Gujarat High Court
National Insurance Co. Ltd. vs Shreenath Industries on 15 September, 2021
Author: J. B. Pardiwala
Bench: J.B.Pardiwala, Vaibhavi D. Nanavati
C/LPA/1688/2017 JUDGMENT DATED: 15/09/2021
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/LETTERS PATENT APPEAL NO. 1688 of 2017
With
R/LETTERS PATENT APPEAL NO. 630 of 2017
With
R/LETTERS PATENT APPEAL NO. 1070 of 2016
In
SPECIAL CIVIL APPLICATION NO. 8516 of 2005
With
CIVIL APPLICATION (FOR STAY) NO. 1 of 2016
In R/LETTERS PATENT APPEAL NO. 1070 of 2016
In
SPECIAL CIVIL APPLICATION NO. 8516 of 2005
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR. JUSTICE J.B.PARDIWALA
and
HONOURABLE MS. JUSTICE VAIBHAVI D. NANAVATI
==========================================================
1 Whether Reporters of Local Papers may be allowed to YES
see the judgment ?
2 To be referred to the Reporter or not ? YES
3 Whether their Lordships wish to see the fair copy of NO
the judgment ?
4 Whether this case involves a substantial question of NO
law as to the interpretation of the Constitution of India
or any order made thereunder ?
==========================================================
NATIONAL INSURANCE CO. LTD. & 2 other(s)
Versus
SHREENATH INDUSTRIES & 1 other(s)
==========================================================
Appearance:
LETTERS PATENT APPEAL NO.1688 OF 2017:
MS MEGHA JANI(1028) for the Appellants Nos. 1,2,3
MR DHAVAL DAVE SENIOR COUNSEL WITH MR KALPESH D PARIKH(11435)
for the Respondent No. 1
MR. SHAIVAL K SHELAT(9912) for the Respondent No. 1
MR AJAY R MEHTA(453) for the Respondent No. 2
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C/LPA/1688/2017 JUDGMENT DATED: 15/09/2021
LETTERS PATENT APPEAL NO.630 OF 2017:
MR DHAVAL DAVE SENIOR COUNSEL WITH MR KALPESH D PARIKH(11435)
for Appellant
MR. SHAIVAL K SHELAT(9912) for Appellant
MS MEGHA JANI(1028) for Respondents Nos.1 - 3
MR AJAY R MEHTA(453) for Respondent No.4
LETTERS PATENT APPEAL NO.1070 OF 2016:
MS MEGHA JANI(1028) for Appellants Nos.1 - 3
MR DHAVAL DAVE SENIOR COUNSEL WITH MR KALPESH D PARIKH(11435)
for Respondent No.1
MR. SHAIVAL K SHELAT(9912) for Respondent No.1
MR AJAY R MEHTA(453) for Respondent No.2
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CORAM:HONOURABLE MR. JUSTICE J.B.PARDIWALA
and
HONOURABLE MS. JUSTICE VAIBHAVI D. NANAVATI
Date : 15/09/2021
COMMON ORAL JUDGMENT
(PER : HONOURABLE MR. JUSTICE J.B.PARDIWALA) 1 Since the issues raised in all the captioned three appeals are interrelated and the parties are also the same, those were take up for hearing analogously and are being disposed of by this common judgement and order.
2 We first start with the Letters Patent Appeal No.1070 of 2016.
3 This appeal under Clause 15 of the Letters Patent is at the instance of the original respondents Nos.1, 2 and 3 respectively of a writ application filed by the respondent No.1 herein (original writ applicant) and is directed against the judgement and order passed by a learned Single Judge of this Court dated 8th September 2016 in the Special Civil Application No.8516 of 2005, by which the learned Single Judge allowed Page 2 of 44 Downloaded on : Sat Oct 09 23:55:10 IST 2021 C/LPA/1688/2017 JUDGMENT DATED: 15/09/2021 the writ application directing the appellants to pay an amount of Rs.25,43,000/- towards the insurance claim put forward by the original writ applicant.
4 The facts giving rise to this appeal may be summarized as under:
5 The original writ applicant filed the Special Civil Application No.8516 of 2005 seeking the following reliefs:
"(A) issue a writ of mandamus or any other writ, direction and/or order in the nature of mandamus declaring the communication intimating the repudiation of the petitioner's claim (Annexure "H") as illegal, arbitrary, unreasonable and violative of Articles 14 and 19 (1) (g) of the Constitution of India;
(B) be further pleased to hold and declare that unilateral and non-
communicated exclusion of the floater facility is illegal, arbitrary, violative of Article 14 and 19 (1) (g) of the Constitution of India and Regulations 2002 and the respondent Insurance Company be directed to treat the policy in question with a floater facility as previously enjoyed by the insured-petitioner and premium directly paid by respondent No.4-Dahod Urban Coop. Bank be further be directed to consider and accept the claim of the petitioner made in pursuance to the incident dated 3.2.2004 as per the report of the surveyors (Annexure "E") with further direction to consider the same with necessary corollary such as interest etc and be further pleased to direct the respondent - insurance company to treat the said fire policy as operative qua the affected premises;
(C) Pending hearing and final disposal of the present petition, the Hon'ble Court be pleased to direct the respondent - Insurance Company to reconsider and review the decision of repudiation of the petitioner's claim in the light of the decision of the respondent - insurance company having head office at Kolkata in accordance with law;
(D) Pending hearing and final disposal of the present petition, the Hon'ble Court be pleased to stay the implementation, execution, operation and effectuation of the impugned decision of repudiation vide communication at Annexure "H".
(E) Pending hearing and final disposal of the present petition, the Hon'ble Court be pleased to direct the respondent - Insurance Company to deposit the amount of claim assessed by the appointed licensed surveyors with this Hon'ble Court;"
Page 3 of 44 Downloaded on : Sat Oct 09 23:55:10 IST 2021C/LPA/1688/2017 JUDGMENT DATED: 15/09/2021 (F) grant ad-interim relief in terms of aforesaid clauses (B) and (C);
(G) award the costs of the petition;
(H) award any such other and further reliefs deemed fit and expedient in the interest of justice."
6 M/s. Shreenath Industries ("Shreenath" for short) is a partnership firm. It is duly registered under the Partnership Act, 1932. It is engaged in the business of jute bags, colloquially called "Bardan". Its predominant area of operation is at Dahod. Since 1990, Shreenath is insuring on yearly basis its jute bags stored in its godowns at Dahod against the perils of fire, earthquake and terrorism with the National Insurance Company Limited ("National Insurance" for short).
7 Till 2001, Shreenath had only one godown located at C/1 217, GIDC, Dahod. Hence, from 1990 to 2001, Shreenath had the insurance policy on yearly basis from the National Insurance against the aforesaid perils confined to the jute bags stored at the said godown. Such insurance policy is called the Standard Fire and Special Perils Policy ("Standard Policy" for short).
8 Over a period of time, Shreenath acquired two more godowns in addition to the aforesaid godown for storing jute bags. In such circumstances, Shreenath thought of opting for the Floater Insurance Policy ("Floater Policy" for short) in place of Standard Policy. The Floater Policy has an additional feature over and above the features of the Standard Policy. In case of a Standard Policy, the goods stored at one particular place only mentioned in the policy are insured against the specified perils. Whereas, in case of a Floater Policy, the goods stored at various places mentioned in the policy are insured against the specified Page 4 of 44 Downloaded on : Sat Oct 09 23:55:10 IST 2021 C/LPA/1688/2017 JUDGMENT DATED: 15/09/2021 perils. When the goods are to be shifted on regular basis from one godown to the other in the course of business, the Floater Policy is preferred.
9 Shreenath availed its first Floater Policy from the National Insurance on 30th April, 2001 for the period between 10 th May, 2001 and 9th May, 2002. It was in respect of the jute bags stored at in all the three specified godowns of Shreenath. The total sum insured under this policy was Rs. 28.69 Lac. The factum of issuance of this Floater Policy is not in dispute.
10 During the operation of the aforesaid policy, Shreenath thought fit to get the sum insured enhanced under the aforesaid policy. Hence, on 31st May, 2001, one additional Floater Policy was availed by Shreenath for the period between 31st May, 2001 and 9th May, 2002. It was also in respect of the jute bags stored at in all the three specified godowns of Shreenath. The total sum insured under this policy was Rs. 7.31 Lac. The factum of issuance of this additional Floater Policy is also not in dispute.
11 In view of the above, the total sum insured pursuant to the aforesaid two Floater Policies up to 9 th May, 2002 worked out at Rs. 36 Lac.
12 Thereafter, on 1st May, 2002, while the aforesaid two Floater Policies were in force, Shreenath opted for renewal of the same for the next yearly period of 10th May, 2002 to 9th May, 2003. Accordingly, Shreenath was issued a single Floater Policy by the National Insurance. This Floater Policy was also in respect of the jute bags stored by Shreenath in all the three godowns referred to above. The total sum insured thereunder was quantified at Rs. 36 Lac. The factum of issuance Page 5 of 44 Downloaded on : Sat Oct 09 23:55:10 IST 2021 C/LPA/1688/2017 JUDGMENT DATED: 15/09/2021 of this single Floater Policy by way of renewal of the aforesaid two Floater Policies is also not in dispute.
