S. Ranganatha Iyer vs The Indo Union Assurance Co., Ltd.

Kunhi Raman, J.—The plaintiff, in response to his application for the post, was appointed as Chief Agent of the defendant Insurance

Company for a period of 10 years commencing from the 2nd May, 1943. There was a stipulation in the contract of employment that a guarantee

should be given by the plaintiff in respect of the volume of work that he would secure. During the course of the plaintiff''s employment, there was

transfer of management of the defendant company to the

Prithvi Insurance Co., Ltd., who had purchased a number of shares of the defendant company. This was necessitated by the financial state of

the defendant. After the Prithvi Insurance Co. had thus obtained control of the defendant company, it was decided that the latter should run its

business as a ""closed fund"". As a consequence, notices were issued by the new management to all the agents and sub-agents of the defendant

company on the 30th November, 1943, asking them to stop taking new business from the 15th December, 1943, and also terminating the

agencies. A letter to that effect was sent to the plaintiff on the 3rd December, 1943, and in this the plaintiff was also offered an appointment in the

Prithvi Insurance Co., Ltd. He was not willing to accept this offer. He pleads that the termination of his service amounts to a breach of contract by

the defendant company. He brought this to the notice of the defendant company by his letter, dated 26th January, 1944, in which he claimed

compensation for wrongful termination of the contract of service. Thereupon, the defendant offered to keep the contract open and called upon the

plaintiff to fulfil his undertaking already given in respect of the volume of business to be acquired through his agency. The plaintiff states that since

the contract had been terminated before this letter was despatched, it was not open to the defendant to revive the contract with the alleged ulterior

motive of demonstrating that the plaintiff was in the wrong. He states that he was prevented from earning his remuneration as a result of the

unlawful conduct of the new management of the defendant company. According to him, had the contract been kept open and had he been

permitted to discharge his duty as chief agent, ""he would have earned Rs. 50,000, and this the defendant company has prevented him from earning.

He estimates the loss caused to him by reason of the breach of contract on the part of the defendant at Rs. 35,000. In the plaint, however, he has

claimed only Rs. 30,000 in respect of this part of the cause of action. He also alleges that he is entitled to have an account taken of the commission

already earned by him in the defendant company before his services were terminated. This, according to him, would amount to Rs. 1,000. He asks

for a decree for Rs. 31,000 or such other amount as may be fixed by this Court and for costs.

The defendant company raises the following pleas in its written statement. The valuation report of the defendant company made on the 23rd

December, 1942, disclosed a deficit of over Rs. 49,000. Thereupon, the Superintendent of Insurance intimated to the company that its account

showed that it was barely solvent and that therefore the interests of the policy holders would be in danger, unless fresh capital in cash was raised.

This advice was not acted upon, with the result that the Superintendent of Insurance threatened to take action u/s 53 of the Insurance Act, 1938.

At that stage, the Prithvi Insurance Co., Ltd., acquired a majority of shares of the defendant company. On making an examination of the affairs of

the defendant company, it was decided that the proper method of safeguarding the interests of the policy holders would be to run the business of

the defendant as a ""closed fund"". The Prithvi Insurance Company accordingly intimated to the Superintendent of Insurance of their decision. This

met with the approval of that officer and he consequently dropped taking further action against the company. The decision arrived at by the

defendant company to stop new business obviously meant drastic reduction in the agencies. The defendant pleads that the plaintiff''s contract of

employment does not imply any promise on the part of the defendant company that it would continue to transact fresh business. Such a term is not

in the contract and it would be quite inconsistent with the nature and scope of Insurance business. The defendant also pleads that the plaintiff was

not in a position, to fulfil the guarantee given by him and for that reason his agreement is liable to be terminated. Of the 14 agents appointed by the

plaintiff, only 5 did any work and the total premium income derived from the business secured by them fell short of the proportionate guaranteed

amount. In view of the financial condition of the defendant company, the plaintiff would not have Canvassed policies for the defendant to any

substantial extent. The defendant therefore denies liability to pay damages to the plaintiff and pleads also that the amount claimed is grossly

exaggerated. Dealing with the offer to appoint the plaintiff in the Prithvi Insurance Company, Ltd., the defendant pleads that had the plaintiff

accepted the offer, it would have brought him a higher income than what he could have earned under the suit contract. The defendant points out

that a number of its chief agents and agents had chosen to accept similar terms offered to them by the Prithvi Insurance Co., Ltd. With regard to

the sum of Rs. 1,000 claimed in the plaint as representing commission already earned by the plaintiff before his services were terminated, the

defendant pleads that had the plaintiff applied for payment of what was due to him, he would have got it without difficulty, but he had not chosen to

claim it until the suit was filed. On these pleadings the following issues were framed:

Has the defendant committed breach of the contract, dated 2nd May, 1943

To what damages, if any, is the plaintiff entitled?

