the said Rice Millers F
were liable to make good certain amount for losses arising from breaches
of the terms and conditions of the respective contracts entered into be-
., tween them, placed demands with the concerned Insurance Company for
payment of those amounts as per the Fidelity Insurance Guarantees given
by the concerned Insurance Company, well before the expiry of the period
of six months from the date of termination of the contract with the Rice G
Miller, as required under the Fidelity Insurance Guarantee. But, such
demands were not made good by the respective Insurance Companies. This
situation led the Corporation to the necessity of filing suits against the
concerned Insurance Companies in Civil Courts of competent jurisdiction
for recovery of the moneys liable to be paid according to the demand made H
~

~
946 SUPREME COURT REPORTS [1994) 1 S.C.R.

A to them in terms of the Fidelity Insurance Guarantees, arraying in those
suits the respective Rice Millers also as party-defendants. Those Courts, ~
after trial of suits made decrees in them against the concerned Rice Miller,
the Respondent - Insurance Company and also the Respondent - the New
India Assurance Company Limited, in which the Respondent - Insurance ' .
Company in each suit had been merged by then. Against the decrees so
B made, while one set of 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, "w'..
allowed the appeals of the Insurance Companies. The High Court allowed
c 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

D
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 i.n the present appeals filed by the Corporation, as is indi-
cated in the question which we have set out in the beginning of this +
-
judgment.

4. The learned counsel for the Corporation, the common appellant
E 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 Company was allowed to be
made as the period within which a suit against the Insurance Company had
to be filed and it is such misreading which has led the High Court to allow
F the first appeals of Insurance Companies, by the judgments and decrees *
under the present appeals. He, therefore, sought for our interference with
the judgments and decrees of the High Court and their reversal.

5. The .learned counsel for the Respondents in the appeals, the
Insurance Companies, however, sought to support the view taken by the
G High Court on the clause containing the restriction relating to the period
allowed for the claim under the contracts of Fidelity Insurance Guarantee.

6. The submission made on behalf of the appellant in the appeals, in
our view, is well founded and deserves acceptance while the submission
H made on behalf of the Respondents does not merit acceptance.

.,
...,
FOOD CORPN. v. NEW INDIA ASSURANCE CO. [VENKATACHALA,J.) 947

7. Indisputably, under the material clauses of the respective bonds A
(contracts) of Fidelity Insurance Guarantee which we have reproduced
earlier as contained in a representative bond, the Insurance Company
concerned therein has in unequivocal terms undertaken to make good the
sum of money upto the limit specified therein, when claimed by the
Corporation (appellant) as the loss suffered by it on account of breaches B
committed by the concerned Rice Miller of the terms of the agreement
entered into with it. But that undertaking of the Insurance Company to
make good the sum of money claimed by the Corporation is made, as seen
from the said clauses, subject to the restriction which reads:

"...... that the Corporation shall have no rights under this bond after c
the expiry of (period) six months from the date of termination of
the contract."

8. Contract, the termination of which is envisaged in the above
· re.striction is the contract (agreement) which had been entered into by the D
~- Rice Miller with the Corporation, cannot be disputed and in fact does not
appear to have been disputed, both in the Trial Court and the High Court.
Since the restriction says that the Corporation shall have no rights under
the bond after the expiry of six months from the date of termination of the
contract, the rights of the Corporation under the contract continue to exits E
for six months beyond the period during which the contract could be in
force unless the dues of the Corporation under the contract are paid or
satisfied in the manner 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 F
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 G
right under the bond against the Insurance Company within a period of six
months from the date of termination of the contract. Therefore, the restric-
tion 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 H
948 SUPREME COURT REPORTS (1994) 1 S.C.R.

A 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 commenc-
B ing 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
C 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 s~t against the Insurance Com-
pany for non-honouring of its claims, after the lapse of the period of six
D months from the date of termination of the contract and consequently in
setting aside the decrees of the Trial Courts on that account. +
9. In the result, we allow these appeals, set aside the dr.crees of the
High Court appealed against and restore the decrees made in the suits by
E 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. SABAi, J. 10. Even though I respectfully agree with Brother
Venkatachala, J., that the order of the Madras High Court allowing the
F appeal of the insurance guarantor and dismissing the suit of the appellant
corporation for recovery of the money is not liable to be maintained yet
considering the importance of the legal issue involved in this appeal arising
in day-to-day commercial dealings and absence of any authoritative
pronouncement of this Court specially when the High Court has traversed
G wide field it appears appropriate to add a few words of my own.