13 Before the aforesaid Floater Policy could expire by efflux of time, Shreenath opted for renewal of the same on 1 st May, 2003 for one another year. Pursuant to the same, the insurance policy was issued by the National Insurance. However, unlike the aforesaid insurance policies which were construed as the Floater Policies without any dispute, the National Insurance declined to treat this insurance policy for the period between 10th May, 2003 and 9th May, 2004 as a Floater Policy covering the jute bags stored at all the three godowns. This is the grey area on the factual front where both the Shreenath and National Insurance are at variance. The circumstances which led to the dispute between the two are as under:
14 During the operation of the aforesaid insurance policy in dispute qua the nature thereof, an accidental fire broke out at one of the godowns of Shreenath located at C/1 217, GIDC, Dahod on 3 rd February, 2004. Resultantly, the jute bags stored there got destroyed. Shreenath, thereupon, lodged its claim before the National Insurance on the basis of its aforesaid insurance policy. The surveyor of the National Insurance, thereupon, inspected the said godown of Shreenath and submitted its report dated 22nd March, 2004. In this report, the claim to which Shreenath was found to be eligible under the policy in question for the loss caused to it came to be quantified at Rs. 25.43 Lac.
15 Shreenath accepted the aforesaid report of surveyor and requested the National Insurance to release the payment in terms thereof. However, the National Insurance, in response thereto, belatedly addressed a communication dated 14 th September, 2004 to Shreenath Page 6 of 44 Downloaded on : Sat Oct 09 23:55:10 IST 2021 C/LPA/1688/2017 JUDGMENT DATED: 15/09/2021 repudiating the claim of Shreenath. The repudiation of the claim was on the premise that the insurance policy in question was a Standard Policy as opposed to the Floater Policy and hence, only the jute bags stored in only one godown specified in the insurance policy in question would be covered thereunder and the godown at which the fire broke was not the godown specified in the insurance policy in question.
16 The aforesaid was followed by remittance of Rs. 945/- by the National Insurance through a cheque vide the communication dated 20 th September, 2004 by terming the same as refund of the excess premium received at the relevant time for the insurance policy in question.
17 Shreenath returned the aforesaid cheque immediately vide its communication dated 23rd September, 2004.
18 Thereafter, since the National Insurance declined to reconsider its aforesaid stand, Shreenath filed a Writ Application, being the Special Civil Application No. 8516 of 2005.
19 The learned Single Judge allowed the writ application vide the impugned judgement and order dated 8 th September 2016. The learned Single Judge having regard to the attending circumstances construed the insurance policy in question as a Floater Policy. Resultantly, the decision of the National Insurance repudiating the claim of Shreenath was quashed with a direction to the Registrar of this Court to pay to Shreenath the claim amount of Rs.25.43 Lac which was deposited by the National Insurance with the Registry of this Court pursuant to an interim direction in this regard pending the final disposal of the writ application along with the interest accrued thereon.
20 Since there was no direction in the impugned judgment and order Page 7 of 44 Downloaded on : Sat Oct 09 23:55:10 IST 2021 C/LPA/1688/2017 JUDGMENT DATED: 15/09/2021
qua the interest on the aforesaid claim amount of Rs. 25.43 Lac for the period for which the said amount remained with the National Insurance and further, since the direction qua the interest on the claim amount was restricted to the interest accrued thereon on account of the investment thereof by the Registry in the fixed deposit, Shreenath preferred an application, being the Miscellaneous Civil Application No. 2184 of 2016 seeking review of the aforesaid judgment and order on the issue of interest. The contention of Shreenath in the said application for review was to the effect that the interest at the rate of 15% per annum was required to be awarded on the claim amount from the date of the report of surveyor till the payment thereof to Shreenath. In support of the same, reliance was placed on the Regulations 9 (5) and 9 (6) respectively of the Insurance Regulatory and Development Authority (Protection of Policyholders' Interest) Regulations, 2002 (for short, "the Regulations, 2002").
21 The aforesaid application for review came to be partly allowed by the learned Single Judge vide the judgment and order dated 20 th February, 2017. Shreenath was awarded interest on the claim amount for the period between the filing of the Writ Application and the deposit of the claim amount by the National Insurance with the Registry at the aggregate rate of interest earned by the claim amount upon its investment in fixed deposit by the Registry following the deposit of the same by the National Insurance.
22 In view of the above, the National Insurance filed two Letters Patent Appeals. One, being the Letters Patent Appeal No. 1070 of 2016, challenging the aforesaid final judgment and order passed in the Writ Application and the other being the Letters Patent Appeal No. 1688 of 2017, challenging the aforesaid judgment and order passed in the Page 8 of 44 Downloaded on : Sat Oct 09 23:55:10 IST 2021 C/LPA/1688/2017 JUDGMENT DATED: 15/09/2021 application for review.
23 Shreenath preferred an appeal, being the Letters Patent Appeal No. 630 of 2017, challenging the aforesaid judgment and order in the application for review to the extent the same declined to awarded interest to Shreenath on the claim amount at the rate of 15% per annum for the entire period commencing with the report of surveyor.
24 In the aforesaid backdrop, the issues which emerges for adjudication in this batch of intra-Court appeals are two fold: First, whether the conclusion reached by the learned Single Judge construing the Insurance Policy in question as a Floater Policy is sustainable in law? Secondly, whether the conclusion reached by the learned Single Judge in the application for review on the aspect of interest warrants any interference?
SUBMISSIONS ON BEHALF OF THE NATIONAL INSURANCE COMPANY:
25 Ms. Megha Jani, the learned counsel vehemently submitted that the learned Single Judge committed a serious error in construing a standard policy to be a Floater Policy. One of her principle contentions is that the nature of the Insurance Policy in question needs to be understood from what is written therein and not from what was intended by the insured at the time of availing the Insurance Policy. Ms. Jani would submit that the plain reading of the Insurance Policy in question would reveal that it is nothing, but a standard policy.
26 Ms. Jani submitted that even otherwise, the learned Single Judge ought to have declined to entertain the writ application having regard to Page 9 of 44 Downloaded on : Sat Oct 09 23:55:10 IST 2021 C/LPA/1688/2017 JUDGMENT DATED: 15/09/2021 the fact that the dispute between the parties falls in the realm of contract.
27 In such circumstances referred to above, Ms. Jani prays that there being merit in her appeal, the same be allowed and the impugned judgement and order be set aside.
SUBMISSIONS ON BEHALF OF THE SHREENATH:
28 Mr. Dhaval Dave, the learned Senior Counsel appearing for the Shreenath Industries (original writ applicant) has on the other hand vehemently opposed the the appeal submitting that no error, not to speak of any error of law could be said to have been committed by the learned Single Judge in passing the impugned judgement and order.
29 Mr. Dave would submit that the learned Single Judge has rightly recorded a finding that the stance of the Insurance Company could be termed as unfair and arbitrary and thereby violative of Article 14 of the Constitution.
30 Mr. Dave would submit that the National Insurance, being an instrumentality of the State, is under an obligation to act fairly even in the field of contract, and more particularly, when there are no disputed questions of fact. He would submit that the conclusion reached by the learned Single Judge on the first issue holding that the impugned decision of the National Insurance repudiating the claim of his client deserves to be quashed is a plausible conclusion and the same may not be disturbed in the present intra-Court appeals.
31 Mr. Dave prays that in such circumstances referred to above, there Page 10 of 44 Downloaded on : Sat Oct 09 23:55:10 IST 2021 C/LPA/1688/2017 JUDGMENT DATED: 15/09/2021
being no merit in the present appeal, the same may be dismissed.
ANALYSIS:
32 Having heard the learned counsel appearing for the parties and having gone through the materials on record, the only question that falls for our consideration is whether the learned Single Judge committed any error in passing the impugned judgement and order?
MAINTAINABILITY OF THE WRIT APPLICATION: 33 Ms. Jani, the learned counsel appearing for the National Insurance
would submit that the learned Single Judge, at the first instance, ought not to have entertained the writ application under Article 226 of the Constitution as the dispute between the parties is purely a contractual matter. She would submit that the question whether the repudiation of the claim was proper or not could not have been gone in the writ proceeding, more particularly, when the other side has an alternative and efficacious remedy to agitate his right. Ms. Jani would submit that otherwise, it amounts to enforcement of the contract, which is not permissible in law.
34 Mr. Dave, the learned Senior Counsel appearing for Shreenath, in response to the aforesaid, would submit that any action of the State or an instrumentality of the State has to stand the test of reasonableness on the anvil of Article 14 of the Constitution. Mr. Dave would submit that the learned Single Judge has recorded a clear finding that the action on the part of the National Insurance in repudiating the claim was not fair and reasonable.
35 The Supreme Court in the case of K. N. Guruswamy vs. State of Page 11 of 44 Downloaded on : Sat Oct 09 23:55:10 IST 2021 C/LPA/1688/2017 JUDGMENT DATED: 15/09/2021
Mysore and others [AIR 1954 SC 592 : 1954 SCJ 644 : (1955) 1 SCR 305] has held that where the source of a right was contractual but the action complained of was the purported exercise of a statutory power, relief could be claimed under Article 226.
