Delhi High Court
Ecgc Ltd (Formerly Known As Export … vs M/S Invention India (Exports) Pvt. Ltd on 14 July, 2025
Author: Vibhu Bakhru
Bench: Vibhu Bakhru
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Judgement delivered on: 14.07.2025
+ RFA(COMM) 256/2024 & CM APPL. 38351/2024
ECGC LTD (FORMERLY KNOWN AS EXPORT CREDIT
GUARANTEE CORPORATION LTD.) .....Appellant
versus
M/S INVENTION INDIA (EXPORTS) PVT. LTD. .....Respondent
Advocates who appeared in this case
For the Appellant : Mr Anand Prakash, Advocate.
For the Respondent : Mr Naresh Thanai, Ms Khushboo Singh,
Advocates.
CORAM:
HON'BLE MR. JUSTICE VIBHU BAKHRU
HON'BLE MR. JUSTICE TEJAS KARIA
JUDGMENT
TEJAS KARIA, J
1. The present Appeal has been filed under Section 96 of Code of Civil
Procedure, 1908 (“CPC“) against the judgment dated 25.04.2024
(“impugned judgment”) in CS(COMM) No. 934 of 2022 (“Suit”) filed by
the Respondent against the Appellant before the District Judge (Commercial
Court), North-West District, Rohini Courts, Delhi (“Commercial Court”).
2. Vide the impugned judgment, the learned Commercial Court allowed
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Signed By:NEELAM
SHARMA
Signing Date:14.07.2025
17:38:31
the Suit of the Respondent and passed a decree against the Appellant for
₹77,32,749.43/- alongwith pendente lite and future interest @ 18% per
annum with effect from 01.03.2022 till realisation thereof. In addition, the
learned Commercial Court also awarded costs as well as counsel‟s fee
quantified as ₹51,000/- in favour of the Respondent.
3. Being aggrieved by the impugned judgment, the Appellant has
preferred the present Appeal.
FACTUAL BACKGROUND
4. The Appellant is a Government of India owned export credit agency
and provides export credit insurance services to Indian exporters and Banks
to boost and meet the requirements of export businesses.
5. The Respondent is a company incorporated in India and engaged in
the business of export of garments. The Respondent availed “Buyer
Exposure Policy” dated 10.07.2018 against the premium of ₹94,500/- for the
period 03.07.2018 to 02.07.2019 (“Policy”) with respect to four purchase
orders dated 08.03.2019 received from M/S Morrison Super Markets PLC
(“MS”).
6. The Policy was renewed against a premium of ₹89,775/- on
17.07.2019 for a period from 03.07.2019 to 02.07.2020. At the time of
renewal of the Policy, the maximum liability was restricted to ₹70,00,000/-
which was subsequently revised / enhanced to ₹1,30,00,000/- vide letter
dated 22.07.2019 issued by the Appellant against the additional premium of
₹76,950/-.
7. The Respondent manufactured the goods and supplied to MS pursuant
to the purchase orders and raised eight invoices amounting to £184,264.08
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Signed By:NEELAM
SHARMA
Signing Date:14.07.2025
17:38:31
for the same. As per the terms and conditions of the purchase orders, the
payment was to be received by the Respondent within 60 (sixty) days from
the shipment of the goods. The first payment became due on 01.09.2019.
8. As per the terms of the Policy, the Respondent could avail the benefit
of the Policy only if the Respondent complied with all the terms and
conditions of the Policy. As per the terms of the Policy, the Respondent was
under an obligation to report any default of payment that remained overdue
for more than thirty days by the 15th of the subsequent month.
9. The Respondent submitted the Report of Default (“ROD”) on
30.11.2019 and informed the Appellant of the amounts due against the eight
shipments sent by the Respondent to MS starting from 03.07.2019 till
08.08.2019.
10. According to the Appellant, the ROD was submitted with a delay of
15 days, which resulted in non-compliance of the Policy conditions. In view
of the ROD, the Appellant placed MS in the Buyers‟ Specific Approval List
(“BSAL”), which is a caution-list maintained by the Appellant for internal
underwriting purposes.
11. On 08.01.2020, MS sent an Email to the Respondent wherein certain
defects were pointed out in the goods on account of which the payment of
the Respondent had been withheld by MS. From 30.11.2019 till March,
2020, the Respondent and MS exchanged various Emails to negotiate and
resolve the dispute with regard to the defect in the goods and the outstanding
payments. On 10.01.2020 and 19.02.2020, MS sent Emails to the
Respondent offering de-branding and resale of the bad quality products and
further made a claim of £1,51,963.74 due to losses suffered by MS. The said
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Signed By:NEELAM
SHARMA
Signing Date:14.07.2025
17:38:31
negotiations were intimated to the Appellant. However, no tangible result
could be achieved for resolving the said dispute.
12. Accordingly, the Respondent submitted its claim to the Appellant with
requisite documents on 23.03.2020. However, vide letter dated 24.07.2020,
the Appellant rejected / repudiated the claim of the Respondent due to the
reason that MS had raised counter-claim of £1,51,963.74 on account of
supply of bad quality of goods. Therefore, there was an “unresolved dispute”
under Part III (Exclusions), Clause 3(b) of the Policy and the liability of the
Appellant was excluded. The other reason given for rejection / repudiation
was that there was a delay in submission of the ROD.
13. The Respondent made a representation dated 31.07.2020, which was
received on 05.08.2020, stating that the reasons assigned in the repudiation
letter rejecting the claim of the Respondent were not sustainable as the
correspondence exchanged between the Respondent and MS was duly
brought to the notice of the Appellant, which clearly established that the
goods were manufactured as per the specifications and various tests at
different stages were conducted. The allegations leveled by MS were
baseless and misconceived. As regards the delay of 15 days in filing ROD,
the same was immaterial as the default by MS was within the knowledge of
the Appellant and did not cause any prejudice.
14. On 04.09.2020, the Respondent and MS arrived at a settlement
agreement resolving the differences between them whereby MS agreed to
pay £92,317 against the total outstanding of £1,84,264.08 (“Settlement
Agreement”), which was agreed upon by the Respondent, without any
intimation to the Appellant to minimize its losses.