To what reliefs are the parties entitled?

The plaintiff''s complaint is that since he was appointed as chief agent of the defendant company for a period of 10 years, the defendant was

bound to continue its business for that period and that the stopping of business by the defendant company after a majority of its shares were

acquired by the Prithvi Insurance Co. amounted to a breach of contract. The defendant''s answer to this contention is that on a proper construction

of its contract with the plaintiff, it cannot be contended that there was a duty imposed upon the defendant to continue its business for a period of

ten years to entitle the plaintiff to enjoy the benefit of his appointment. According to the defendant, the business of the company was stopped for

valid reasons as a result of criticism of its financial condition by the Superintendent of Insurance, who was competent to make that criticism on the

strength of the reports published by the defendant. The majority of the shares of the defendant was taken over by the Prithvi. The defendant thus

became a subsidiary company to the Prithvi. On a scrutiny of the financial condition of the defendant company, it was then felt that the proper

course to adopt would be to continue the defendant company as a ""closed fund"". The idea was that no fresh insurance business should be

accepted by the defendant, but that it should go on functioning only in respect of the insurance business which was already secured before it

became subsidiary to the Prithvi. This naturally meant stopping fresh work being done by the chief agents and agents. Such procedure, according

to the defendant, was legitimate and could not give the plaintiff a cause of action. It is also contended that after the plaintiff''s services were

determined by notice, the plaintiff was offered an equally profitable agency as chief agent of the Prithvi. From the point of view of the remuneration

which was likely to be earned by the plaintiff, this new appointment offered to him was as good as the appointment under the defendant company,

which was terminated by notice. Since the plaintiff did not choose to accept this offer, even if it is found that the defendant had committed a breach

of contract, the plaintiff would be entitled only to nominal damages.

The first question for determination turns upon the construction of the contract of chief agency between the plaintiff and the defendant. This

contract is to be found in two letters Exhibit P-l, dated 2nd May, 1943, which contains the terms of the appointment and Exhibit P-2, dated 3rd

May, 1943, which is the acceptance of those terms by the plaintiff. In Exhibit P-l, which was sent in response to plaintiff''s application for the post,

the defendant company informed the plaintiff that he was appointed chief agent from 15th April, 1943, subject to certain terms and conditions

enumerated in the letter. These authorised the plaintiff to engage agents, organisers, inspectors and superintendents for the purpose of securing

Insurance business within the whole of the Presidency of Madras, which was the area allotted to the plaintiff. Reference was then made to a

guarantee which was to be given by the Plaintiff in respect of the quantum of business to be secured by him year after year. The next clause

referred to the commission payable to the plaintiff on the business secured by him which was inclusive of the remuneration which he would have to

pay to his employees. The method of payment of the commission earned by the plaintiff was then referred to and incidentally reference was also

made to the doctor''s fees payable on examination of persons who send proposals for insurance to the defendant company. Clause 5 of the letter is

important and may be read in full. It is as follows:

The tenure of your appointment as chief agent shall be for a period of 10 years certain. You shall not be removed in the meanwhile for any reason

whatsoever except for reasons of fraud, misappropriation of funds or for your presentation of a petition for adjudication as an insolvent or failure to

fulfil the annual progressive guarantee of premium income.

It is not necessary to refer to the remaining clauses of this letter which deal with other details concerning the chief agency.

The question therefore is, What is the proper construction to be put upon Clause 5 of Exhibit P-l2 Since the plaintiff was informed that the

tenure of his appointment as chief agent would be for a period of;10 years certain, can he complain of a breach of contract because his services

were terminated before the expiry of this period? The fundamental principles involved in a case of this description arose for consideration in Shivlal

Mulchand v. Manlekji Mancherji I.L.R.(1929)54 Bom. 510. All the relevant English decisions, which may be regarded as leading cases on the

subject, are discussed in the judgments of the two learned judges who decided this case. In the judgment of the learned Chief Justice (Marten,

C.J.), reference is made to the rule of construction of a contract like the present. The following observations of Kay, L.J., in Hamlyn & Co. v.

Wood & Co. (1891) 2 Q.B. 488, are quoted:

I agree with the rule as laid down by the Master of the Rolls, vis., that the Court ought not to imply a term in a contract unless there arises from the

language of the contract itself, and the circumstances under which it is entered into, such an inference that the parties must have intended the

stipulation in question that the Court is necessarily driven to the conclusion that it must be implied. To state the rule in any wider terms would be

going, I think, beyond what is justifiable on principle.