36 The Supreme Court in the case of Basheshar Nath vs. Commissioner of Income-tax, Delhi and Rajasthan and another [AIR 1950 SC 149 : 1959 SCJ 1207 : (1959) 35 ITR190 (SC)], held that Article 14 protects us from both, legislative and administrative tyranny of discrimination.
37 In State of Madhya Pradesh and another vs. Thakur Bharat Singh, [AIR 1967 SC 1170 : (1967) 2 SCR 454], it has been held that even an executive action must not be found to be arbitrary but must have the authority of law to support it.
38 The Supreme Court in the case of D.F.O., South Kheri and others vs. Ram Sanehi Singh [AIR 1973 SC 205 : (1971) 3 SCC 864] held, that merely because the source of the right was initially in a contract, for obtaining relief against any arbitrary and unlawful action on the part of a public authority suit is the remedy and not a writ petition. Even if the right to relief arose out of an alleged breach of contract, where the action challenged was of a public authority invested with statutory power, writ petition is maintainable.
39 In Erusian Equipment and Chemicals Limited vs. State of West Bengal and another [AIR 1975 SC 266 : (1975)1 SCC 70], it was held, Article 14 speaks of equality before the law and equal protection of the laws. Equality of opportunity should apply to matters of public contracts. The State has the right to trade. The State has therefore the duty to Page 12 of 44 Downloaded on : Sat Oct 09 23:55:10 IST 2021 C/LPA/1688/2017 JUDGMENT DATED: 15/09/2021 observe equality. An ordinary individual can choose not to deal with any person. The Government cannot chose to exclude persons by discrimination. When the State acts to the prejudice of a person, it has to be supported by legality.
40 The Supreme Court in the case of Radhakrishna Agarwal and others vs. State of Bihar and others [AIR 1977 SC 1496 : (1977) 3 SCC 457 : (1977) 3 SCR 249] held, after the State or its agents have entered into the field of the ordinary contract, the relations are no longer governed by the constitutional provisions but by the legally valid contract which determines the rights and obligations of the parties inter se. No question arises of violation of Article 14 or of any other constitutional provision when the State or its agents, purporting to act within this field, perform any act. In this sphere, they can only claim rights conferred upon them by contract and are bound by the terms of the contract only.
41 The Supreme Court in the case of Kasturi Lal Lakshmi Reddy vs. State of Jammu and Kashmir and another [AIR 1980 SC 1992 : (1980) 4 SCC 1] held that the constitutional power conferred on the Government cannot be exercised by it arbitrarily or capriciously or in an unprincipled manner, it has to be exercised for the public good. Every activity of the Government has a public element in it and it must therefore, be informed with reason and guided by public interest. Every action taken by the Government must be in public interest, the Government cannot act arbitrarily and without reason and if it does, its action would be liable to be invalidated.
42 In Gujarat State Financial Corporation vs. Lotus Hotels Private Limited [AIR 1983 SC 848 : (1983) 3 SCC 379 : (1983) 3 Comp. L.J. Page 13 of 44 Downloaded on : Sat Oct 09 23:55:10 IST 2021 C/LPA/1688/2017 JUDGMENT DATED: 15/09/2021 202 (SC)], it was held, the State cannot commit breach of a solemn undertaking to the prejudice of the other party which acted under an obligation and put itself in a disadvantageous position. It cannot be said in such circumstances that the only remedy for the aggrieved party would be to sue for damages for breach and that it could not compel the Corporation for specific performance of the contract under Article 226.
43 A Constitution Bench of the Supreme Court in the case of Life Insurance Corporation of India vs. Escorts Limited and others [AIR 1986 SC 1370 : (1986)1 SCC 264 : (1986) 59 Comp. Cas. 548 (SC)] held, if the action of the State is related to contractual obligation or obligations arising out of the tort the Court may not ordinarily examine it unless the action has some public law character attached to it. Broadly speaking the Court will examine the actions of State if they pertain to the public law domain and refrain from examining them if they pertain to the private law field. The difficulty would arise in demarcating the frontier between the public law domain and the private law field. It is impossible to draw the line with precision, and the Court may not want to attempt it. The question must be decided in each case with reference to the particular action, the activity in which the State or the instrumentality of the State is engaged when performing the action, the public law or private law character of the action and a host of other relevant circumstances. When the State or an instrumentality of the State ventures into the corporate world and purchases the shares of a company, it assumes to itself the ordinary role of a shareholder, and adorn the robes of a shareholder, with all the rights available to such a shareholder. There is no reason why the State as a shareholder should be expected to state its reasons when it seeks to change the management, by a resolution of the Company, like any other shareholder.
Page 14 of 44 Downloaded on : Sat Oct 09 23:55:10 IST 2021C/LPA/1688/2017 JUDGMENT DATED: 15/09/2021 44 The three Judges Bench of the Supreme Court in the case of
Dwarkadas Marfatia and Sons vs. Board of Trustees of the Port of Bombay [AIR 1989 SC 1642 : (1989)3 SCC 293] held, that every activity of a public authority especially in the background of the assumption on which such authority enjoys immunity from the rigours of the Rent Act, must be informed by reason and guided by the public interest. All exercise or discretion or power by the public authorities as the respondent in respect of dealing with tenants in respect of which they have been treated separately and distinctly from other landlords on the assumption that they would not act as private landlords must be judged by that standard. If a governmental policy or action even in contractual matters fails to satisfy the test of reasonableness, it would be unconstitutional. Being a public body even in respect of its dealing with its tenant, it must act in public interest and an infraction of that duty is amenable to examination either in civil suit or in writ jurisdiction.
45 In the case of Bareilly Development Authority and another vs. Ajay Pal Singh and others [AIR 1989 SC 1076 : (1989)2 SCC 116], it is held that, there is a line of decisions where the contract entered into between the State and the persons aggrieved is non-statutory and purely contractual and the rights are governed only by the terms of the contract, no writ or order can be issued under Article 226 of the Constitution of India so as to compel the authorities to remedy a breach of contract pure and simple.
46 In Kumari Shrilekha Vidyarthi and others vs. State of Uttar Pradesh and others [AIR 1991 SC 537 : (1991) 1 SCC 212], the Supreme Court has held that the appointment and its concomitants viewed as purely contractual matters after the appointment is made, also attract Article 14 and exclude arbitrariness permitting judicial review of the Page 15 of 44 Downloaded on : Sat Oct 09 23:55:10 IST 2021 C/LPA/1688/2017 JUDGMENT DATED: 15/09/2021 impugned State action. The personality of the State, requiring regulation of its conduct in all spheres by requirements of Article 14, does not undergo such a radical change after the making of a contract merely because some contractual rights accrue to the other party in addition. It is not as if the requirements of Article 14 and contractual obligations are alien concepts, which cannot co-exist. The scope and permissible grounds of judicial review in such matters and the relief which may be available are different matters but that does not justify the view of its total exclusion. This is more so when the modern trend is also to examine the unreasonableness of term in such contracts where the bargaining power is the unequal so that these are not negotiated contracts but standard form contracts between unequals. There is an obvious difference in the contracts between private parties and contracts to which the State is a party. Private parties are concerned only with their personal interest whereas the State while exercising its powers and discharging its functions, acts indubitably, as is expected of it, for public good and in public interest. The impact of every State action is also on public interest. This factor alone is sufficient to import at least the minimal requirements of public law obligations and impress with this character the contracts made by the State or its instrumentality. The State cannot be attributed the split personality of in the contractual field so as to impress on it all the characteristics of the State at the threshold while making a contract requiring it to fulfill the obligation of Article 14 of the Constitution and thereafter permitting it to cast off its garb of State to adorn the new robe of a private body during the subsistence of the contract enabling it to act arbitrarily subject only to the contractual obligations and remedies flowing from it.
As such, all powers so vested in the State are meant to be exercised for the public good and promoting the public interest. This is Page 16 of 44 Downloaded on : Sat Oct 09 23:55:10 IST 2021 C/LPA/1688/2017 JUDGMENT DATED: 15/09/2021 equally true of all actions even in the field of contract. Thus every holder of a public office is a trustee whose highest duty is to the people of the country and, therefore, every act of the holder of a public office, irrespective of the label classifying that act, is in discharge of public duty meant ultimately for public good.
47 In Life Insurance Corporation of India and another vs. Consumer Education and Research Centre and others [AIR 1995 SC 1811 : (1995)5 SCC 482], it was held, the arms of the High Court are not shackled with technical rules or procedure. The actions of the State, its instrumentality, any public authority or person whose actions bear insignia of public law element or public character are amenable to judicial review and the validity of such an action would be tested on the anvil of Article 14. While exercising the power under Article 226, the Court would be circumspect to adjudicate the disputes arising out of the contract depending on the facts and circumstances in a given case. The distinction between the public law remedy and private law field cannot be demarcated with precision.