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Signed By:NEELAM
SHARMA
Signing Date:14.07.2025
17:38:31
15. On 16.09.2020, the Respondent sent an email to the Appellant
informing that MS and the Respondent had arrived at an amicable settlement
of the dispute and the Respondent withdrew the complaint regarding MS and
the non-payment of its invoices. It was confirmed by the Respondent that the
matter has been resolved to its satisfaction and MS be removed from any
blacklist and restrictions preventing the Appellant from supporting supply to
MS.
16. Pursuant to the Settlement Agreement, the Respondent received
£92,317 from MS and for the balance amount of £91,947.08, the Respondent
issued a legal notice dated 28.01.2022 calling upon the Appellant to make
payment of ₹77,32,749.43/- at the conversion rate of ₹84.10/- for £1 within
a period of four weeks from the receipt of the notice.
17. The Appellant vide interim reply dated 31.01.2022 informed the
Respondent that the matter was being looked into and the Appellant would
revert shortly. On 17.02.2022, the Appellant sent detailed reply to the legal
notice received from the Respondent denying the contents of the same and
reiterating that the claim of the Respondent was rightly repudiated. It was
stated in the reply that the Policy categorically stated in Part III, Clause 3(b)
that the Appellant shall not be liable for any losses where there was an
unresolved dispute and the very fact that there was an amicable settlement
between the Respondent and MS established that there existed an unresolved
dispute. Accordingly, the Respondent was not entitled to any claim from the
Appellant as the goods supplied had quality issues because of which the
Respondent agreed for an amicable settlement and confirmed that the matter
had been resolved between the Respondent and MS to the satisfaction of the
Respondent. It was clarified that MS was not blacklisted but placed in BSAL
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Signed By:NEELAM
SHARMA
Signing Date:14.07.2025
17:38:31
for internal underwriting reference and was removed after the matter having
been resolved to the satisfaction of the Respondent. Therefore, the
Respondent was estopped from claiming any amount from the Appellant as
vide Email dated 16.09.2020, the Respondent had withdrawn all claims on
MS pursuant to which the name of MS was removed from the BSAL.
Accordingly, the Appellant denied the liability to indemnify the Respondent
for any amount whatsoever.
18. On 13.05.2022, the Respondent approached the Appellant for pre-
institution mediation, however, as the claim had been withdrawn, the
Appellant did not provide the consent to participate in the process of pre-
institution mediation. A non-starter report was submitted on 04.06.2022 and
the Suit was filed on 16.12.2022 claiming recovery of ₹89,92,653.43/-
alongwith pendente lite and future interest @ 18% per annum.
19. The Appellant in its written statement, inter alia, made a preliminary
objection that the Suit was bad for non-joinder of MS. The Appellant stated
that there was a violation of the essential terms and conditions of the Policy
and, as such, the claim of the Respondent was repudiated as there existed an
unresolved dispute between the Respondent and MS and thereafter, the
Respondent had withdrawn the claim against MS after the settlement of the
matter. Additionally, ROD was submitted with a delay of 15 days which was
in non-compliance of the terms and conditions of the Policy by the
Respondent.
20. After examining the documentary and oral evidence submitted by the
parties, the learned Commercial Court decreed the Suit vide impugned
judgment holding as under:
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Signed By:NEELAM
SHARMA
Signing Date:14.07.2025
17:38:31
a. MS was not a necessary or a proper party in the Suit as the
subject matter of the Suit was not the quality or otherwise of
the goods supplied by the Respondent to MS as the same was
under a different contract between the Respondent and MS. As
the dispute between the Respondent and MS was amicably
resolved and the Suit is for the remaining amount of goods
which was not included in the settlement between the
Respondent and MS, it was not necessary to join MS as a
defendant in the Suit.
b. There was no delay in sending the ROD as the Branch Manager
of the Appellant, who used to deal with the Respondent, was
informed and the ROD was sent as per his instructions in
furtherance of the discussions / advice by the said Branch
Manager of the Appellant, who was aware of the defaults.
Further, the requirement of ROD was a collateral condition.
Hence, the delay in ROD as ground for repudiation of the claim
of the Respondent was not sustainable in law.
c. Interpretation of Clause 3(b) of the Policy providing for
“Exclusions” by the Appellant was misconceived as it has to be
read to mean that if there was any other dispute at the time of
taking the Policy or at the time of making the claim, besides the
purchase orders secured by way of Policy, and it being
unresolved, the Appellant will have no liability. The clause
cannot be read to mean that the dispute in respect to the
purchase orders covered under the Policy and cannot be used
for denying the claim in respect to the said purchase orders.
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Signed By:NEELAM
SHARMA
Signing Date:14.07.2025
17:38:31
d. As regards the withdrawal of the claim vide Email dated
16.09.2020 by the Respondent pursuant to the settlement of
dispute with MS, it was the complaint which was withdrawn by
the Respondent and not the claim.
e. The Policy requires the Respondent to take practicable
measures available to prevent or minimize any loss in respect
of the exports. The Respondent negotiated and amicably settled
with MS, which appeared to be a bona fide settlement. By
entering into the settlement, the Respondent saved the cost of
litigation and reduced the loss which would have been caused
to the Appellant, which was prudent on part of the Respondent.
f. Accordingly, the Appellant was held to be liable for the amount
claimed by the Respondent.
21. Being aggrieved by the impugned judgment, the Appellant has
preferred the present Appeal.
SUBMISSIONS BY THE APPELLANT:
22. The learned counsel for the Appellant has submitted that the learned
Commercial Court has erroneously allowed the Suit without considering the
evidence at hand and the oral testimony of the witnesses of the Appellant
and the Respondent.
23. It was further submitted that the Respondent could avail the benefit of
the Policy only if the Respondent complied with all the terms and conditions
of the Policy. The learned Commercial Court failed to appreciate the fact
that the respondent miserably failed to comply with the terms of the Policy.
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Signed By:NEELAM
SHARMA
Signing Date:14.07.2025
17:38:31
24. It was further submitted that the Policy covered only three categories
of Buyer Risks: (i) Protracted Default; (ii) Insolvency; and (iii) Contract
Repudiation. These insured perils were subject to exclusions, inter alia, of
any „unresolved dispute‟ between the Respondent and MS. Upon receipt of
the ROD, the Appellant vide Email dated 13.12.2019 enquired from MS the
reason for the default and the payment schedule. MS in response informed
the Appellant about the quality disputes. Through a series of
communications between the Respondent and MS, it was established that
there was an ongoing unresolved quality dispute between them.