The facts of that English case are then referred to. That was a case where the defendants who were brewers had agreed to sell all their grain to

the plaintiffs. Subsequently, the defendants sold their business and the question was whether they had committed a breach of the contract. It was

held that from the contract, a term could not be implied to the effect that the defendants would not by any voluntary act of their own prevent

themselves from continuing the sale of the grain to the plaintiff for the period mentioned in the contract.

Another English case which is referred to in the judgment of Blackwell, J., in the Bombay case is Lazarus v. Cairn Line of Steamships, Ltd.

(1912) 106 L.T. 378 Mr. Justice Scrutton in his judgment in that case summarised the principles that can be gathered from the leading English

cases on the point and two of the principles so laid down, which are relevant to the present case, are the following:

Where there is a principal subject-matter in the power of one of the parties, and an accessory or subordinate benefit arising by contract out of

its existence to the other party, the Court will not, in the absence of express words, imply a term that the subject-matter shall be kept in existence

merely in order to provide the subordinate or accessory benefit to the other party.

But where there is an express term requiting the continuance of the principal subject-matter or giving the plaintiff a right to a continuing benefit,

the Courts will not imply a condition that the plaintiff''s right in this respect shall cease on certain events not expressly provided for.

The question then is whether the facts of this case will bring it within the purview of the first or the second of these classes of cases; in other

words, was there an obligation on the part of the defendant to continue to carry on its business for ten years for the purpose of enabling the plaintiff

to earn his (Commission by discharging his duty as chief agent? If, for bona fide reasons, the defendant had of necessity to stop functioning actively

as an insurance company, can that give a cause of action to the plaintiff to claim damages for the reason that such conduct on the part of the

defendant deprived him of the benefit that he would otherwise have derived under the contract of chief agency? The relevant part of the contract

between the two parties has already been read. In that contract, there is no express stipulation to the effect that the defendant would continue to

carry on active business of the insurance company for the full period of ten years for which the plaintiff was appointed as chief agent.

Consequently, the ""decision of the defendant to function as a ""closed fund"" did not amount to breach of an express contract. The contract stated

that the plaintiff would hot be removed for any reason whatsoever except for reasons of fraud, misappropriation of funds, insolvency or failure to

fulfil the guarantee that he gave with regard to the quantum of business to be secured by him as chief agent. Can this part of the contract be

regarded as containing an implied term that the defendant undertook to carry on active business for the full period of ten years? On a careful

scrutiny of the contract as a whole and especially of the two relevant terms adverted to, the inference that can be drawn, in my view, is that the

whole contract depended upon the defendant being able to work as an active insurance company for ten years. There was no undertaking or

promise given by the defendant that the company would work for that period. If the company did not work for that period, but had to stop active

work for bona fide reasons, then the plaintiff cannot take the defendant to task and plead that a breach of contract was committed; in other words,

the case is covered by the observations of Kay, L.J., in Hamlyn & Co. v. Wood & Co. (1891) 2 Q.B. 488, in which the rule laid down by the

Master of the Rolls was adopted namely, that the Court ought not to imply a term in a contract unless there arises from the language of the contract

itself, and the circumstances under which it is entered into, such an inference that the parties must have intended the stipulation in question, that the

Court is necessarily driven to the conclusion that it must be implied. In my judgment, the circumstances and the facts of this case do not warrant

such a term and it cannot therefore be implied.

At first sight there seems to be an apparent conflict between the view taken in Rhodes v. Forwood (1876) 1 A.C. 256, the facts of which are

very similar to the present case and the decision in Turner v. Goldsmith (1891) 1 Q.B. 544, where the facts appear to be somewhat similar, but

where a different conclusion was arrived at. The distinction between the two cases was considered by Phillimore, J., in his judgment in Northey v.

Trevillion (1902) 7 Com. Cases. 201 where it was stated as follows:

The distinction seems to be that if it is a mere contract of agency with no service or. subordination, the Court will hold that there is no implied

contract that the agent is to be supplied with the means of earning his commission. If the contract is one of service then the commission is merely

intended to be instead of salary, and the contract cannot be determined without compensation.