48 In the case of Style (Dress Land) vs. Union Territory, Chandigarh and another [(1999)7 SCC 89 : 1999(7) Supreme 311], the Court held that the governmental actions are required to be based on standards which are not arbitrary or unauthorised. Even the administrative orders and not (sic only) quasi-judicial are required to be made in a manner of consonance with the rules of natural attributes of the property. While exercising the powers of judicial review the Court can look into the reasons given by the Government in support or its action but cannot substitute its own reasons. The Court can strike down an executive order, if it finds the reasons assigned were irrelevant and extraneous.
Page 17 of 44 Downloaded on : Sat Oct 09 23:55:10 IST 2021C/LPA/1688/2017 JUDGMENT DATED: 15/09/2021 The Courts are more concerned with the decision making process than the decision itself.
49 The Supreme Court in the case of Air India Limited vs. Cochin International Airport Limited and others [AIR 2000 SC 801 : (2000)2 SCC 617] held, the award of a contract, whether it is by a private party or by a public body or the State, is essentially a commercial transaction. In arriving at a commercial decision the considerations which are paramount are commercial considerations. The State can choose its own method to arrive at a decision. It can fix its own terms of invitation to tender and that is not open to judicial scrutiny. It can enter into negotiations before finally deciding to accept one of the offers made to it. The price need not always be the sole criterion for awarding a contract. It is free to grant any relaxation, for bona fide reasons, if the tender conditions permit such a relaxation. It may not accept the offer even though it happens to be the highest or the lowest. But the State, its Corporations, instrumentalities and agencies are bound to adhere to the norms, standards and procedures laid down by them and cannot depart from them arbitrarily. Though that decision is not amenable to judicial review, the Court can examine the decision making process and interfere if it is found vitiated by mala fides, unreasonableness and arbitrariness. The State, its Corporations, instrumentalities and agencies have the public duty to be fair to all concerned. Even when some defeat is found in the decision making process the Court must exercise its discretionary power under Article 226 with great caution and should exercise it only in furtherance of public interest and not merely on the making out of a legal point. The Court should always keep the larger public interest in mind in order to decide whether its intervention is called for or not. Only when it comes to a conclusion that overwhelming public interest requires interference, the Court should intervene.
Page 18 of 44 Downloaded on : Sat Oct 09 23:55:10 IST 2021C/LPA/1688/2017 JUDGMENT DATED: 15/09/2021 50 The Supreme Court in the case of Kerala State Electricity Board
and another vs. Kurien E. Kalathil and others [AIR 2000 SC 2573 :
(2000)6 SCC 293] held, the interpretation and implementation of a clause in a contract cannot be the subject-matter of a writ petition.
Whether the contract envisages actual payment or not is a question of construction of contract? If a term of a contract is violated, ordinarily the remedy is not the writ petition under Article 226. A contract would not become statutory simply because it is for construction of a public utility and it has been awarded by a statutory body. A statute may expressly or impliedly confer power on a statutory body to enable it to discharge its functions. The dispute arising out of the terms of such contracts or alleged breaches and should be settled by the ordinary principles of law of contract. The fact that one of the parties to the agreement is a statutory or public body will not by itself affect the principles to be applied. The disputes about the meaning of a covenant in a contract or its enforceability have to be determined according to the usual principles of the Contract Act. Every act of a statutory body need not necessarily involve an exercise of statutory power. The statutory bodies like private parties have power to contract or deal with property. Such activities may not raise any issue of public law.
51 After reviewing almost all the cases aforementioned, the Supreme Court in the ABL International Limited and another vs. Export Credit Guarantee Corporation of India Limited and others [(2004)3 SCC 653 :
(2004)118 Comp. Cas. 213 (SC)] held, that merely because one of the parties to the litigation raises a dispute in regard to the facts of the case, the Court entertaining such petition under Article 226 of the Constitution is not always bound to relegate the parties to a suit. In an appropriate case the writ Court has the jurisdiction to entertain a writ Page 19 of 44 Downloaded on : Sat Oct 09 23:55:10 IST 2021 C/LPA/1688/2017 JUDGMENT DATED: 15/09/2021 petition involving disputed questions of fact and there is no absolute bar for entertaining a writ petition even if the same arises out of a contractual obligation and/or involves some disputed questions of fact.
Once the State or an instrumentality of the State is a party to the contract, it has an obligation in law to act fairly, justly and reasonably which is the requirement of Article 14 of the Constitution of India. The Court laid down the following principles:
(a) In an appropriate case, a writ petition as against a State or an instrumentality of a State arising out of a contractual obligation is maintainable.
(b) Merely because some disputed questions of fact arise for consideration, same cannot be a ground to refuse to entertain a writ petition in all cases as a matter of rule.
(c) A writ petition involving a consequential relief of monetary claim is also maintainable.
The Court has a discretion to entertain or not to entertain a writ petition. The Court has imposed upon itself certain restrictions in the exercise of this power. This plenary right of the High Court to issue a prerogative writ will not normally be exercised by the Court to the exclusion of other available remedies unless such action of the State or its instrumentality is arbitrary and unreasonable so as to violate the constitutional mandate of Article 14 or for other valid and legitimate reasons, for which the Court thinks it necessary to exercise the said jurisdiction.
52 The propositions of law laid down in the aforesaid cases must be Page 20 of 44 Downloaded on : Sat Oct 09 23:55:10 IST 2021 C/LPA/1688/2017 JUDGMENT DATED: 15/09/2021
read in the context of facts established in each case. A decision is only an authority for what it actually decides. What is of the essence in a decision is its ratio and not every observation found therein nor what logically follows from the various observations made therein. Apart from Article 141 of the Constitution of India, the policy of Courts is to stand by the precedent and not to disturb a settled point. When Court has once laid down a principle of law as applicable to certain state of facts, it will adhere to that principle, and apply it to all future cases where facts are substantially the same. A deliberate and solemn decision of Court made after argument on question of law fairly arising in the case, and necessary to its determination, is an authority, or binding precedent in the same Court, or in other Courts of equal or lower rank in subsequent cases where the very point is again in controversy unless there are occasion when departure is rendered necessary to vindicate plain, obvious principles of law and remedy continued injustice. The only thing in a Judge's decision binding as an authority upon a subsequent Judges is the principle upon which the case was decided. It is unsafe to extract sentence here and there from a judgment and to build upon it. Those words in the said judgments cannot be interpreted as the wordings of the statute. The observations in a judgment have to be understood in the context in which they are made, the subject-matter of the proceedings and what exactly the learned Judges intended in making those observations. The generality of the expressions which are found there are not intended to be expositions of the whole law but governed and qualified by the particular facts of the case in which such expressions are to be found.
53 From the aforesaid catena of case-law it is clear that judicial review would apply to the exercise of contractual powers by Government and public authorities in order to prevent arbitrariness or favoritism. It Page 21 of 44 Downloaded on : Sat Oct 09 23:55:10 IST 2021 C/LPA/1688/2017 JUDGMENT DATED: 15/09/2021 must be remembered that the power of the High Court under Article 226 of the Constitution is plenary in nature. No limitations on the exercise of such power is permissible. The limitation is only by way of self restraint. Judicial review is a great weapon in the hands of the Judges, but the Judges must observe the constitutional limits set up by our parliamentary system upon the exercise of this plenary power. Judicial review is not an appeal from a decision but a review of the manner in which the decision was made. The Courts do not review the merits of the decision in support of which the application for judicial review is made but, decision making process itself. Judicial review is a protection and not a weapon. Fair-play in action is an essential requirement. Similarly, free play in the joints is also a necessary concomitant for an administrative body functioning in an administrative sphere or quasi- administrative sphere. The doctrine that powers must be exercised reasonably has to be reconciled with no less important doctrine that the Court must not usurp the discretion of the public authority which the Parliament appointed to take the decision. If the decision is within the confines of reasonableness, it is no part of the Court's function to look further into its merits.
54 The decision of the Supreme Court in ABL International (supra) still holds the field. It is clear from the observations of the Supreme Court made in ABL International (supra) that once the State or an instrumentality of the State is a party to the contract, it has an obligation in law to act fairly, justly and reasonably which is the requirement of Article 14 of the Constitution of India. Therefore, if by the impugned repudiation of the claim of the appellants, the first respondent as an instrumentality of the State has acted in contravention of the above said requirement of Article 14, then we have no hesitation in holding that a writ court can issue suitable directions to set right the arbitrary actions Page 22 of 44 Downloaded on : Sat Oct 09 23:55:10 IST 2021 C/LPA/1688/2017 JUDGMENT DATED: 15/09/2021 of the first respondent.
55 However, while entertaining an objection as to the maintainability of a writ petition under Article 226 of the Constitution of India, the court should bear in mind the fact that the power to issue prerogative writs under Article 226 of the Constitution is plenary in nature and is not limited by any other provisions of the Constitution. The High Court having regard to the facts of the case, has a discretion to entertain or not to entertain a writ petition. The Court has imposed upon itself certain restrictions in the exercise of this power. [See Whirlpool Corporation v. Registrar of Trade Marks, (1998) 8 SCC 1)]. And this plenary right of the High Court to issue a prerogative writ will not normally be exercised by the Court to the exclusion of other available remedies unless such action of the State or its instrumentality is arbitrary and unreasonable so as to violate the constitutional mandate of Article 14 or for other valid and legitimate reasons, for which the Court thinks it necessary to exercise the said jurisdiction.