25. It was further submitted by the learned counsel for the Appellant that
the Settlement Agreement entered into between the Respondent and MS was
without any intimation to the Appellant and the same was shared for the first
time alongwith the Suit. The mere existence of a settlement agreement
established that there was a dispute between the Respondent and MS, which
excluded the liability of the Appellant in terms of Part III, Clause 3(b) of the
Policy.
26. It was submitted that MS made the payment of £92,317 to the
Respondent in terms of the Settlement Agreement and the remaining
payment was not remitted by MS on account of quality issues. The Policy
did not cover the liability for inferior quality of goods supplied by the
Respondent as otherwise, it will lead to scenarios where exporters will
supply inferior goods to the overseas buyers to reduce their expenses and
then claim the amount disputed by the buyers from the Appellant and make
profits on the insurance transaction.
27. The learned counsel for the Appellant submitted that the learned
Commercial Court failed to appreciate that the Respondent submitted the
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Signed By:NEELAM
SHARMA
Signing Date:14.07.2025
17:38:31
ROD with a delay of 15 days. This delay in reporting amounted to non-
compliance of the terms of the Policy.
28. It was submitted by the learned counsel for the Appellant that despite
the quality issues raised by MS, the Respondent filed its claim with
Appellant on 23.03.2020 and the same was rejected by the Appellant on the
ground of „unresolved dispute‟ of quality and delayed ROD vide letter of
repudiation dated 24.07.2020.
29. It was further submitted that the Respondent vide email dated
16.09.2020 withdrew its complaint against MS and confirmed that the
matter has been resolved to the satisfaction of the Respondent and requested
that name of MS be removed from BSAL. The said email dated 16.09.2020
shows that the matter was resolved with MS and, therefore, the Respondent
was not entitled to take contradictory stand by alleging that the quality issue
raised by MS was baseless as otherwise the Respondent would not have
requested the Appellant to remove the name of MS from BSAL.
30. It was further submitted that the Respondent has received the amount
from MS for the goods supplied and there is no cause to file claim with the
Appellant. It was further submitted that none of the insured perils are
triggered and, thus, the Policy cannot be invoked.
31. The learned counsel for the Appellant referred to Recital A of the
Settlement Agreement to submit that it is admitted by the Respondent that a
dispute had arisen between the Respondent and MS relating to the safety and
quality of the garments supplied by the Respondent. It was further submitted
that Settlement Agreement records that MS believed that the garments did
not comply with the agreed specifications and / or with the contractual terms
agreed with the Respondent. It also records that MS had refused to pay the
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Signed By:NEELAM
SHARMA
Signing Date:14.07.2025
17:38:31
Respondent for the supplied garments. In view of the same, it is clear that
the dispute had arisen between the Respondent and MS.
32. The learned counsel for the Appellant further relied upon Clause 3 of
the Settlement Agreement to submit that it records that there was full and
final settlement and the Respondent had released and forever discharged MS
and agreed to not take any action or raise any claim, demands or set-offs
against MS. It was submitted by the learned counsel for the Appellant that in
view of the Settlement Agreement, the demand raised by the Respondent
vide legal notice dated 28.01.2022 demanding ₹77,32,749.32/- from the
Appellant was baseless.
33. It was further submitted by the learned counsel for the Appellant that
the claim of the Respondent was rightly repudiated by the Appellant as the
Respondent had admitted to unresolved disputes by calling the counter-
claim by MS a threatening technique. Further, the Settlement Agreement
was entered into without any consultation with or information to the
Appellant and in collusion with MS. The Appellant became aware of the
Settlement Agreement only when the Suit was initiated by the Respondent
against the Appellant.
34. It was submitted that MS was a necessary and proper party to the Suit
and the learned Commercial Court erred in holding that Suit was
maintainable without joinder of MS as a party, as MS was not made a party
even though it was required to establish the facts about the quality of the
garments and the negotiations between the Respondent and MS. In view of
the same, the learned counsel for the Appellant submitted that the impugned
judgment is liable to be set aside on the sole ground of non-joinder of a
necessary party.
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Signed By:NEELAM
SHARMA
Signing Date:14.07.2025
17:38:31
35. The learned counsel for the Appellant submitted that the learned
Commercial Court erred in holding that there was no delay in submission of
the ROD as the Appellant was informed of the default. The learned
Commercial Court wrongly held that mere verbal information to one officer
of the Appellant would dilute the requirement of timely filing of ROD in the
prescribed format. The impugned judgement failed to appreciate that the
delay in filing of ROD was a material breach of the Policy as ROD was
delayed by 15 days, which was a substantial delay sufficient to repudiate the
claim of the Respondent by the Appellant.
36. It was further submitted by the learned counsel for the Appellant that
the learned Commercial Court noted the admission on the part of the
Respondent that there existed an unresolved dispute between the Respondent
and MS and, therefore, Part III Clause 3(b) of the Policy excluded the
liability of the Appellant. Once the claim was withdrawn after the settlement
was reached between the Respondent and MS, the Respondent was not
entitled to raise any subsequent demand after two years of withdrawing its
claim as there was no liability of the Appellant to honour such a claim.
37. It was further submitted that the learned Commercial Court erred in
observing that “MS had also raised a fictitious counter claim in order to
avoid making due payment” as, if the counter-claim by MS was fictitious
then the Respondent would not have accepted a much lesser amount of
£92,317 as against the original due amount of £1,84,264.08. By its own
conduct, the Respondent had accepted lesser amount without any prior
approval or consultation with the Appellant by „amicably‟ resolving the
dispute, which establishes that MS did not default in the payment as the
lesser amount was accepted to fully satisfy the claim of the Respondent. The
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Signed By:NEELAM
SHARMA
Signing Date:14.07.2025
17:38:31
decision to accept a lesser amount was taken by the Respondent on its own
and it did not entitle the Respondent to claim the balance amount as part of
the insured perils under the Policy.
