New India Assurance Co. Ltd. v. Itty Kurian — 1997 DIGILAW 382 (KER)

Judgment :- 1. This appeal was once heard and disposed of by judgment dated 1.10.1990. But later on a petition was filed stating that the respondent-plaintiff died on 28.2.1990 and praying that the appeal be re-heard, after impleading his legal representatives. That petition was allowed. 2. The additional 2nd defendant in O.S. 78 of 1973 of the Sub Court, Kottayam is the appellant. The 1st defendant-company amalgamated with 2nd defendant-company. The Cross Objection relates to refusal of interest from the date of notice till date of decree. 2A. Plaintiff who is the proprietor of Padinjarekkara Bankers Kottayam is a financier. He had entered into hire purchase agreement with regard to vehicles sold by Kulathunkal Motor Corporation (for short the Corporation), sole distributors of Tata Diesel vehicles in Kerala. Whenever the purchasers wanted hire purchase facility, they were introduced to the plaintiff by the Corporation. The Corporation introduced me buyers of the vehicles and also produced the necessary registration certificates for entering into hire purchase agreement. After collecting premium and other amounts, the plaintiff had made declarations to the defendant-company for the purpose of taking policy covering the risk and paid the premium in respect of 27 vehicles. When one of the hirer defaulted payment, plaintiff proceeded against him and seized the vehicle. Someone else came with a claim and it was found out that the vehicle seized belonged to the third party and the registration certificate produced was false. Plaintiff applied to the R.T.O. for copies of registration certificates of all the 27 vehicles and ail of them turned out to the bogus ones. There was a criminal complaint pursuant to which police registered a case against the partner of the Corporation for cheating and evidence shows that he was convicted by court and the conviction was upheld by the apex court. Plaintiff has filed the suit for return of the premium amount paid to the defendants on the ground that the insurance contracts were void because the vehicles did not exist. The suit claim was Rs. 47,460/- with interest. 3. Defendant took up the position that the policies were issued on the basis of declarations submitted by plaintiff in utmost good faith, without enquiring into the truth or otherwise of the same. The suit claim was Rs. 47,460/- with interest. 3. Defendant took up the position that the policies were issued on the basis of declarations submitted by plaintiff in utmost good faith, without enquiring into the truth or otherwise of the same. Therefore, it was contended that being uberrimae fidei contracts, the plaintiff ought to have known the facts and disclosed the same to the insurance company and as he had violated the good faith reposed in him, it is riot liable to return the amount. It was further contended that even if the plaintiff was misled by the Corporation, he could have discovered the truth and therefore, the mistake was unilateral on the part of the insurance company and there is no mutual mistake of fact and the contracts would not be void. It was also pleaded that the claim is barred by limitation. 4. Exts. A1 to A243 and B1 to B27 were marked. PWs.1 to 4 were examined. The trial court held that there was mistake of fact committed by both parties and the contracts were void under S.20 of the Contract Act and therefore, the defendant is liable to return the money paid by plaintiff towards premium. It further held that the fraud was discovered only on 19.10.1970 and the suit instituted in April, 1973 is within time. Hence the appeal. 5. Heard counsel. 6. The two points that arise for consideration are: 1) whether the insurance contract entered into between the plaintiff and the defendant is void on the ground of mutual mistake or fraud; and 2) whether the claim is barred by limitation. 7. Point No. 1:- It is unnecessary to refer in detail the facts because there is little dispute regarding the same. I shall state the brief facts. The procedure adopted was plaintiff used to finance purchasing diesel vehicles from the Corporation and purchasers would be introduced to the plaintiff by the Corporation. They would produce invoice containing a statement that the vehicle has been sold to the purchaser subject to hire purchase agreement. Thereafter the purchaser and guarantor would execute a hire purchase agreement in plaintiff's favour. Plaintiff would pay the balance price due to the Corporation from the hirer as per a crossed cheque drawn on Central Bank of India. The vehicle sold would have only the engine and the chases at that time. The body is built later. Thereafter the purchaser and guarantor would execute a hire purchase agreement in plaintiff's favour. Plaintiff would pay the balance price due to the Corporation from the hirer as per a crossed cheque drawn on Central Bank of India. The vehicle sold would have only the engine and the chases at that time. The body is built later. Thereafter, it would be registered with the registering authority. After registration the Corporation would produce the certificate before the plaintiff. In respect of all vehicles regarding which there is hire purchase agreement insurance premium would be paid by plaintiff and the policy issued by the insurance company contained an endorsement in favour of the plaintiff to the effect that all amount in respect of loss and damages to the vehicle would be paid to the plaintiff. On 10.9.1970 one such vehicle was seized by the plaintiff's representative, but it turned out that the vehicle seized did not belong to the party who signed the hire purchase agreement. It was later found out an obtaining copy of registration certificates that many of these vehicles did not exist. 