56 As already noticed, colourable exercise of power and arbitrary action of the State, while offending the principle of equality, is an exception to the rule of superior domain of the State in contractual matters. Wherever these ingredients exist, the Court would be doubly cautious in approving the State action in exercise of its powers of judicial review. Judicial review of administrative actions, examined in its correct perspective, would cause a logical impediment in the implementation of such decisions and would have the effect of directing the State to act fairly. Arbitrariness in State action in commercial/contractual transactions with private parties hurts the spirit of Article 14 of the Constitution and would be open to judicial chastizm.
Page 23 of 44 Downloaded on : Sat Oct 09 23:55:10 IST 2021 C/LPA/1688/2017 JUDGMENT DATED: 15/09/2021
MEANING AND TRUE IMPORT OF ARBITRARINESS:
57 In Ramana Dayaram Shetty vs. The International Airport Authority
of India and others [AIR 1979 SC 1628], the Supreme Court held:
"This rule also flows directly from the doctrine of equality embodied in Article 14. It is now well settled as a result of the decisions of this Court in E.P. Royappa v. State of Tamil Nadu, A.I.R. 1974 S.C. 555 and Maneka Gandhi v. Union of India, A.I.R. 1978 S.C. 597 that Article 14 strikes at arbitrariness in State action and ensures fairness and equality of treatment. It requires that State action must not be arbitrary but must be based on some rational and relevant principle which is non- discriminatory; it must not be guided by any extraneous or irrelevant consideration, because that would be denial of equality. The principle of reasonableness and rationality which is legally as well as philosophically an essential element of equality or non-arbitrariness is projected by Article 14 and it must characterise every State action, whether it be under authority of law or in exercise of executive power without making of law- The State cannot, therefore, act arbitrarily in entering into relationship, contractual or otherwise with a third party, but its action must conform to some standard or norm which is rational and non-discriminatory."
58 In Dwarkadas Marfatia and Sons v. Board of Trustees of the Port of Bombay [A.I.R. 1989 SC 1642], the matter was re-examined in relation to an instrumentality of the State for applicability of Article 14 to all its actions. Referring to the earlier decisions of this Court and examining the arguments for applicability of Article 14, even in contractual matters, Sabyasachi Mukherji, J. (as the learned Chief Justice then was), speaking for himself and Kama, J., reiterated that every action of the State or an instrumentality of the State must be informed by reason......actions uninformed by reason may be questioned as arbitrary in proceedings under Article 226 or Article 32 of the Constitution.
Page 24 of 44 Downloaded on : Sat Oct 09 23:55:10 IST 2021C/LPA/1688/2017 JUDGMENT DATED: 15/09/2021 59 In Kumari Shrilekha Vidyarthi etc. etc. v. State of U.P. and others
[A.I.R. 1991 S.C. 537], a two Judges Bench of the Supreme Court made an extensive and in depth analysis of the scope of equality clause and laid down the following propositions:
"It can no longer be doubted at this point of time that Act. 14 of the Constitution of India applies also to matters of governmental policy and if the policy or any action of the Government, even in contractual matters, fails to satisfy the test of reasonableness, it would be unconstitutional. (See Ramana Dayaram Shetty v. The International Airport Authority of India, A.I.R. 1979 S.C. 1628 and Kasturi Lal Lakshmi Reddy v. State of Jammu and Kashmir, A.I.R. 1980 S.C. 1982). In Col. A.S. Sangwan v. Union of India, A.I.R. 1981 S.C. 1545, while the discretion to change the policy in exercise of the executive power, when not trammelled by the statute or rule, was held to be wide, it was emphasised as imperative and implicit in Article 14 of the Constitution that a change in policy must be made fairly and should not give the impression that it was so done arbitrarily or by any ulterior criteria. The wide sweep of Article 14 and the requirement of every State action qualifying for its validity on this touch-stone, irrespective of the field of activity of the State, has long been settled. Later decisions of this Court have reinforced the foundation of this tenet and it would be sufficient to refer only to two recent decisions of this Court for this purpose.
It is now too sell settled that every State action, in order to survive, must not be susceptible to the vice of arbitrariness which is the crux* of Article 14 of the Constitution and basic to the rule of law, the system which governs us. Arbitrariness is the very negation of the rule of law. Satisfaction of this basic test in every State action is sine qua non to its validity and in this respect, the State cannot claim comparison with a private individual even in the field of contract."
60 The meaning and true import of arbitrariness is more easily visualized than precisely stated or defined. The question, whether an impugned act is arbitrary or not, is ultimately to be answered on the facts and in the circumstances of a given case. An obvious test to apply is to see whether there is any discernible principle emerging from the impugned act and if so, does it satisfy the test of reasonableness. Where a mode is prescribed for doing an act and there is no impediment in following that procedure, performance of the act otherwise and in a Page 25 of 44 Downloaded on : Sat Oct 09 23:55:10 IST 2021 C/LPA/1688/2017 JUDGMENT DATED: 15/09/2021 manner which does not disclose any discernible principle which is reasonable, may itself attract the vice of arbitrariness. Every State action must be informed by reason and it follows that an act uninformed by reason, is arbitrary. Rule of law contemplates governance by laws and not by humour, whims or caprices of the men to whom the governance is entrusted for the time being. It is trite that be you ever so high, the laws are above you.
61 In S.G. Jaisinghani v. Union of India [A.I.R. 1967 S.C. 1427 at p. 1434], the Court indicated the test of arbitrariness and the pitfalls to be avoided in all State actions to prevent that vice, in a passage as under:-
"In this context it is important to emphasize that the absence of arbitrary power is the first essential of the rule of law upon which our whole constitutional system is based. In a system governed by rule of law, discretion, when conferred upon executive authorities, must be confined within clearly defined limits. The rule of law from this point of view means that decisions should be made by the application of known principles and rules and, in general, such decisions should be predictable and the citizens should know where he is. If a decision is taken without any principle or without any rule it is unpredictable and such a decision is the antithesis of a decision taken in accordance with the rule of law. (See Dicey - "Law of the Constitution" - Tenth Edn., Introduction ex). "Law has reached its finest moments", stated Douglas, J. in United States v. Wunderlick, (1951-342 US 98 : 96 Law Ed
113),"When it has freed man from the unlimited discretion of some ruler .....where discretion is absolute, man has always suffered". It is in this sense that the rule of law may be said to be the sworn enemy of caprice. Discretion, as Lord Mansfield stated it in classic terms in the case of John Wilkes (1770-98 E.R. 327), "means should discretion guided by law. It must be governed by rule, not humour: it must not be arbitrary, vague and fanciful."
62 In Liberty Oil Mills v. Union of India, A.I.R. 1984 S.C. 1271, the Supreme Court held that the expression 'without assigning any reason' implied that the decision has to be communicated but reason for the Page 26 of 44 Downloaded on : Sat Oct 09 23:55:10 IST 2021 C/LPA/1688/2017 JUDGMENT DATED: 15/09/2021 decision has to be stated; but the reason must exist, otherwise the decision would be arbitrary. This decision was relied upon in Shrilekha Vidyarath's case (supra) to reject the argument made on behalf of the State of Uttar Pradesh that in term of Clause 3 of para 7.06 the services of the Government Pleaders could be terminated at any time without assigning any cause as would appear from the following extract of the decision of Apex Court:
"The other part of Clause 3 which enables the Government to terminate the appointment at any time without assigning any cause can also not be considered in the manner, suggested by the learned Additional Advocate General. The termination may be made even during the subsistence of the term of appointment and without assigning any cause means without communicating any cause to the appointee whose appointment is terminated. However, without assigning any cause is not to be equated with without existence of any cause. It merely means that the reason for which the termination is made need not to be assigned or communicated to the appointee. It was held in Liberty Oil Mills v. Union of India, A.I.R. 1984 S.C. 1271 that the expression without assigning any reason implies that the decision has to be communicated, but reasons for the decision have not to be stated; but the reasons must exist, otherwise, the decision would be arbitrary. The non-assigning of reasons or the non-communication thereof may be based on public policy, but termination of an appointment without the existence of any cogent reason in furtherance of the object for which the power is given would be arbitrary and, therefore, against public policy. Clause 3 of para 7.06 must, therefore, be understood to mean that the appointment of a District Government Counsel is not to be equated with appointment to a post under the Government in the strict sense, which does not necessarily mean that it results in denuding the office of its public character; and that the appointment may be terminated even during currency of the term by only communicating the decision of termination without communicating the reasons which led to the termination. It does not mean that the appointment is at the sweet will of the Government which can be terminated at any time, even without the existence of any cogent reasons during the subsistence of the term.........................In our opinion, the wide sweep of Article 14 undoubtedly takes within its fold the impugned circular issued by the State of U.P. in exercise of its executive power, irrespective of the precise nature of appointment of the Government counsel in the districts and the other rights, contractual or statutory, which the appointees may have. It is for this reason that we base our decision on the ground that independent of any statutory right, available to the Page 27 of 44 Downloaded on : Sat Oct 09 23:55:10 IST 2021 C/LPA/1688/2017 JUDGMENT DATED: 15/09/2021 appointees, and assuming for the purpose of this case that the rights flow only from the contract of appointment, the impugned circular, issued in exercise of the executive power of the State, must satisfy Article 14 of the Constitution and if it is shown to be arbitrary, it must be struck down."