This was adopted by Blackwell, J., in his judgment in the case reported in Shivlal Mulchand v. Manekji Mancherji I.L.R.(1929)54 Bom. 510. In

the present case, the terms of the, contract entered into between the plaintiff and the defendant indicate that there-was merely a contract of agency

and there was no ""service or subordination"". The plaintiff is a highly influential man who has shares in lucrative concerns and who is himself in very

affluent circumstances. Because of his status and financial condition, the defendant entered into a contract of agency with him,. There does not

appear to be any contract of service or subordination so far as the plaintiff is concerned. Therefore the facts of the present case are similar to the

facts in Rhodes v. Forwood (1876) 1 A.C. 256 and not those in Turner v. Goldsmith.(1891) 1 Q.B. 544

The reason why the Prithvi Insurance Co. was approached for purchasing a large number of shares in the defendant company has been clearly

explained in the evidence of the witnesses examined on behalf of the defendant. The Superintendent of Insurance, on a scrutiny of the report of

progress of the defendant company, had valid reasons for objecting to its continuing to do active business as before. Certain courses were

suggested by him. The defendant company approached the United India Life Assurance Co. The latter company, on taking expert advice, was not

willing to take it up. Then the Prithvi Insurance Co. came to the relief of the defendant company and took over a large number of shares which

reduced the defendant company to the position of a subsidiary company to the Prithvi Insurance Co. The evidence of D.W. 1, T.S. Swaminathan

who has got technical qualifications to pronounce an opinion on the subject, is that he was consulted and that it was he who advised the Prithvi

Insurance Company to run the defendant company as a ""closed fund."" He also said that he did not advise the United India Insurance Co. to take

up the defendant company. The evidence shows that in November, 1943, there was a deficit of Rs. 49,000 and the decision reached by the Prithvi

Insurance Company after taking expert opinion was to adopt the course already referred to. It is stated on behalf of the defendant company that

even now the plaintiff will be getting his commission earned on insurance already effected by him, as and when the insured pay their premiums. It

was decided that no fresh insurance business should be transacted. The evidence shows clearly that the decision to run the defendant company as

a ""closed fund"" was taken after obtaining the opinion of qualified experts, that it was a bona fide decision and not one made with the sinister object

of bringing an unfair advantage to the Prithvi Insurance Co., or of putting the plaintiff to any loss. 1st issue: In view of these circumstances, my

finding on the first issue is in the negative.

2nd issue: The next question is about damages. On my finding on the first issue, the plaintiff is not entitled to any damages, but the question as

to whether there are other circumstances which would disentitle the plaintiff to damages even if it is assumed that the defendant had committed a

breach of contract, must now be considered. The Prithvi Insurance Co. made offers to all the agents working for the defendant company, similar

agencies in that company. Most of them accepted. But the plaintiff refused the offer. The offer was to pay him commission at the rate of 7 1/2 per

cent, on the business secured. The plaintiff''s learned advocate states that under the plaintiff''s agreement with the defendant company, he was

entitled to commission at 10 per cent, on the renewal policies, and he therefore states that he was not offered equally advantageous terms by the

Prithvi Insurance Co. But what is urged on behalf of the Prithvi Insurance Company is that it is a more successful company than the defendant

company and that there is a possibility of a larger volume of business being secured by an agent of the Prithvi Insurance Company than by an agent

of the defendant company. Thus, the plaintiff would not have sustained any detriment whatsoever; on the other hand he would have been benefited

had he accepted the agency of the Prithvi Insurance Company. There is certainly a difference in the rate of commission offered to the plaintiff; it

was 2 1/2 per cent, lower than the rate of commission that he was entitled to under his contract with the defendant company. But that will be a

minor factor. There is substance in the defendant''s advocate''s contention that the damages to which the plaintiff will be entitled will in any event be

nominal. But in view of my finding on the first issue, my finding on the second issue is that the plaintiff is not entitled to any damages.

There remains only one other minor point for consideration. The plaintiff has claimed Rs. 1,000 as the amount of commission earned by him

before the defendant decided to run its business as a ""closed fund"". On this point the evidence is that in response to the claim of the plaintiff, the

defendant sent a statement showing a lower amount (Rs. 326-10-0). But the plaintiff has not yet scrutinised that statement nor has he replied

admitting or denying the correctness of the figure mentioned in Exhibit D. 3. In the circumstances, in the interests of both the parties the point about

the actual amount payable to the plaintiff in respect of this item is left open. But the defendant has admitted clearly that the plaintiff is in any event

entitled to commission earned by him in respect of business already secured by him and to renewal commission in future in respect of that business.

The parties have not yet come to an agreement as to the exact amount that is payable to the plaintiff. That is a matter that parties agree to look into

and decide for themselves, and if the plaintiff is entitled to an amount higher than what is conceded by the defendant, it is open to him to claim it.

Since the plaintiff has substantially failed in this action the suit is dismissed with costs.