8. Though the plaintiff would allege that he was a victim of fraud practised by the Corporation, defendant would argue that the plaintiff could have found out the truth, if some care was bestowed on it. The manager of the financier examined as PW.1 stated that they used to physically verify all vehicles relating to which hire purchase agreement is to be entered into, but in the case of vehicles sold by the Corporation, there was no such verification. The Corporation being the sole distributor of Tata diesel vehicles and as there were business connections between the two for a long time, plaintiff acted in good faith and advanced money towards balance price. Therefore, the plaintiff was proceeding on the belief that such vehicles were actually sold to the respective hirers by the Corporation and made declarations to the insurance company which issued policies. 9. An argument was raised that these vehicles were insured in the name of hirers as Ext. A 167 to A192 insurance policies showed, but premium was paid by plaintiff and receipts issued in this name as revealed by Exts. A143 to A163. It was therefore, argued that the plaintiff cannot be taken to have paid the premium on behalf of the insured. A 167 to A192 insurance policies showed, but premium was paid by plaintiff and receipts issued in this name as revealed by Exts. A143 to A163. It was therefore, argued that the plaintiff cannot be taken to have paid the premium on behalf of the insured. But the policies have been endorsed in plaintiff's favour and such an argument has no substance. In this connection another argument was advanced that the plaintiff cannot sue for the money because PW1 admitted that premium was collected from the hirers. This argument is of no avail because the payment was actually made by plaintiff is not disputed. 10. S.65 of the Contract Act says that when an agreement is discovered to be void or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it, or to make compensation for it, to the person from whom he received it. S.2 defines contract as an agreement enforceable by law. An agreement which is not enforceable by law is void. Agreements discovered to be void can include agreements which are void at the inception. But a contract that becomes void is an agreement enforceable, but becomes void due to subsequent events. 11. In this case, the plaintiff would contend that he discovered the non-existence of these vehicles only on 19.10.1970 and he was under full faith and belief that the vehicles existed. But appellant-defendant would contend that if the plaintiff had taken pains to physically verify it, he could have discovered the fact that such vehicles did not exist. I have already made mention of the evidence of PW1 that plaintiff was bye passing the normal procedure when he did not care to make a physical verification before money was advanced to the hirers. It was also discovered that registration certificates of the vehicles produced by the Corporation were forged and necessarily fraud was practised by the Corporation on the plaintiff. There was a long time business relationship between the two and three is no case for the appellant that they colluded together to defeat the appellant In fact, I have already mentioned that pursuant to the complaint preferred by plaintiff, one of the partners of the Corporation was charged with fraud and later on convicted. There was a long time business relationship between the two and three is no case for the appellant that they colluded together to defeat the appellant In fact, I have already mentioned that pursuant to the complaint preferred by plaintiff, one of the partners of the Corporation was charged with fraud and later on convicted. Therefore, the mistake committed by the plaintiff was an honest one in the context of the circumstances outlined above. The lower court has pointed out the hard fact that the vehicles did not exist and the plaintiff proceeded to advance money and enter into hire purchase agreements believing that such vehicles existed. It also made declarations to the defendant regarding the same, based on which they issued policies. Therefore, notwithstanding the tact that there was some negligence on the part of the plaintiff, the lower court found that mistake was committed by both and it is a mutual mistake of fact. S.20 of the Contract Act states that when both parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void. The plaintiff paid value of vehicles to the Corporation and defendant issued policies covering the risk presupposing that such vehicles were in existence. Therefore, this is a point on which both parties were under a mistake regarding the fact essential to the agreement. 12. I have already referred to the argument advanced by appellant that it issued policies only on utmost good faith. Parties cited various decisions on the point. In Sales Tax Officer v. Kanhaiya Lal (AIR 1959 SC 135) the question arose whether tax paid by mistake can be retained by the Government or is liable to be repaid. Interpreting the word "mistake" occurring in S.72 of the Act, their Lordships of the Supreme Court held that the term comprises within its scope a mistake of law as well as a mistake of fact, and the principle is that if one party under a mistake, whether of fact or law, pays to another party money which is not due by contract or otherwise that money must be repaid. The mistake lies in thinking that the money paid was due when in fact it was not due and that mistake, if established, entitles the party paying the money to recover it back from the party receiving the same. The mistake lies in thinking that the money paid was due when in fact it was not due and that mistake, if established, entitles the party paying the money to recover it back from the party receiving the same. On the question of estoppel it was held that it depends upon the facts and circumstances of each case. It was held: "No question of estoppel can ever arise where both the parties are labouring under the mistake of law and one party is not more to blame than the other. Estoppel arises only when the plaintiff by his acts or conduct makes a representation to the defendant of a certain state of facts which is acted upon by the defendant to his detriment. It is only then that the plaintiff is estopped from setting up a different state of facts." An argument was raised that Government has already spent the tax paid for developmental purpose and it is not liable to repay the same. This argument was overruled by the Supreme Court. 