63 In Dwarkadas Marfatia's case (supra), Sabyasachi Mukharji, J. (as he then was), indicated the extent of the power of judicial review by observing as under:
"......Where there is arbitrariness in State action, Article 14 springs in and judicial review strikes such an action down. Every action of the executive authority must be subject to rule of law and must be informed by reason. So, whatever, be the activity of the public authority, it should meet the test of Article 14......"
64 In view of the aforesaid, we are of the view that having regard to the stance of the National Insurance, which was found to be unfair by the learned Single Judge, no error could be said to have been committed by the learned Single Judge in entertaining the writ application.
RULE OF STRICT INTERPRETATION: 65 Ms. Jani, the learned counsel appearing for the National Insurance
submitted that the terms of the Insurance Policy should be construed strictly and all the expressions appearing in the policy should be interpreted with reference to the terms of the policy. She would submit that it is not open for the Court to add, delete or substitute any words.
66 In United India Insurance Co. Ltd. vs. Harchand Rai Chandan Lal (2004) 8 SCC 644, the Supreme Court held as follows:
"9....It is settled law that terms of the policy shall govern the contract between the parties, they have to abide by the definition given therein and all those expressions appearing in the policy should be interpreted with reference to the terms of policy and not with reference to the Page 28 of 44 Downloaded on : Sat Oct 09 23:55:10 IST 2021 C/LPA/1688/2017 JUDGMENT DATED: 15/09/2021 definition given in other laws. It is a matter of contract and in terms of the contract the relation of the parties shall abide and it is presumed that when the parties have entered into a contract of insurance with their eyes wide open, they cannot rely on the definition given in other enactment...."
67 Reliance was placed on Raghunath Rai Bareja vs. Punjab National Bank [(2007) 2 SCC 230] wherein it was held:
"58. We may mention here that the literal rule of interpretation is not only followed by judges and lawyers, but it is also followed by the layman in his ordinary life. To give an illustration, if a person says "this is a pencil", then he means that it is a pencil; and it is not that when he says that the object is a pencil, he means that it is a horse, donkey or an elephant. In other words, the literal rule of interpretation simply means that we mean what we say and we say what we mean. If we do not follow the literal rule of interpretation, social life will become impossible, and we will not understand each other. If we say that a certain object is a book, then we mean it is a book. If we say it is a book, but we mean it is a horse, table or an elephant, then we will not be able to communicate with each other. Life will become impossible. Hence, the meaning of the literal rule of interpretation is simply that we mean what we say and we say what we mean."
68 Reliance was also placed on the following paragraph in Suraj Mal Ram Niwas Oil Mills (P) Ltd. vs. United India Insurance Co. Ltd. [(2010) 10 SCC 567]:
"26. Thus, it needs little emphasis that in construing the terms of a contract of insurance, the words used therein must be given paramount importance, and it is not open for the court to add, delete or substitute any words. It is also well settled that since upon issuance of an insurance policy, the insurer undertakes to indemnify the loss suffered by the insured on account of risks covered by the policy, its terms have to be strictly construed to determine the extent of liability of the insurer. Therefore, the endeavour of the court should always be to interpret the words in which the contract is expressed by the parties."
69 It is a settled legal proposition that:
"26...[while] construing the terms of a contract of insurance, the words Page 29 of 44 Downloaded on : Sat Oct 09 23:55:10 IST 2021 C/LPA/1688/2017 JUDGMENT DATED: 15/09/2021 used therein must be given paramount importance, and it is not open for the Court to add, delete or substitute any words. It is also well settled, that since upon issuance of an insurance policy, the insurer undertakes to indemnify the loss suffered by the insured on account of risks covered by the policy, its terms have to be strictly construed in order to determine the extent of the liability of the insurer.
Therefore, the endeavour of the Court should always be to interpret the words used in the contract in the manner that will best express the intention of the parties. (Vide: M/s. Suraj Mal Ram Niwas Oil Mills (P) Ltd. v. United India Insurance Co. Ltd., (2010) 10 SCC
567).
70 The insured cannot claim anything more than what is covered by the insurance policy. "The terms of the contract have to be construed strictly, without altering the nature of the contract as the same may affect the interests of the parties adversely." The clauses of an insurance policy have to be read as they are. Consequently, the terms of the insurance policy, that fix the responsibility of the Insurance Company must also be read strictly. The contract must be read as a whole and every attempt should be made to harmonize the terms thereof, keeping in mind that the rule of contra proferentem does not apply in case of commercial contract, for the reason that a clause in a commercial contract is bilateral and has mutually been agreed upon. (Vide : Oriental Insurance Co. Ltd. v. Sony Cheriyan AIR 1999 SC 3252; Polymat India P. Ltd. v. National Insurance Co. Ltd., AIR 2005 SC 286; M/s. Sumitomo Heavy Industries Ltd. v. Oil & Natural Gas Company, AIR 2010 SC 3400; and Rashtriya Ispat Nigam Ltd. v. M/s. Dewan Chand Ram Saran AIR 2012 SC 2829).
71 In Vikram Greentech (I) Ltd. and another vs. New India Assurance Co. Ltd. [AIR 2009 SC 2493], it was held :
Page 30 of 44 Downloaded on : Sat Oct 09 23:55:10 IST 2021C/LPA/1688/2017 JUDGMENT DATED: 15/09/2021 "16. An insurance contract, is a species of commercial transactions and must be construed like any other contract to its own terms and by itself....
* * *
18. The endeavour of the court must always be to interpret the words in which the contract is expressed by the parties. The court while construing the terms of policy is not expected to venture into extra liberalism that may result in rewriting the contract or substituting the terms which were not intended by the parties."
(See also : Sikka Papers Limited v. National Insurance Company Ltd & Ors. AIR 2009 SC 2834).
72 Thus, it is not permissible for the court to substitute the terms of the contract itself, under the garb of construing terms incorporated in the agreement of insurance. No exceptions can be made on the ground of equity. The liberal attitude adopted by the court, by way of which it interferes in the terms of an insurance agreement, is not permitted. The same must certainly not be extended to the extent of substituting words that were never intended to form a part of the agreement.
73 The principles relating to interpretation of insurance policies are well settled and not in dispute. At the same time, the provisions of the policy must be read and interpreted in such a manner so as to give effect to the reasonable expectations of all the parties including the insured and the beneficiaries. It is also well settled that coverage provisions should be interpreted broadly and if there is any ambiguity, the same should be resolved in favour of the insured. On the other hand, the exclusion clauses must be read narrowly. The policy and its components must be read as a whole and given a meaning which furthers the expectations of the parties and also the business realities. According to Page 31 of 44 Downloaded on : Sat Oct 09 23:55:10 IST 2021 C/LPA/1688/2017 JUDGMENT DATED: 15/09/2021 us, the entire policy should be understood and examined in such a manner and when that is done, the interpretation becomes a commercially sensible interpretation. [See Canara Bank vs. M/s. United India Insurance Co. Ltd and others (Civil Appeal No.1042 of 2020 decided on 6th February 2020)].
74 In Hanil Era Textiles v. Oriental Insurance (2001) 1 SCC 269, the Supreme Court observed that any alteration in Insurance contract ought to be informed to the Insured. When premium is demanded and collected at higher rate - the Insurer is aware of the higher risks involved and it evidences the nature of contract subsisting between the parties.
75 In General Assurance Society v. Chandmull Jain [AIR 1966 SC 1644], the Supreme Court observed that in case of ambiguity in a contract of insurance, said ambiguity should be resolved in favour of claimant and against Insurance Company ( Contra Proferentem). Insurance Contract is formed when there is unqualified acceptance of proposal. Acceptance is implied if Insurer accepts the premium and retains it. Essentials of a contract of insurance are definition of Risk, Duration of Risk, Premium, and Amount of Insurance.
76 In United India Insurance v. Pushpalaya Printers (2004) 3 SCC 694, the Supreme Court observed that if there is any ambiguity or a term is capable of two possible interpretations, one beneficial to the insured should be accepted consistent with the purpose for which the policy is taken, namely, to cover the risk on the happening of certain event.
77 In United Indian Insurance v. MKJ Corporation (1996) 6 SCC 428, the Supreme Court observed that Non-closure of material facts by Page 32 of 44 Downloaded on : Sat Oct 09 23:55:10 IST 2021 C/LPA/1688/2017 JUDGMENT DATED: 15/09/2021 Insurer; no material alteration can be made without Insured's consent. When Insured is deprived of the right to enjoy his money, loss has to be compensated by payment of interest by Insurance Company.
78 In Oriental Insurance v. Ozma Shipping (2009) 9 SCC 159, the Supreme Court observed that Insurance companies in genuine claims should not adopt attitude of avoiding payment on one pretext or other.
