PROJECT FILE ON CONTRACT-II

CASE COMMENT ON Harshad J. Shah & Anr. v LIC of India & Ors. AIR 1997, SC 2459

2012-2017 BATCH

MADE BY:AMAN PANDEY 12/BBA/009

Contents
FACTS .......................................................................................................................................................... 3 Issues overlooked by the court ...................................................................................................................... 4 Decision of the court ..................................................................................................................................... 4 Reasons for the decisions of the court .......................................................................................................... 5 Analysis of the decision of the court ............................................................................................................. 6

FACTS
On March 6, 1986 Jaswantrai G. Shah (insured), took four insurance policies of worth Rs. 25,000 each from Life Insurance Company (LIC) though Shri Chaturbhuj H. Shah (general agent of LIC). All four policies have double accidental benefits. Under said policies, premium has to be paid on half yearly basis. The insured deposited his first two premiums on time i.e. on 6th march 1986 and on 6th September 1986 respectively. But he failed to pay 3rd premium which was due on March 6 1987. Later on June 4, 1987 he gave cheque (dated June 4, 1987) to the general agent of LIC for Rs 2,730 for the payment of half yearly premium due on all the four policies. Cheque was encashed by the Son of respondent no.3 on 5th June 1987. Agent of LIC deposited the same amount in the office on 10th august 1987. In the meanwhile, the insured met with a fatal accident on August 9, 1987 and died on the same day. The widow of the insured (Appellant No. 2), as the nominee under the given four policies, submitted a request to the LIC on the basis of the policies but the same was rejected by the LIC on the ground that the no more exist as they had lapsed due to non-payment of the half yearly premium which was due on March 6, 1987 within the period of grace. Appellant No. 2 along with the Consumer Education & Research Society, submitted a complaint before the Gujarat State Consumer Disputes Redressal Commission at Ahmedabad wherein a claim was made for payment dues on the part of LIC with rate of interest on the same. The said complaint was transferred by the Gujarat State Consumer Disputes Redressal Commission to the Maharashtra State Consumer Disputes Redressal Commission at Bombay. Thereafter respondents appealed against the decision at National Consumer Disputes Redressal Commission. National commission changed the decision of state commission. Thereafter the original appellants have appealed at Supreme Court of India.

Issues framed by the court

Court looked into many issues either explicitly or impliedly. But the decision of the court was basically dependent on the answers of two basic issues. They are: 1) Whether paying said amount to the agent by the insured can be considered as a payment to LIC so as to constitute a discharge of his liability? 2) Whether doctrine of apparent authority can be applied to make LIC liable?

Issues overlooked by the court

According to me court has perfectly determined all the issues and hence came to conclusion. All relevant issues were taken in to consideration while deciding the case although all the issues are not expressly mentioned in the judgment but all matters were taken care of in the case. But the court missed to give authoritative statement on the point that: Whether by adding a restrictive clause, principal can escape from the liability which he owes vicariously for the act of his agent?

Decision of the court

On the basis of contentions raised by both the parties and by applying the prevalent laws, Supreme Court of India decided that 1) Doctrine of apparent authority given under 237 of the Indian Contract Act cant be applied in the present case. 2) The constitutional obligation has no bearing on the present case. 3) The LIC has to refund the amount insured has given in the form of premium on all the four policies along with a interest @ 15% from the date of deposit. 4) That the LIC has to pay additional amount of Rs 10,000 as costs.