13. In Chhanganlal v. Narandas (AIR 1982 SC 121) the Supreme Court has dealt with the question of estoppel in Para.23 of its judgment Estoppel deals with questions of facts and not of rights. A man is not estopped from asserting a right which he had said that he will not assert. The Supreme Court has mentioned conditions to bring the case within the scope of estoppel as defined in S.115. Condition No. 7 which is relevant is as follows: "(7) the person claiming the benefit of an estoppel must show that he was not aware of the true stale of things. If he was aware of the real state of affairs or had means of knowledge, there can be no estoppel;" 14. Plaintiff's case is that he could not have discovered the mistake in the normal course even if vehicles were produced because the registration certificates were forged. But the fact remains that the hirers could not have produced the vehicles because the vehicles were not in their possession. In Kuju Collieries v. Jharkhand Mines (AIR 1974 SC 1892) the Supreme Court was considering the question whether an agreement void ab initio will come within the scope of S.65 of the Contract Act. Where parties are in pari delicto, the court held that S.65 will not be attracted to such cases. In Kuju Collieries v. Jharkhand Mines (AIR 1974 SC 1892) the Supreme Court was considering the question whether an agreement void ab initio will come within the scope of S.65 of the Contract Act. Where parties are in pari delicto, the court held that S.65 will not be attracted to such cases. It was held in Para.6 as follows: "The section makes a distinction between an agreement and a contract. According to S.2 of the Contract Act an agreement which is enforceable by law is a contract and an agreement which is not enforceable by law is said to be void. Therefore, when the earlier part of the section speaks of an agreement being discovered to be void it means that the agreement is not enforceable and is, therefore, not a contract. It means that it was void. It may be that the parties or one of the parties to the agreement may not have, when they entered into the agreement, known that the agreement was in law not enforceable. They might have been come to know later that the agreement was not enforceable. The second parat of the Section refers to a contract becoming void. That refers to a case where an agreement which was originally enforceable and was, therefore, a contract, becomes void due to subsequent happenings. In both these cases any person who has received any advantage under such agreement or contract is bound to restore such advantage or to make compensation for it to the person from whom he received it. But where even at the time when the agreement is entered into both the parties know that it was not lawful and, therefore, void, there was no contract but only an agreement and it is not a case where it is discovered to be void subsequently. Nor is it a case of the contract becoming void due to subsequent happenings. Therefore, S.65 of the contract Act did not apply." But in this case the agreement as such was not illegal becomes it was only a hire purchase agreement entered into between the plaintiff and the hirers and the consequent insurance contract entered into between the plaintiff and the defendant. It was void because of a mistake of fact and the contract was not void due to an illegality as in the case referred above. 15. It was void because of a mistake of fact and the contract was not void due to an illegality as in the case referred above. 15. I will now deal with the argument regarding the nature of the contract of insurance which, according to the appellant, was entered in good faith and was based on the declaration made by plaintiff. It was argued that there was a duty for disclosure on the part of the plaintiff and as he has violated it, the contract is unenforceable. At page 3924 of Chitty on contracts, Twenty-fourth Edn., Vol. II, uberrimae fidei contracts are dealt with thus: "An insurance contract is a contract uberrimae fidei: it is a contract based on the utmost good faith and if the utmost good faith is not observed by either party the contract may be avoided by the other party. The reason for this principle of insurance law is that contracts of insurance are founded on facts which are nearly always in the exclusive knowledge of one party (usually the assured) and, unless this knowledge is shared, the risk insured against may be different from that intended to be covered by the party in ignorance." At page 3925, the learned another speaks about the duty of disclosure. It is stated: "The duty extends only to facts that are known to one party and not to the other. The rules in marine insurance that an assured is deemed to know every circumstance which in the ordinary course of business ought to be known to him, but that he need not disclose facts which are matters of common notoriety or knowledge of which an insurer in the ordinary course of business, as such, ought to know, are probably applicable to all kinds of insurance. If a party forbears to ask questions after disclosure of facts have put him in inquiry, he may be taken to have waived the right to disclosure of the facts which such inquiry would have disclosed. At page 3944 of the said book, the author has considered whether the assured may be able to recover the premium: "In some circumstances the assured may be able to recover the premium and generally his right to do so depends