79 A contract of insurance is one of the species of commercial transaction between the insurer and insured. It is for the parties (insurer/insured) to decide as to what type of insurance they intend to do to secure safety of the goods and how much premium the insured wish to pay to secure insurance of their goods as provided in the tariff. If the insured pays additional premium to the insurer to secure more safety and coverage of their insured goods, it is permissible for them to do so.
80 It appears from the materials on record that the insurance policy in question was never provided to Shreenath till the controversy with regard to its nature arose. Hence, Shreenath had no occasion to note that what was meant by the National Insurance was Standard Policy and not Floater Policy. Nothing has been placed on record by the National Insurance to establish that the insurance policy in question was made available to Shreenath at the relevant time. Be that as it may, the multiple attending circumstances referred to herein as concerning the insurance policy in question leave no room for the doubt that at the time of availing the insurance policy in question Shreenath was led to understand in no uncertain terms that the insurance policy in question is a Floater Policy.
81 First, it is not in dispute that the insurance policy in question was Page 33 of 44 Downloaded on : Sat Oct 09 23:55:10 IST 2021 C/LPA/1688/2017 JUDGMENT DATED: 15/09/2021
by way of renewal of the earlier policy which was to expire on 9th May, 2003.
82 Secondly, it is also not in dispute that this renewal aspect was clearly mentioned with the expression "RP" in the cover note which was issued by the National Insurance on 1st May, 2003 when Shreenath availed the insurance policy in question by making payment of premium for the same at the rate prescribed by the National Insurance. In insurance contract, the concept of renewal is well known. It has specific connotation. It means repetition of original policy on the same terms [See Biman Krishna Bose v. United India Insurance (2001) 6 SCC 477 at Para 5].
83 Thirdly, the premium was calculated and charged by the National Insurance for the policy in question at the same rate and in the same manner in which it was calculated for the insurance policies for the preceding two years which were admittedly Floater Policies. Accordingly, since the total sum insured in the insurance policy in question as also in the insurance policy for the preceding year was the same, being Rs. 36 Lac, the premium paid for the insurance policy in question as also for the insurance policy for the preceding year was the same, being Rs. 13,04/-.
84 Fourthly, it is not even the case of National Insurance that the rate and the method applicable for calculating premium for a Floater Policy were changed in the year in which the insurance policy in question was issued.
85 Fifthly, it is not even the case of National Insurance that premium for the Floater Policies for the preceding two years was also charged in Page 34 of 44 Downloaded on : Sat Oct 09 23:55:10 IST 2021 C/LPA/1688/2017 JUDGMENT DATED: 15/09/2021 excess as it is claimed by it for the insurance policy in question. Accordingly, no refund was made in respect of the premium for the preceding two years. It is needless to mention that if it was an error in calculating the premium for the insurance policy in question as maintained by the National Insurance which necessitated refund of the excess premium collected at the time of issuing insurance policy in question, the same logic would apply for the premium collected for the insurance policies for the preceding two years.
86 Sixthly, the repudiation of the claim and so called refund of excess payment took place nearly six months after the report of surveyor quantifying the entitlement of Shreenath for the claim.
87 Seventhly, if the National Insurance was right in its contention that the premium for the insurance policy in question if the same was to be treated as a Floater Policy should have been Rs.13,306/- in place of Rs. 13,041/- which was charged from Shreenath, it could have demanded from Shreenath the shortfall which was to the tune of Rs. 265/- instead refunding the excess of Rs. 945/- by treating the situation as if Shreenath intended to avail a Standard Policy. It is needless to mention that the demand for the shortfall would have sounded more reasonable as the intention of Shreenath was undoubtedly to go for a Floater Policy. Even judging from the yardstick of reasonable man's prudence, Shreenath would not have declined to make good such a shortfall in the premium.
88 Eighthly, the aforesaid aspect also supports the version of Shreenath that the insurance policy in question was never furnished to it by the National Insurance. Else, noticing the same as contrary to its intention, it would have moved the National Insurance with the Page 35 of 44 Downloaded on : Sat Oct 09 23:55:10 IST 2021 C/LPA/1688/2017 JUDGMENT DATED: 15/09/2021 corrective measure.
89 At this juncture, in furtherance to the aforesaid, it would not be out of place to refer to the rule of contra proferentem which always governs the contract of insurance. As per this rule, in interpreting the contract of insurance, when there is doubt about the true import thereof, the interpretation which favours the insured is to be preferred and followed as opposed to the interpretation which tilts the balance in favour of the insurance company. [See General Assurance Society v. Chandmull Jain AIR 1966 SC 1644 at Paras 11, 12 & United India Insurance v. Pushpalaya Printers (2004) 3 SCC 694 Para 6] 90 In light of the aforesaid, the conclusion reached by the learned Single Judge on the first issue holding that the impugned decision of the National Insurance repudiating the claim of Shreenath deserves to be quashed is a plausible conclusion and hence, the same does not warrant interference considering the scope of an intra-Court appeal.
CONCEPT OF INTEREST: 91 When interest is awarded by the Court, our normal
feeling is that it is so awarded by way of penalty or punishment. But interest in all cases is not granted by way of penalty or punishment. In this regard, reference may be made to the decision of the Supreme Court in the case of Alok Shanker Pandey Vs. Union of India, 2007 AIR (SC) 1198, wherein the concept of grant of interest has been explained in the following manner:
"It may be mentioned that there is misconception about interest. Interest is not a penalty or punishment at all, but it is the normal accretion on capital. For example if A had to pay B a certain amount, say ten years ago, but he offers that amount to him Page 36 of 44 Downloaded on : Sat Oct 09 23:55:10 IST 2021 C/LPA/1688/2017 JUDGMENT DATED: 15/09/2021 today, then he has pocketed the interest on the principal amount. Had A paid that amount to B ten years ago, B would have invested that amount somewhere and earned interest thereon, but instead of that A has kept that amount with himself and earned interest on it for this period. Hence equity demands that A should not only pay back the principal but also interest thereon to B."
92 The above-noted decision of the Supreme Court makes it clear that the claim of interest on the delayed payment of the claim amount to which an insured is otherwise entitled to, flows from the Regulations 9(5) and 9(6) respectively of the Insurance Regulatory and Development Authority (Protection of Policyholders' Interests) Regulations, 2002. The claim for interest cannot be held to be a stale claim as a right to claim interest. All delayed payments of the legitimate dues accrue due to the continuing wrong committed by the insurance company for withholding the payment to the insured towards the claim, causing continuous injury to the insured until such payment is made.
93 The normal position is that where one party suffers loss because the other party has failed to meet its contractual obligations, the innocent party may claim damages for the loss suffered (Hadley v. Baxendale (1854) EWHC J70). The English Courts have, however, held that insurance contracts fall outside this rule. In English Law, an insurer is not liable for any loss caused by its delay or failure to pay valid claim. This is based on the legal fiction that the insurer's contractual obligation is to prevent the loss occurring (or to "hold the insured harmless") rather than to pay out a claim. As a result, claims payments are considered to be damages. Where payment is late, there can be no remedy (other than interest on the amount outstanding) as English law does not allow damages for late payment of damages (the President of India v Lips Page 37 of 44 Downloaded on : Sat Oct 09 23:55:10 IST 2021 C/LPA/1688/2017 JUDGMENT DATED: 15/09/2021 Maritime Corporation (The Lips) [1988] AC 395).
94 The operation of the "hold harmless" principle is clearly illustrated in Sprung v Royal Insurance (UK) Limited [1999] 1 Lloyd's rep 111. In that case, the insured was unable to finance the repairs to his factory after his insurer denied liability for the damage caused during a break- in. As a result, after a few months, the insured was forced to wind up his business. He brought proceedings against his insurer and managed to recover the amount of his claim under the policy together with interest, but the Court held that he could not recover a further loss representing the amount for which he could have sold his business had the delayed payment by the insurer been made in good time and the business been kept open.
95 The Commissions' report on the insurance law reform in July 2014 set out a number of reasons for changing the unfairness illustrated by Sprung, including the following:
The notion that an insurer's primary obligation under a contract of indemnity is to prevent the insured loss from occurring does not reflect commercial reality. Insureds expect to have a contractual right to a payment in the event of a loss;
The current position unfairly favours the interests of insurers and their failure to make a timely payment risks prejudicing the very purpose for which insurance is purchased; and The English law position is inconsistent with that of a number of other jurisdictions, and less protective of insureds. This, among other things, poses risks to the competitiveness to the UK insurance market.Page 38 of 44 Downloaded on : Sat Oct 09 23:55:10 IST 2021
C/LPA/1688/2017 JUDGMENT DATED: 15/09/2021 96 The U.K. Government believes that such a change in the law may
incentivise the insurers to pay claims promptly and allow for damages to be paid to the policyholders who have suffered loss as a result of late payment. However, the introduction of the Commissions' proposal in the Bill came as a surprise to the insurance industry which opposed the introduction of such a remedy as drafted in clause 13A. The industry was against the inclusion of such a requirement on the basis that it would impair insurers' ability to investigate the claims thoroughly before taking a decision on its liability and make it almost impossible to calculate the future liabilities.