38. The Respondent‟s subsequent demand for the balance amount from
the Appellant made after two years of withdrawing its claim was baseless
and an afterthought. It was submitted that the Respondent cannot be allowed
to blow hot and cold, approbate and reprobate. The Settlement Agreement
rules out any Protracted Default of the Buyer. It was also submitted that the
learned Commercial Court has wrongly observed that the Settlement
Agreement was brought to the notice of the Appellant as the same is not true
and the Appellant became aware of the contents of the Settlement
Agreement only when the Suit was filed by the Respondent.
39. It was submitted by the learned counsel for the Appellant that the
learned Commercial Court wrongly observed that the signing of the
Settlement Agreement was to minimize the loss. By no stretch of
imagination, entering into a settlement agreement whereby the Appellant
was required to remove the name of the Buyer from BSAL can be termed as
minimizing the loss.
40. It was further submitted that the learned Commercial Court erred in
concluding that there was no „unresolved dispute‟. Admittedly, the non-
payment by MS was due to an unresolved dispute between the Respondent
and the Insured Buyer. The Respondent had alleged that non-payment was
due to Protracted Default of the Insured Buyer. However, when the
settlement was entered between the Respondent and MS, there cannot be a
Protracted Default of the Insured Buyer. Hence, the risk insured of
Protracted Default under the Policy did not remain in existence.
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Signed By:NEELAM
SHARMA
Signing Date:14.07.2025
17:38:31
41. The learned counsel for the Appellant submitted that the impugned
judgment wrongly holds that the Respondent withdrew its complaint and not
the claim. It was submitted that the Appellant was not an authority to deal
with complaint against the Buyer. The Appellant had a limited role to either
pay or reject the claim as per the strict and well-defined terms and
conditions of the Policy. The distinction between complaint and claim
carved out by the learned Commercial Court was totally erroneous. The
email dated 16.09.2020 clearly mentions that the claim was withdrawn by
the Respondent and, therefore, there was no pending claim of the
Respondent with the Appellant. The Respondent was estopped from taking a
contradictory stand as once the Respondent got the name of the Buyer
removed, it cannot make a claim to the Appellant. The Respondent has
waived its right against the Appellant in view of the settlement of the
payment dispute with the Buyer.
42. The learned counsel for the Appellant submitted that the impugned
judgment has wrongly interpreted Part III Clause 3(b) of the Policy to hold
that „unresolved dispute‟ would mean that the dispute in respect of the
purchase order covered under the Policy shall be excluded for denying the
claim in respect of the purchase orders covered under the Policy. It was
submitted that the Policy was a contract of indemnification and the
Respondent was entitled to claim only in case of occurrence of loss provided
the Respondent strictly complied with all the terms and conditions of the
Policy. It was submitted that the Policy is based on the concept of uberrimae
fidei.
43. The learned counsel for the Appellant relied upon Section 124 of the
Indian Contract Act, 1872, which provides as under:
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Signed By:NEELAM
SHARMA
Signing Date:14.07.2025
17:38:31
“124. “Contract of indemnity” defined.– A contract by which one
party promises to save the other from loss caused to him by the
conduct of the promisor himself, or by the conduct of any other
person, is called a “contract of indemnity”.”
44. In view of the above, it was submitted that the Policy was a contract
by which the Appellant had promised to indemnify the Respondent from the
loss caused to the Respondent. In the present case, there was no occurrence
of loss in view of the Settlement Agreement and, therefore, the Appellant
was not liable to indemnify the Respondent.
45. The learned counsel for the Appellant relied upon the decisions of the
National Consumer Disputes Redressal Commission, New Delhi
(“NCDRC”) in the cases of M/S International Corporation v. Export
Credit Guarantee Corporation of India Ltd. [First Appeal No. 596 of
2012]; M/S Galundia Textiles Pvt. Ltd. v. E.C.G.C. Ltd. [First Appeal No.
2015 of 2017] and ECGC of India Ltd. v. Blossom Grocery & Foods India
Pvt. Ltd. [First Appeal No. 2344 of 2019], which have interpreted the terms
of the policies issued by the Appellant that are similar to Part III Clause 3(b)
of the Policy. It is held by the learned NCDRC that when there were
unresolved disputes between the policyholder and the insured buyer, the
Appellant was not held to be liable to reimburse the Complainant for the loss
alleged to have suffered by it. The learned NCDRC has held that if the cause
of non-payment was unresolved disputes between the policy holder and the
buyer, it was immaterial whether the goods were actually defective or not. It
was further held that once the buyer took the position that the goods were
defective and the policyholder did not accept the stand taken by the buyer,
the issue with respect to the quality of the goods exported had arisen and
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Signed By:NEELAM
SHARMA
Signing Date:14.07.2025
17:38:31
that issue having remained unresolved, the reimbursement in terms of the
policy was not available to the policyholder.
46. In view of the above, the learned counsel for the Appellant submitted
that the Appellant was not liable under the terms of the Policy and prayed
that the present Appeal be allowed by setting aside the impugned judgment
passed by the learned Commercial Court in the Suit.
SUBMISSIONS BY THE RESPONDENT:
47. The learned counsel for the Respondent submitted that the learned
Commercial Court has passed the impugned judgment within the four
corners of law, after appreciating all the contentions raised by the parties and
the documentary evidence and oral testimony placed by the parties and no
ground has been made out which warrants interference by this Court.
48. The learned counsel for the Respondent submitted that the
Respondent had informed the officer of the Appellant about the defaults by
MS and after the discussion with the said officer of the Appellant, the ROD
was submitted on 30.11.2019. The same was admitted by DW-1 in his cross-
examination. Therefore, there was no delay in submitting the ROD. Even
otherwise, no prejudice was caused to the Appellant because of any such
delay. Further, after the ROD, the Appellant wrote an email to MS and
enquired about the default in making payment. The Appellant did not inform
the Respondent that there was any delay in ROD. Therefore, the Appellant is
not entitled to assail the impugned judgment on the ground of delay in
submission of the ROD.