upon whether the insurer has ever been on risk. At page 3944 of the said book, the author has considered whether the assured may be able to recover the premium: "In some circumstances the assured may be able to recover the premium and generally his right to do so depends upon whether the insurer has ever been on risk. In marine insurance recovery of the premium is governed by the Marine Insurance Act 1906 but the wide rights of recovery provided therein have not been applied to non-marine insurance and it is unwise to assume that the same rules will be applied. It seems, however, that the assured can claim a refund of the premium if: (a) The contract is void for mistake of fact, even if the true facts make it illegal. Thus if a house is insured in the mistaken belief that it is still standing, or a life in the mistaken belief that the life assured is still living, the premium may be recovered." 16. In Law of Contract by Cheshire and Fifoot, Ninth Edn., at page 280 it is observed as follows: "A similar duty of disclosure exists in the case of non-marine insurances. Whether the policy is taken out for a life, fire, burglary, fidelity or accidental risk, it is the duty of the assured to give full information of every material fact; and it has been held by the Court of Appeal that the definition of "material" contained in the Marine Insurance Act, 1906, namely every circumstance "which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk," is applicable to all forms of insurance." At page 281 of the same book, it is stated: "The duty of disclosure thus imposed by law is confined to facts which the assured knows or ought to know. "The duty" said FLETCHER-MOULTON, L.J., "is a duty to disclose, and you cannot disclose what you do not know." The learned authors while discussing the insurance contracts refer to the conditions in the policies of insurance and state that any incorrect statement about a matter that is nothing more than a matter of opinion is sufficient to avoid the policy. Thus, one of the commonest questions put to a person who applies for a life insurance is "Have you any disease?", a matter which even for a doctor, is often a subject of mere speculation or opinion. Thus, one of the commonest questions put to a person who applies for a life insurance is "Have you any disease?", a matter which even for a doctor, is often a subject of mere speculation or opinion. The Courts view this practice with dictate and they do what they can to mitigate its severity by imposing a strict burden of proof upon insurers. 17. In this connection, during the course of arguments it was submitted that no claim arose in respect of any of these vehicles during the relevant period. Learned counsel for the appellant submitted that if any such claim arose, the company would be absolved from liability on the ground that there was a mistake of fact and the insured vehicles did not really exist. Therefore, there was no real risk taken by the insurance company in insuring the vehicles because it could receive the premium and still absolve itself from the liabilities on that ground. The principle of equity must apply with force to both parties and it cannot be that one party could receive the advantage under the contract and still avoid the liabilities. As observed by Cheshire and Fifoot the contracts of insurance contain clauses which make it almost unilateral in terms of advantage. The conclusion that follows is that both the plaintiff and defendant were proceeding under the mistaken belief that the vehicles existed and it was a mistake committed by both parties. The insurance company could also have discovered the truth on enquiry. It is significant in this connection to note that the defendant did not adduce any evidence at all. In Para.19 of the written statement it is stated: "In the event, the plaintiff is given a decree, the defendant is entitled to the commission given to the agent of the plaintiff K.C. Kurien, who acted as the agent of the defendant also. The defendant will be filing a petition under O. VIII-A of CPC to implead C.K. Kurien as additional defendant". Such a petition was never filed. C.K. Kurien was examined as PW.1. He has admitted that he was receiving commission from the insurance company. He was at the same time Manager of the plaintiff's company. Probably it is this factor which contributed to this deep plot where both plaintiff and defendant were cheated. I find that there was a mutual mistake of fact. C.K. Kurien was examined as PW.1. He has admitted that he was receiving commission from the insurance company. He was at the same time Manager of the plaintiff's company. Probably it is this factor which contributed to this deep plot where both plaintiff and defendant were cheated. I find that there was a mutual mistake of fact. S.20 of the Contract Act refers to agreements where both parties are under a mistake as to a matter of fact essential to the agreement. It is not affected by the negligence on the part of any of the parties. The only condition is that both parties must have been acting under a mistake of fact. Therefore, I am of the view that S.20 of the Act squarely applies to this case. Both parties were acting under a mistake as to the existence of the vehicles and the insurance company was not taking any risk under the contracts. Therefore, it is liable to return the money paid as premium for insuring the vehicles that did not exist. 18. Point No. 2: - On the question of limitation as rightly pointed out by the lower court, the fraud was discovered by plaintiff only on 19.10.1970 and the suit is within time. Another argument advanced was that the period for which the risk was covered should be the starting point. This argument cannot also be accepted. 19. In the result, the judgment and decree of the lower court are confirmed and the appeal is dismissed. The Cross objection is also dismissed. There will be no order as to costs.