Reasons for the decisions of the court

Indian Contract act in 21 says talks about the liability of the principal whereby it induces belief that the agents acts, which are unauthorized, are authorized. Here in this case appellants contended that acceptance of the premium paid by the general agent and it receipt shows that the LIC gave an implied authority to the general agent. Moreover, they claimed that there are some places, villages in the country where there are no offices of LIC. In those remote areas, insured pays premium amount to the agents and they deposit it in the office on the name of respective insured. And this practice is going with the knowledge of the authorities and there was no restriction on the practice. While on the other side counsel for respondents contended that firstly the receipt of payment nowhere implies or show that it was paid by the agent and by mere fact of receiving and encashing the cheque LIC does no induce the insured that the general agent is liable for receiving the premium amount on their behalf. Therefore the court said that doctrine of apparent authority, laid under 237 of Indian contract act cannot be applied in the present case, as LIC was taken appropriate measure, and was careful as it made an explicit provision in the Rules, which are statutory in nature, which indicates that the general agents are not authorized to take money or to receive money on behalf of LIC. Hence, Doctrine of Apparent authority cannot be applied in the present case. Now, the counsel for the appellant now contended that since LIC is a state under article 12 of indian constitution so it has a duty to not to violate any fundamental right of the citizens and also to act fairly as far as article 14 is concerned. The court agreed that LIC is a state and it has to act as per mandate given under article 14 but the court held that this constitutional obligation does not have any bearing to the present case. While denying its liability, LIC is acting strictly as per rules framed by it which is statutory in nature which restrict agents to collect money on behalf of LIC. Moreover court observed that the provisions were made by the LIC in order to protect the corporation as well as its customers from the fraud on the part of the agent. Hence, the contention of the appellant that LIC has not acted fairly or in consonance with its obligations which were posed on it by article 14 of Indian Constitution but while doing so LIC acted in accordance with the rules.

Analysis of the decision of the court

According to me, court followed different approach while deciding the present case. Although it followed the laws which are there but by this decision court defeated the very basic aim of law i.e. to provide justice. If we again look in to the facts and trend of working of LIC, we can easily say that there is clear injustice done to the aggrieved party. As there are many places in our country where there is no office of LIC so in order to increase their customers, or to give them convenience, generally agents take money from them and deposit it in the office as premium on their name. This is not hidden from the management of the company, as far as it is beneficial for the company, neither restriction was applied from the management nor any action was taken against them for the same cause. This can be easily found out of the fact that when respondent no.3 deposited the money on behalf of the appellant no 1, management or the office staff readily accepted it which shows that agents were taking premium amount on behalf of LIC and management had knowledge of it. This very act of the management of LIC induced in the masses that the management has authorized the agent to receive money on its behalf. The appellant in this case gave money to the general agent as he was induced by the management (by its act of accepting deposit by the agent on behalf of insured) that agent was authorized to take premium amount. After handing over cheque, appellant is in the misconception that his policy is not lapsed as agent has received his cheque. Even if we strictly apply 2371 of Indian Contract Act, the word inducing refers to any act by which agent make the other party belief that plaintiff is authorized to do such an act. In this case as we know that it was trend that payment was generally given to the to the agents and they deposit this premium amount in the name of the insured and this procedure was readily accepted by the management of the LIC and hence we can say that they induced the insured that the agents are authorized to take premium amount on their behalf. So according to 237 LIC should be held liable for the act of their agent and they should pay the appellant accordingly, as appellant has completed his duty by giving money to the agent, although late but as per the rules
1

237 of Indian Contract Act, 1872 When an agent has, without authority, done acts or incurred obligations to third persons on behalf of his principal, the principal is bound by such acts or obligations, if he has by his words or conduct induced such third persons to believe that such acts and obligations were within the scope of the agent' s authority.

it was the discretion of the company either to accept the premium amount and charge interest or to lapse the policy. In this case acceptance of the cheque on the part of the agent make insured belief that he is insured and his policy is not lapsed. Moreover in England, premium paid to the general agent acting on behalf of the principal is considered as premium paid to the principal and if the agent has authority, the payment binds the insurers. The authority need not be an express authority, depending on the circumstances it may be implied but still it will bind the insurers. In this case if we see there was implied authority then LIC should be held liable for the 4 policies and should pay accordingly.

Whether the case was a departure from earlier precedents.

There existed a precedent for the court to treat LIC as a state2 and if it is a state then it has to take care of fundamental right given under Part III of the constitution. Court validly sticked to the precedent and considered LIC as a state. But after treating it as state, court does not found any relation of the present circumstances with voilation of fundamental right in any way. Moreover court said that LIC acted fairly and made rules in order to prevent fraud by the agent against the company or the customers. And hence the present case was not a departure from earlier precedent as substantial part was not decided earlier, and the issue which had the precedent was not relevant in the present case.

LIC of India & Anr. vs. Consumer Education & Research Centre & Ors. 1995 (5) SCC 482