49. It was further submitted by the learned counsel for the Respondent
that the rejection of claim on the ground of „unresolved dispute‟ between the
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Signed By:NEELAM
SHARMA
Signing Date:14.07.2025
17:38:31
Respondent and MS was misconceived. It was submitted that the said
Clause 3(b) has to be read to mean that there was any other dispute at the
time of taking policy or making claim, besides the purchase orders secured
by way of the Policy. If any such dispute was unresolved, the Appellant
would not have any liability. However, the Policy was taken for the purpose
of securing amounts of purchase order and the default in payment of the said
purchase orders cannot be said to be an unresolved dispute.
50. The learned counsel for the Respondent submitted that as per the
terms of the Policy, the Respondent was liable to take all practical measures
to prevent or minimize any loss and take all prudent and reasonable steps in
connection of that loss, which may have been incurred or is likely to be
incurred. As per the legal advice received by the Respondent, the
Respondent negotiated and accepted the reduced amount from MS. The
Settlement Agreement was entered into to reduce the loss as a prudent party.
51. It was submitted that the Respondent never withdrew its claim and the
email dated 16.09.2020 was only sent to have the name of MS removed
from the blacklist.
52. It was submitted that as the Policy was a separate, distinct and
independent contract between the Appellant and the Respondent and the
claim being in terms of the Policy, MS was neither a necessary nor a proper
party to the Suit.
53. The learned counsel for the Respondent placed reliance on the
judgment of the Division Bench of the Bombay High Court in Ramchandra
B. Loyalka v. Shapoorji N. Bhownagree 1940 SCCOnLine Bom 21,
wherein it was held that the contract of indemnity is different from the
contract of guarantee. It was further held that the contract of guarantee
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Signed By:NEELAM
SHARMA
Signing Date:14.07.2025
17:38:31
requires an additional / a third contract between the principal debtor and
surety whereby the principal debtor requests the surety to act as surety. The
surety has the right to seek recovery from the principal debtor. Unless the
third contract by which the principal debtor expressly or impliedly requests
the surety to act as surety is present, it is impossible to work out the rights
and liabilities of the surety under the Indian Contract Act, 1872. Section 145
of the Indian Contract Act provides that in every contract of guarantee, there
is an implied promise by the principal debtor to indemnify the surety. Unless
the principal debtor is privy to the contract of suretyship, a promise cannot
be implied by the principal debtor to indemnify the surety. The right of a
surety to call upon the principal debtor to discharge the debt of the creditor
which has become due, cannot be worked out, unless the principal debtor
has authorized the contract of suretyship. Unless the same has been done,
the surety is not in a position to compel the principal debtor to pay the debt.
In a contract of indemnity, the constituent does not know the guarantee
which was unascertained when the contract is made. The learned counsel for
the Respondent has relied upon the following paragraphs:
“It is I think true that a contract might fall within both those
definitions, but it is clear from s. 126 that a contract of guarantee
involves three parties, – the creditor, the surety and the principal
debtor -, and I agree with the view taken by the Madras High Court
in Periamanna Marakkayar v. Banians & Co that a contract of
guarantee involves a contract to which those parties are privy. Of
course, the contract need not be embodied in a single document, but
I think there must be a contract or contracts to which the three
parties referred to in s. 126 are privy. There must be a contract, first
of all, between the principal debtor and the creditor. That lays the
foundation for the whole transaction. Then there must be a contract
between the surety and the creditor, by which the surety guarantees
the debt, and no doubt the consideration for that contract may move
either from the creditor or from the principal debtor or both. But if
those are the only contracts, in my opinion, the case is one ofSignature Not Verified RFA(COMM) 256/2024 Page 18 of 36
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SHARMA
Signing Date:14.07.2025
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indemnity. In order to constitute a contract of guarantee there must
be a third contract, by which the principal debtor expressly or
impliedly requests the surety to act as surety. Unless that element is
present, it is impossible in my view to work out the rights and
liabilities of the surety under the Indian Contract Act. Section 145
provides that in every contract of guarantee there is an implied
promise by the principal debtor to indemnify the surety. It is
impossible to imply a promise by the principal debt or to indemnify
the surety, unless the principal debtor is privy to the contract of
suretyship. A promise cannot be implied against a stranger to the
transaction of guarantee. Again, the right of a surety to call upon the
principal debtor to discharge the debt of the creditor which has
become due,-a right which is referred to in Mulla’s note to s. 145 of
the Contract Act, and is illustrated by the English case there referred
to, Ascherson v. Tredegor Dry Cock and Wharf Company, Limited,
cannot be worked out, unless the principal debtor has authorised the
contract of suretyship. Unless he has done that, the surety is not in a
position to compel the principal debtor to pay the debt. In my view,
therefore, exhibit A is a contract of indemnity and not a contract of
guarantee; the principal debtors, namely the constituents introduced
by the plaintiff not only knew nothing of the alleged guarantee, but
were unascertained when the contract was made.
But even if I am wrong on that point, I feel no doubt whatever
that under exhibit B the plaintiff is liable to pay the whole amount of
Rs. 16,176 therein referred to. Exhibit B is, I should say, neither a
contract of guarantee nor a contract of indemnity. It is a contract to
pay an agreed sum ascertained, I will assume, as the amount due on
a contract of guarantee. I can see no answer on the part of the
plaintiff to a suit against him for payment of the agreed amount. No
doubt, had such a claim been made against him, he would have been
entitled to require the defendant to assign to him the debts covered
by his contract, and if the creditor had compromised some of those
debts without consulting the plaintiff, the plaintiff might have
challenged the compromise. But he would then have to show that he
had suffered loss by reason of the compromise, and that he has not
done. Prima facie under s. 135 of the Indian Contract Act and also
under the express terms of exhibit B, I am of opinion that the
defendant was entitled to compromise the claim. Exhibit B refers to
his giving credit to the plaintiff for whatever amount or amounts the
defendant realized from the named clients. I think that implies a
right to realize the amount in the ordinary course of business. ThereSignature Not Verified RFA(COMM) 256/2024 Page 19 of 36
Signed By:NEELAM
SHARMA
Signing Date:14.07.2025
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is no suggestion here of any collusion or imprudent conduct in
arranging the compromise.
In my opinion, therefore, the defendant is entitled to claim as
against the plaintiff the amount due under exhibit B, less the sums
which he has actually received in respect of the debtors named in
that document, and that amount will have to be set off against
anything due to the plaintiff for sub-brokerage.”