11. Shortly the issue of law that arises for consideration in these
appeals directed against judgment of Madras High Court is, if the suit filed
after six months by the appellant, a public sector corporation, against
insurance Company was barred by time in view of the following recital in
H the Fidelity Insurance Guarantee,
FOODCORPN. v. NEWINDIAASSURANCECO. [SAHAI,J.] 949

"however, that the corporation shall have no rights under this bond A
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 B
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 necel'!sary for appreciating the legal issue. The appellant, as C
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 D
was given right under the Guarantee to indemnify for any loss, directly, ·
+ from the company. The exact words were,

'We THE ANAND INSURANCE COMPANY LIMITED do--
hereby undertake to indemnify and keep indemnified the corpora-
tion to the extent of Rs. 1,50,000 (Rupees One Lakh and Fifty E
Thousand only) against any loss, claim suit proceeding and expen-
ses caused to or suffered by the corporation by reason of any
breach by the said miller of any term or condition of the said
agreement and authorise the corporation to recover the same
directly from us." F

Since there was breach of agreement the appellant filed suits for recovery
of money agamst the millers and the company. The findings on agreement
between the appellant and the miller and the company, the terms of
agreement, its breach, shortfall in supply of rice, amount due etc. are all
agreed to by both· the courts below and were in fact more or less conceded. G
For instance on the relevant issues about the quantum of short delivery,
and the amount due to the appellant the Trial Court in Appeal No. 1799
which is treated as leading found that it was admitted that the firm-defen-
dant entered int0 agreement with the appellant to procure paddy, transport
the s~e deliver .to other millers as directed by the appellant for hulling H
950 · SUPREMECOURTREPORTS [1994) 1 S.C.R.

A converting it into rice and for suppiy. It further found that there was no
dispute about the quantity of supply of paddy and the balance which ought
to have been supplied. It, therefore, held that as regards insurance com-
pany the default occurred within the stipulated period of agreement. It
.,
l
-~
observed that in reply notice sent by the company demanding the amount
it was never claimed that the company was liable only if there was misap-
B propriation or that the claim was barred by time. It was found that even in
the Written Statement the plea of limitation was not raised. The Trial Court
held that even though it was mentioned in the guarantee agreement that
the appellant would loose all the claims as against the Insurance Company
if it was not claimed within six months from the date of expiry of the
c contract of fidelity and the agreement terminated on 15.2.1971 and cal-
culating six months from that date the claim was barred but non-filing of
the suit within six months did not mean that the suit was barred by
limitation. It held when the law of limitation allows a person to recover the
amount within three years the parties could not agree to reduce the period
D of limitation and say that the amount should be claimed within 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
E 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 enfor-
ceabilitY of the contract ceased after six months from the date of termina-
tion of contract which admittedly was 15th March 1971. The High Court
F 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
G and debtor. It relied on a number of decisions both Indian and Eoglish and
held that a clause in the Fidelity Insurance Guarantee to the effect that no
claim shall be entertained after six months was not contrary to Section 28
of the Contract Act nor it was against public policy under Section 23 of
the Contract Act.
H
FOODCORPN. v. NEWINDIAASSURANCECO. [SAHAI,J.] 951

1.2. Both the courts below thus found as a fact that an agreement was A
entered between the appellant and the company on 24th March 1970
stipulating period of guarantee from 15th February 1970 to 15 February
1971, that the default occurred on 1st July 1970, that the demand was made
on 17th June 1971 and the suit was filed on 20th January 1973 but they
differed as a matter of law on the effect of Section 28 of the Contract Act B
on such agreement. Section 28 is extracted below:

"Every agreement, by which any party thereto is restricted ab-
solutely 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 this C
rights, is void to that extent."

The section is a departure from English law as there is no such statutory
bar restraining parties from entering into such agreement. In Rehmatunnisa
+ Begum v. Price, AIR (1917) PC 116 it was observed as a general principle D
that, 'no man can exclude himself from the protection of the courts'. The
rationale obviously is to ensure protection against fair dealing even between
unequal bargaining parties. The intention and objective being clear the
courts' primary responsibility is to construe and interpret it in a manner so
as to advance the objective and protect the interest of the party who might
be frustrated by too tech~cal and expensive approach in such matters. E
Further it is trite saying that the courts should lean in favour of construc-
tion which keeps the remedy alive, that is if two constructions are possible
then the one favouring continuance of the suit is to be preferred than the
one barring the remedy. Even though the phraseology. of Section 28 is
explicit and strikes at the very root by declaring any agreement curtailing F
the normal statutory period of limitation to be void the courts have been
influenced bf the distinction drawn by English courts in extinction of right
by agreement and curtailment of limitation. For instance in The Baroda
Spinning & Weaving Company Limited v. The Satyanarayan Marine & Fire
Insurance Compc:ny Limited, ILR 38 Bombay 344, the Agreement provid-
ing, 'if the claim to be made and rejected, an action or suit be not G
commenced witlLn 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 H
952 SUPREME COURT REPORTS (1994] 1 S.C.R.