97 As observed by a learned Single Judge of the Madras High Court, in the case of Jasmine Ebenezer Arthur vs. HDFC ERGO General Insurance Company Limited [Writ Petition No.22234 of 2016 decided on 6th June 2019], in India, there should be more transparency and accuracy of the facts before the contract comes into force. This reduces the chances of confusion later, when the claim is made under the insurance policy. The malpractice and arbitrary use of power by the insurance companies must be restrained by incorporating provisions to reduce the chances of ambiguity at a later date. Or else, the insurer would continue to take advantage of the insured by falsely repudiating the claims made by the insured.
98 So far as the second issue relating to the aspect of interest on the claim amount awarded to Shreenath is concerned, the predominant contention of the National Insurance is that as no interest was specifically prayed for in the Writ Application, the same ought not to have been awarded in the application for review for the period between the filing of the Writ Application and deposit of the claim amount with Page 39 of 44 Downloaded on : Sat Oct 09 23:55:10 IST 2021 C/LPA/1688/2017 JUDGMENT DATED: 15/09/2021 the Registry by the National Insurance pursuant to an interim order.
99 In response, per contra the contention of Shreenath is that the interest was prayed for in the petition. It is pointed out that the guidance for the appropriate rate of interest emanates from the Regulations 9 (5) and 9 (6) respectively of the Insurance Regulatory and Development Authority (Protection of Policyholders' Interests) Regulations, 2002 ["Regulations 2002" for short]. As per the same, the insurer is under an obligation to offer settlement of the claim amount to the insured within the period of 30 days from the report of surveyor and thereafter, to make the payment to the insured within the period of seven days from the acceptance of the same by insured. If the insurer is not to make the payment within this stipulated period, the insurer is liable to pay interest on the claim amount at the rate over and above the prevailing bank rate by 2%.
100 In view of the above, the position which emerges upon allowing of the Writ Application of Shreenath is analogous to the one contemplated by the Regulations 9 (5) and 9 (6) respectively of Regulations, 2002. The provision contained in these Regulations are aimed at ensuring payment of interest at the stipulated rate to the insured when there is a default on the part of the insurer in releasing the claim amount in time.
101 We quote the relevant regulations of the Regulations, 2002 as under:
"9. Claim procedure in respect of a general insurance policy:
(1) An insured or the claimant shall give notice to the insurer of any loss arising under contract of insurance at the earliest or within such Page 40 of 44 Downloaded on : Sat Oct 09 23:55:10 IST 2021 C/LPA/1688/2017 JUDGMENT DATED: 15/09/2021 extended time as may be allowed by the insurer. On receipt of such a communication, a general insurer shall respond immediately and give clear indication to the insured on the procedures that he should follow.
In cases where a surveyor has to be appointed for assessing a loss / claim, it shall be so done within 72 hours of the receipt of intimation from the insured.
(2) Where the insured is unable to furnish all the particulars required by the surveyor or where the surveyor does not receipt the full cooperation of the insured, the insurer or the surveyor as the case may be, shall inform in writing the insured about the delay that may result in the assessment of the claim. The surveyor shall be subjected to the code of conduct laid down by the Authority while assessing the loss, and shall communicate his findings to insured, if he so desires. Where, in special circumstances of the case, either due to its special and complicated nature, the surveyor shall under intimation to the insured, seek an extension from the insurer for submission of his report. In no case shall a surveyor take more than six months from the date of his appointment to furnish his report.
(3) If an insurer, on the receipt of a survey report, finds that it is incomplete in any respect, he shall require the surveyor under intimation to the insured, to furnish an additional report on certain specific issues as may be required by the insurer. Such a request may be made by the insurer within 15 days of the receipt of the original survey report.
Provided that the facility of calling for an additional report by the insurer shall not be resorted to more than once in the case of a claim.
(4) The surveyor on receipt of this communication shall furnish an additional report within three weeks of the date of receipt of communication from the insurer.
(5) On receipt of the survey report or the additional survey report, as the case may be, an insurer shall within a period of 30 days offer a settlement of the claim to the insured. If the insurer, for any reasons to be recorded in writing and communicated to the insured, decides to reject a claim under the policy, it shall do so within a period of 30 days from the receipt of the survey report or the additional survey report, as the case may be.
(6) Upon acceptance of an offer of settlement as stated in sub- regulation (5) by the insured, the payment of the amount due shall be made within 7 days from the date of acceptance of the offer by the insured. In the cases of delay in the payment, the insurer shall be liable to pay interest at a rate which is 2% above the bank rate prevalent at the beginning of the financial year in which the claim is reviewed by it."
Page 41 of 44 Downloaded on : Sat Oct 09 23:55:10 IST 2021C/LPA/1688/2017 JUDGMENT DATED: 15/09/2021 102 The learned Single Judge having taken the view that
Shreenath is entitled to the claim amount in accordance with the quantification thereof by the surveyor, it would follow as a corollary thereto that the National Insurance was obliged to make the payment of the claim amount forthwith upon submission of the report of surveyor.
103 Needless to mention that the declaration about entitlement of the claim amount made in the Writ Application would relate back to date of repudiation of the claim by the National Insurance. Therefore, the claim amount which remained with the National Insurance till it was deposited with the Registry and even thereafter with the Registry even till date undoubtedly belonged to Shreenath. It cannot be denied that Shreenath was deprived of the entitlement which lawfully belonged to Shreenath. In such a situation, it goes without saying that the one who is deprived of the monetary entitlement is entitled to the interest thereon for the period of deprivement. [See United India Insurance v. MKJ Corporation (1996) 6 SCC 428 at Para 10].
104 Thus, the resultant situation emerging upon allowing of the Writ Application is no way different from the situation contemplated by the Regulations 9 (5) and 9 (6) of the Regulations, 2002. Hence, the default rate of interest contemplated therein must govern the case of Shreenath. This rate of interest would work out at 15% per annum considering the fact that the jute backs were hypothecated with the Dahod Urban Cooperative Bank Limited, a formal Respondent No.4 in Writ Application, for the financial assistance secured by Shreenath at the rate of 13% per annum. As maintained by the Bank during hearing, the dues of the Bank are still outstanding. As such, Shreenath has suffered interest at the rate of 13% per annum for all these years on the financial Page 42 of 44 Downloaded on : Sat Oct 09 23:55:10 IST 2021 C/LPA/1688/2017 JUDGMENT DATED: 15/09/2021 assistance secured by it from the bank by hypothecating the jute bags. This could have been avoided if the National Insurance was to release the claim amount in time. Thus, even on equitable consideration, Shreenath deserves to be compensated for the loss suffered by it on this count.
105 While dealing with the present appeal, one has to bear in mind that a intra-Court appeal is really not a statutory appeal preferred against the judgment and order of an inferior to the superior Court. The appeal inter se in a High Court from one Court to another is really an appeal from one coordinate Bench to another Coordinate Bench and it is for this reason that a writ cannot be issued by one Bench of the High Court to another Bench of the High Court nor can even the Supreme Court issue writ to a High Court. Thus, unlike an appeal, in general, an intra-Court appeal is an appeal on principle and that is why, unlike an appeal, in an ordinary sense, such as a criminal appeal, where the whole evidence on record is examined afresh by the appellate Court, what is really examined, in an intra-Court appeal, is the legality and validity of the Judgment and/or Order of the Single Judge and it can be set aside or should be set aside only when there is a patent error on the face of the record or the judgment is against the established or settled principle of law. If two views are possible and a view, which is reasonable and logical, has been adopted by a Single Judge, the other view, howsoever appealing such a view may be to the Division Bench, it is the view adopted by the Single Judge, which should, normally, be allowed to prevail. Hence, the impugned judgment of the learned Single Judge should not be completely ignored and this Court has to consider the judgment and order in its proper perspective and if this Bench, sitting as an appellate Bench, is of the view that the decision has been arrived at by the learned Single Judge without any material error of fact or law, Page 43 of 44 Downloaded on : Sat Oct 09 23:55:10 IST 2021 C/LPA/1688/2017 JUDGMENT DATED: 15/09/2021 then, the judgment, in question, should be allowed to prevail.
106 Our final conclusions are under:
[a] The Letters Patent Appeal No.1070 of 2016 preferred by the National Insurance against the impugned judgement and order passed by the learned Single Judge in the Special Civil Application No.8516 of 2005 is hereby dismissed. Consequently, the connected Civil Application also stands disposed of.
[b] The Letters Patent Appeal No.1688 of 2017 preferred by the National Insurance against the judgement and order passed by the learned Single Judge in the Review Application also stands dismissed.
[c] The Letters Patent Appeal No.630 of 2017 preferred by Shreenath is allowed. We hold that Shreenath is entitled to interest at the rate of 15% per annum for the period commencing from the date of the report of the surveyor till the realization of the claim amount by Shreenath.
(J. B. PARDIWALA, J) (VAIBHAVI D. NANAVATI,J) CHANDRESH Page 44 of 44 Downloaded on : Sat Oct 09 23:55:10 IST 2021