54. In view of the above, the learned counsel for the Respondent
submitted that the Respondent was entitled to enter into the Settlement
Agreement as it had the right to realize the amount received under the
Settlement Agreement in the ordinary course of business. It was submitted
that there was no suggestion of any collusion or imprudent conduct in
arriving at the Settlement Agreement. Therefore, the Respondent was
entitled to claim against the Appellant the amount due to the Respondent
less the amount which the Respondent had actually received under the
Settlement Agreement.
55. The learned counsel for the Respondent has relied upon the decision
of the Madras High Court in case of Alla Venkataramanna v. Palacherla
Mangamma 1943 SCC OnLine Mad 254 to submit that it is a settled law
that a judgment obtained after bona fide contest against the party
indemnified in respect of the matter to which a contract of indemnity
applies, is conclusive against the indemnifier although the latter was not
party to it. This is because such judgment binds the indemnifier as res
judicata and because the claim against which the indemnification has been
promised, has been conclusively established against the party indemnified. It
was held that the indemnifier is bound by the settlement entered into
between the party indemnified and a third party, and is not entitled to
question the liability thereby established against the indemnifier.
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Signed By:NEELAM
SHARMA
Signing Date:14.07.2025
17:38:31
56. In view of the above, the learned counsel for the Respondent
submitted that the Appeal deserves to be dismissed as there is no infirmity
with the impugned judgment.
ANALYSIS AND FINDINGS:
57. In the present case, the core issue that requires consideration is
whether the Appellant is liable under the Policy in view of the Settlement
Agreement entered into between the Respondent and the Buyer to amicably
resolve all the disputes by full and final settlement and releasing and
discharging the Buyer from any actions, claims, rights, demands and set-offs
without admission of any liability either by the Respondent or the Buyer.
58. The relevant clauses of the Policy are as under:
“PART-I INSURED PERILS
(a) Buyer risks:
i. Protracted Default;
ii. Insolvency; or
iii. Contract Repudiation.
PART-III EXCLUSIONS
(1) We shall not be liable for losses arising out of any shipment
despatched by you the Insured Buyer where under your contract of
export sale, payment of the invoice value of the goods sold by you is
to be received under a documentary letter of credit (LC) if –
(a) The LC opening bank has refused to make payment on the
documents sent by you under the LC citing discrepancy in
documents; OR
(b) In response to your requirement as stated in the Proposal, we
have excluded all such shipments from the purview of cover
under the Policy and shown as such in the Schedule;
(2) We shall not be liable for losses arising out of any of the insured
Perils that falls within the class of Insured Perils that is specified asSignature Not Verified RFA(COMM) 256/2024 Page 21 of 36
Signed By:NEELAM
SHARMA
Signing Date:14.07.2025
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excluded from the purview of cover under the Policy in the Schedule
in pursuance of your requirement as stated in the Proposal and
specified against ‘Excluded Class of Insured Perils’ in the Schedule;
(3) Unless we have agreed otherwise in writing, we shall not be
liable for any losses where:
(a) The buyer is one of your subsidiary or associated companies
or you have any direct or indirect interest in or connection with
the buyer other than that between a supplier and his customer;
or
(b) There is an unresolved dispute between you and the Insured
Buyer;”
59. In view of the above clauses, it is clear that the Appellant would be
liable only if there is (i) Protracted Default; (ii) Insolvency; or (iii) Contract
Repudiation by the Buyer. However, Part III Clause 3(b) of the Policy
provides for exclusions of the liability of the Appellant in case of there being
an unresolved dispute between the Respondent and the Insured Buyer.
60. The Respondent had submitted the ROD on 30.11.2019 for eight
invoices, under which the goods were supplied to MS by the Respondent.
Pursuant to the ROD, the Appellant on 13.12.2019 sent an email to MS
enquiring about the reason for delay / non-payment of the eight invoices
mentioned in the ROD and also seeking the payment schedule for the
exports made by the Respondent. In response, MS vide Email dated
20.12.2019 informed the Appellant that the payment was withheld as the
goods supplied by the Respondent were defective which posed a choking
hazard to young children. MS also informed that it has a counter-claim of
£151,963.74 against the Respondent. The Appellant forwarded the said
Email to the Respondent on 08.01.2020 informing that MS had raised a
dispute with regard to the overdue bills reported by the Respondent. The
Appellant sought comments of the Respondent on the same.
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Signed By:NEELAM
SHARMA
Signing Date:14.07.2025
17:38:31
61. On 14.01.2020, the Respondent informed the Appellant that the goods
were manufactured as per the agreed specifications of MS and the agent of
MS was in the factory premises to ensure that the product was as per the
agreed specifications. It was further stated that MS took a wrong decision of
recalling the goods without any notice to the Respondent. It was also
informed that the representative of the Respondent had visited MS and
checked the goods in front of the technician of MS and there was no
problem. The Respondent also forwarded a copy of the detailed reply given
by the Respondent to MS on 28.12.2019, to the Appellant alongwith the said
Email dated 14.01.2020. On 10.01.2020, MS sent an Email to the
Respondent providing the steps forward and the summary of losses suffered
by MS which was followed by an Email dated 19.02.2020 from MS to the
Respondent. On 23.03.2020 the Respondent submitted a claim form under
the Policy, claiming loss due to default of the Buyer. On 05.06.2020, MS
sent an Email to the Appellant providing the details of the product
investigation process and the serious nature of the complaint received by MS
with regard to the quality of the products supplied by the Respondent. The
Appellant vide letter dated 24.07.2020 repudiated the claim of the
Respondent on the ground that the Buyer had made counter-claim of
£1,51,963.74 due to quality of supplied material and, therefore, there was an
unresolved dispute between the Respondent and the Insured Buyer, which
entitled the Appellant to exclude its liability as per Part III Clause 3(b) of the
Policy. It was further stated that ROD was submitted with a delay of 15
days, which was in non-compliance of Clause 3(b) of the Policy.