A 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, AIR (1976) SC 2B7 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
B 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 2B of the Contract Act. Similar clause
was considered in Pearl Insurance Co. v. Atma Ram, AIR (1960) Punjab
236 PB on which reliance was placed by the High Court. Since the Bombay
C decision in Baroda Spinning (supra) has been referred, even though in-
cidentally in Vulcan Insurance (supra), and it has been observed that clause
like the· one which came up for consideration in that case was not hit by
Section 2B of the Contract Act the distinction drawn by the Bombay High
Court on strength of English decisions between agreements giving up the
D right to enforce and the one curtailing limitation may .be assumed to be +
valid. The occasion to draw such distinction flows from the anxiety of the
courts to interfere as less as possible in agreements unless it is uncon-
scionable or against public policy etc. Where statutory prohibition is placed
on agreements and they are declared to be void the provision has to be
construed strictly and applied restrictively confining to only those situations
E which are squarely covered in it. It is for this reason that any agreement
which was not specifically covered in Section 2B was not held to be invalid.
When this Court observed in Vulcan Insurance (supra) that clause like 19,
in that, case was not violative of Section 2B it, obviously, meant that where
filing of suit within specified time agreed between partie~ is made depend-
F ent on any condition precedent then such agreement would not be void.
And probably, rightly, as then it is not an agreement curtailing limitation
but providing for doing one or other thiilg and filing the suit only after
condition precedent was complied. Some of such decisions which were
relied by the High Court were Kasim Ali Bulbul v. New India Assurance
Co., AIR (1968) J & K 39; Girdharilal Honuman Bux v. Eagle Star and
G British Dominions Insurance Co. Ltd., AIR (1924) Cal. 186; G. Rainey v.
17ie Burma Fire and Marine Insurance Co. Ltd., AIR (1926) Rangoon 3; Pt.
Prithvi Nath Malla v. Union of India, AIR (1962) J & K 15 and Ramji
Karamsi v. The Unique Motor and General Insurance Co. Ltd, AIR (1951)
347. In all these the filing of suit within stipulated period wa~ dependent
H
FOODCORPN. v. NEWINDIAASSURANCECO. [SAHAI,J.) 953

on rejection of claim. It could be validly said that it was not violative of A
Section 28 of the Contract Act as the agreement did not curtail limitation
but provided for that if the suit was not filed within the stipulated period
after rejection of clause the plaintiff shall loose all rights or benefits. No
further 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 B
decision in South British Fire & Marine Insurance Co. v. Brojo Nath Shaba,
1909 (36) Calcutta 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 C
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 D
+ 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 the ordinary law was not void. The various English decisions, ad-
verted to by the High Court, namely, Bank of England v. Vagliano Brothers,
[1891) AC 107, Ford v. Baron, [1848) 11 QB 871, Thimbley v. Barron, [1838) E
3 N & W 210, Walker v. Nevill, [1864) 3 H & C 403, therefore, do not
appear to be appropriate for deciding either the effect of Section 28 or for
the construction of the Fidelity Insurance Guarantee clause. The High
Court further placed reliance on the following passage from Porter's Law
of Insurance: F
"In Porter's Law of Insurance (6th Edn.) page 195 it is stated that
insurance may lawfully limit the time within which an action may
to brought to a period less than that allowed by the statute of
limitation and that the true ground, on which the clause limiting
the time of claim rests and is maintainable is that, by the contract G
of the partii~s the right to indemnity in case of loss and the liability
of the Company therefore do not become absolute, unless the
remedy is sought within the time fixed by the condition in the
policy."

H
954 SUPREME COURT REPORTS [1994] 1 S.C.R.

A It is indeed doubtful if the time limit for bringing an action can be lawfully
limited and brought to a period less than that allowed by the Statute. By
lawful limit the author appeared to mean by a valid and legal agreement.
But no agreement could be entered against statute. The statement was
made in context of English law and not Section 28 of the Contract Act.
The only extent to which it could be helpful could be in the sense explained
B in various decisions. That is if curtailment of limitation is dependent on
happening or otherwise of some other agreement it may not be strictly in
the mischief of Section 28 .

. 13. Truly speaking the entire discussion on Section 28 of the Contract
C Act, its broad sweep yet narrow reach could have been avoided by examin-
ing the nature of Fidelity Guarantee and the clause in the agreement.
'Fidelity' according to dictionary means faithfulness, loyalty. In insurance
terminology it is understood as assurance to indemnify against loss conse-
quent up~n the dishonesty or default. Usually the assured and the person
D whose fidelity is assured stand to each other in . relation of employer and
employee. As the use of the word 'fidelity' indicates, 'it is a policy intended +
to protect the assured against the contingency of breach of fidelity on part
of a person in whom confidence has been placed.' It is a contract whereby,
for a consideration, one agrees to indemnify another against loss arising
E from the want of honesty, integrity or fidelity of an employee or other
p.erson holding a .Position of trust. In Black's Law Distionary '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
F the assured, or rather to indemnify the latter for losses caused by
dishonesty or a want of fid~lity on the part of such a person."