62. In response, the Respondent made a representation dated 31.07.2020
explaining its position that the goods were manufactured as per the protocols
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Signed By:NEELAM
SHARMA
Signing Date:14.07.2025
17:38:31
shared by MS, in the presence of its agent. The goods were offered for third
party inspection and after sharing the reports with MS, the goods were
shipped by the Respondent. The payments were not contingent on the
decision of MS to sell or recall the goods as invoices became due for
payment once the goods were inspected, approved and accepted by MS.
63. On 16.09.2020, the Respondent informed the Appellant about an
amicable settlement between MS and the Respondent. The Respondent
withdrew the complaint against MS regarding the non-payment of the
invoices and confirmed that the matter was resolved to the satisfaction of the
Respondent. The Respondent also requested the Appellant to remove MS
from the blacklist.
64. The said email was sent by the Respondent to the Appellant pursuant
to the Settlement Agreement dated 04.09.2020 entered into between the
Respondent and MS. However, the said email did not contain the copy of the
Settlement Agreement. The Settlement Agreement which was filed
alongwith the Suit provides that the Respondent agreed to receive an amount
of £92,317 against the total outstanding amount of £184,264.08. The
Settlement Agreement also provided that the said amount of £92,317 was in
full and final settlement of the dues of MS and the Respondent released and
forever discharged MS of all and / or any actions, claims, rights, demands
and set-offs.
65. After a gap of almost 15 months, the Respondent issued a legal notice
to the Appellant making a claim of ₹77,32,749.43/- for the balance amount
after receipt of £92,317 from the total amount of £184,264.08. As the
Appellant refused the liability, the Respondent preferred the Suit, which
resulted into the impugned judgment.
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Signed By:NEELAM
SHARMA
Signing Date:14.07.2025
17:38:31
66. We have considered the impugned judgment, the documentary and
oral evidence considered by the learned Commercial court, grounds of
Appeal and the submissions made by the learned counsel for the parties.
67. Part III Clause 3(b) of the Policy provides for an exclusion of the
liability of the Appellant in cases where there is an unresolved dispute
between the Respondent and the Buyer. From the correspondence exchanged
between the Appellant, the Respondent and MS, it clearly shows that there
was a dispute with regard to the quality of the goods supplied by the
Respondent. At the time when the claim was repudiated, there was an
unresolved dispute between the Respondent and MS. In the representation
dated 31.07.2020, the Respondent sought to justify that the dispute was
misconceived, however, there was no denial with regard to existence of the
dispute between the Respondent and MS.
68. The Settlement Agreement clearly admits the existence of dispute
between the Respondent and MS that was amicably resolved in terms of the
Settlement Agreement. Pursuant to the Settlement Agreement, the
Respondent withdrew its complaint against MS in view of the settlement to
the satisfaction of the Respondent.
69. The claim made by the Respondent for the difference between the
amount for goods supplied and the amount received under the Settlement
Agreement under the terms of the Policy can be considered if the said claim
is termed as loss suffered by the Respondent even after entering the
Settlement Agreement voluntarily. It is the case of the Respondent that the
Settlement Agreement was entered into to reduce the loss. The Settlement
Agreement also provides that the settlement was full and final as regards the
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Signed By:NEELAM
SHARMA
Signing Date:14.07.2025
17:38:31
claim of the Respondent against MS and the Respondent had released MS
from any further claim or liability.
70. Although the Settlement Agreement mentions that neither the
Respondent nor MS had admitted any liability towards the quality issues, the
Settlement Agreement conclusively settles the dispute with regard to the
same. In view of the same, the right to recover the balance amount by the
Respondent from MS was extinguished by way of the Settlement
Agreement.
71. In the case of Economic Transport Organization vs. Charan Spg.
Mills (P) Ltd., (2010) 4 SCC 114, the Constitutional Bench of the Supreme
Court held as under:
“15. A contract of insurance is a contract of indemnity. The
loss/damage to the goods covered by a policy of insurance, may be
caused either due to an act for which the owner (assured) may not
have a remedy against any third party (as for example when the loss
is on account of an act of God) or due to a wrongful act of a third
party, for which he may have a remedy against such third party (as
for example where the loss is on account of negligence of the third
party). In both cases, the assured can obtain reimbursement of the
loss, from the insurer. In the first case, neither the assured, nor the
insurer can make any claim against any third party. But where the
damage is on account of negligence of a third party, the assured will
have the right to sue the wrongdoer for damages; and where the
assured has obtained the value of the goods lost from the insurer in
pursuance of the contract of insurance, the law of insurance
recognises as an equitable corollary of the principle of indemnity
that the rights and remedies of the assured against the wrongdoer
stand transferred to and vested in the insurer.
16. The equitable assignment of the rights and remedies of the
assured in favour of the insurer, implied in a contract of indemnity,
known as “subrogation”, is based on two basic principles of equity:
(a)No tortfeasor should escape liability for his wrong;
(b)No unjust enrichment for the injured, by recovery of
compensation for the same loss, from more than one source.
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Signed By:NEELAM
SHARMA
Signing Date:14.07.2025
17:38:31
The doctrine of subrogation will thus enable the insurer, to step into
the shoes of the assured, and enforce the rights and remedies
available to the assured.”
72. In view of the above it is clear that the insured can suffer a loss /
damage covered under a policy of insurance for which the insured either
may or may not have a remedy against any third party. In either case, the
insured can obtain reimbursement of the loss from the insurer. If insured did
not have remedy against third party, neither the insured nor the insurer can
make any claim against the third party. But when the damage is on account
of negligence of a third party, the insured will have the right to sue the
wrongdoer for damages and when the insured has recovered the losses from
the insurer, the right to sue is transferred to and vested in the insurer.
73. In the case of West of England Fire Insurance Company v. Isaacs
[1897] 1 QB 226 certain premises were insured against fire by two insurance
companies. Lord Esher held as under:
“In this case there were some premises insured against fire in
two insurance offices, and there has been a fire, and in respect
of that each of the offices has paid 100L. The question is
whether that state of things can stand. For the plaintiffs it is said
that the cases shew that that situation must be got rid of, and I
think it can be by the application of well-known principles.