In Hatsbury's Laws of England, Vol. 25, 4th Ed. a F~delity Guarantee
Insurance is described. as pecuniary loss insurance, not falling within nor-
G mal 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
H employee is a policy of pecuniary loss."
FOOD CORPN. v. NEW INDIA ASSURANCE CO. [SARAI, J.] 955

It is a policy, A

"intended to protect the assured against contingency of a breach
of fidelity on the part of a person in whom confidence has been
reposed ..... ".

In paragraph 798 dealing with time and notice it is stated, B

''The duty of giving notice of the loss to the insurers does not arise
until the employer has satisfied himself of his employee's dishones-
ty; the employer is under no duty to notify mere suspicion. How-
ever, if the policy fixes a time from the date of loss for giving notice C
to the insurers, the assured will be unable to recover if the time
has expired before he becomes aware of the loss."
;
14. Fidelity Guarantee is thus different from contingency guarantee.
The insurance under it is for honesty, against negligence or for being
.J. faithful and loyal. The protection afforded is different than normal in- D
surance policies. Its consequences and enforcement are also not the same.
The employer or the principal has first to be satisfied about the breach.
... No action can be taken on suspicion. In contingency insurance the cause
of action arises immediately whereas in Fidelity Guarantee it has to be
ascertained and verified. And on being satisfied the company must neces- E
sarily be informed of it to enable the principal to seek its remedy in the
court of law.

15. Such being the nature of Fidelity insurance its enforceability
depends on satisfaction by the insured of dishonesty or negligence of the
F
other side and its intimation either during the contract period or within the
time agreed from the termination of contract. The Trial Court found that
the millers <luring latter period of contract became negligent and left no
choice with the appellant except to get the paddy hulled from others. For
this violation the appellant exercised right of claiming the dues under the
bond within the stipulated period. None of the cases relied by the High G
Court related to Fidelity Insurance Guarantee. Nor the clause in any of the
decisions was similar.

16. To determine the nature of agreement entered between the
company and the appellant and whether the clause in the agreement could H
956 SUPREME COURT REPORTS [1994) 1 S.C.R.

A be construed as providing for limitation during which a suit could be filed
for recovery of dues, the relevant portion of the Agreement is extracted
below:

''We THE AJ:.JAND INSURANCE COMPANY LIMITED further
agree that the guarantee herein contained shall remain in full force
B and effective upto and inclusive of the 15.2.1971 the date referred
to above on the expiry of the extended period from time if any and
that it shall continue to be enforceable till aJl 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
c 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."
D
Since the foundation of such guarantee is protection against dishonesty the
law shC'uld be construed so as to promote honesty and fairness and .>
frustrate dishonesty. As has been explainedjn Halsbury's Laws of England
the appellant could have taken action against the company not on suspicion
E 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 discharged its obligation under the bond. A
F right under an agreement or a Statute may be enforced in the manner
provided. The right of the appellant under the agreement was to recover
all dues against miller, directly, from the company. That was never in
dispute How to recover it? First by making a demand and on delay or
refusal by moving the machinery provided in the agreement or· by ap-
proaching the court. Enforceability thus commences from making of
G demand and extends to ultimate vindication of the claim. When the appel-
lant gave notice to the company informing it of the default and made
demand of the amount due it was an exercise of right under the bond for
satisfaction of its claim arising out of negligence of the miller. And this
right, undisputedly, was exercised within six months from the termination
H of contract.

,
FOOD CORPN. v. NEW INDIA ASSURANCE CO. (SAHA!, J.] 957

17. From the agreement it is clear that it does not contain any clause A
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 hdd 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 B
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 than six months from the date of termination of contract. It is in C
keeping with the principle which has been C?xplained 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
the facility and certainty. The High Court erroneously construed it as giving
up the right of enforceability of its claim after six months. Since the period
is provided under the agreement .the appellant had to move within this D
period asserting its right and apprising the company of the breach or
viol~tion by the miller to enable it either to pay or to persul}de 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 E
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
F
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 G
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.
H
958 SUPREME COURT REPORTS (1994) 1 S.C.R.

A 18. In the result, these appeals succeed and are allowed. The judg-
ment and order of the Madras High Court are set aside and the decree
passed by the Trial Court shall stand restored.

ORDER

B 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. We,
however, make no order as to costs.

J.B. Appeals allowed.