The action is by one of the insurance companies, and the
plaintiffs do not say that they were not bound to pay on their
contract ; but they say that on their doing so any remedy which
the defendant bad against anybody in respect of the damage is
subrogated to them, and that the defendant had no right to deal
with such a claim to the prejudice of the plaintiffs. That
proposition is not disputed on behalf of the defendant. Did he,
then, deal with any rights he had against third parties? He had a
right against the person who was in the position of being the
lessor at that time arising out of a covenant in the lease that the
lessor would insure the premises against loss by fire, and expend
any money received under the insurance as far as might beSignature Not Verified RFA(COMM) 256/2024 Page 27 of 36
Signed By:NEELAM
SHARMA
Signing Date:14.07.2025
17:38:31
necessary in restoring the damage done by the fire. There was
some suggestion that there was no one whom the defendant
could have sued on that covenant ; but the position at the time of
the fire was that Jones had taken upon himself the fulfilment of
the covenant, and that the defendant had agreed to be tenant
upon these terms. The lessor was bound to endeavour to recover
from the Royal Insurance Company, and to spend any money
recovered in putting the premises to rights. If that had been done
before the present plaintiffs had been called on to pay, as they
were only bound to indemnify the defendant, they would not
have had to pay anything. They now say that, having paid under
their policy, they are entitled to the right which the defendant
had to insist that Jones should expend the money he had
received in repairing the damage done by the fire, and that they
ought to be in a position to force Jones to do this, or to recover
damages from him for his breach of covenant in not doing it.
Inasmuch as the damage by the fire was agreed at 100%, they
say that would be the amount of damages that they would have
been entitled to recover from Jones. The defendant has given up
this right of action against Jones, so that the plaintiffs can never
recover that amount, and the course taken by the defendant has
damaged the plaintiffs to that extent. The plaintiffs claim that
this gives them a right to recover that amount in their action.
That was the view taken by the learned judge; and it seems to me
that it is perfectly right, and in accordance with the law of
insurance. I think, therefore, that the plaintiffs were entitled to
succeed, and that the appeal should be dismissed.”
74. MacGILLIVRAY in Insurance Law Relating to All Risks other than
Marine (Fourth Edition, page 1700, 1701) states that:
“After a loss has occurred but before the insurers have made
payment, any release or settlement made by the assured with third
parties to the prejudice of the insurers will free the insurers from
liability upon the policy (x). The insurers are in the same position as
sureties where the creditor has released or given time to the
principal debtor (y). The assured is not, however, precluded in the
case of a doubtful claim from making a reasonable settlement for the
benefit of himself and the insurers, and such a settlement is no
defence to the assured’s claim on the policy.
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Signed By:NEELAM
SHARMA
Signing Date:14.07.2025
17:38:31
If the insurer desires to have the question of settlement in his own
hands he must either make an express condition to that effect, or pay
a full indemnity to the assured so as to become dominus litis. If the
assured does release a third party before payment has been made by
the insurers, the release is good and as effective against the insurer
as it would be against the assured (z). But where the release of the
third party was not made unconditionally, but subject to the express
condition that it should be without prejudice to the assured’s claim
against the insurers, it was held that the release was only operative
as between the assured and the third party, and that it did not
prevent the assured recovering from the insurers or the insurers
recovering by subrogation from the third party (a).”
75. The position related to the right of subrogation is explained by W.I.B.
Enright in Professional Indemnity Insurance Law, Sweet and Maxwell,
(page 729, 730) that subrogation is literally the substitute of one person for
another. Its effect is that the rights of the one party then attach to the
substituted other party. In terms of insurance law, the right of subrogation is
thus, the right by which the insurer is entitled to, and has transferred to it,
the rights of the insured by which its loss can be diminished. The said rights,
by which the insurer may diminish the loss, are rights acquired by
subrogation. While explaining it further, Enright has quoted the following
extract from the case of Castellion v Preston (1883) 11 Q.B.D. 380, which is
reproduced as under:
“…as between the [insurer] and the [insured], the [insurer] is
entitled to the advantage of every right of the [insured], whether
such right consists in contract, fulfilled or unfulfilled, or in remedy
for tort capable of being insisted on or already insisted on, or in any
other right, whether by way of condition or otherwise, legal or
equitable, which can be, or has been exercised or has accrued, and
whether such right could or could not be enforced by the insurer in
the name of the [insured] by the exercise or acquiring of which right
or condition the loss against which the [insured] is insured, can be,
or has been diminished.”
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Signed By:NEELAM
SHARMA
Signing Date:14.07.2025
17:38:31
76. In the present case, it is not disputed that the Respondent, before any
payment was made by the Appellant, entered into a Settlement
Agreement with the Buyer whereby the Respondent released the Buyer from
all claims, demands, and actions relating to the dispute. Clause 3.1 read with
Clause 4.1 of the Settlement Agreement make it clear that the Respondent
agreed, “on behalf of itself and on behalf of its Related Parties”, not to sue
or prosecute the Buyer. The effect of this clause being that the Appellant is
also barred from pursuing any recovery from the Buyer.
77. This release is further reinforced by the Respondent‟s email dated
16.09.2020, wherein it was communicated that the matter with the Buyer
had been resolved “to its satisfaction” and the complaint against the Buyer
was withdrawn. The Respondent also requested the Appellant to remove the
Buyer‟s name from the BSAL, which is a crucial risk-control mechanism.
78. The Respondent has argued that it acted in furtherance of the policy
requirement to take all practical measures to minimize the loss.
Minimization of loss, as contemplated under the Policy, cannot be stretched
to include acts that have the effect of compromising or extinguishing the
insurer‟s rights under the subrogation. Entering into a full and final
settlement that permanently bars any claim against the defaulting Buyer
cannot be said to be a measure of loss mitigation.
79. It may instead be termed a business compromise, made possibly to
preserve the ongoing commercial relationship. Be that as it may, once the
matter is fully and finally settled, even when a lesser amount is accepted
with respect to the claim, no further default exists under the Policy. Hence,
the Buyer had discharged its liability as per the Settlement Agreement.
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Signed By:NEELAM
SHARMA
Signing Date:14.07.2025
17:38:31
There is no evidence of consultation with the Appellant insurer regarding the
settlement of the Respondent‟s claims against the Buyer.
80. In United India Insurance Co. Ltd. v. Kantika Colour Lab (2010) 6
SCC 449, the Supreme Court emphasized that insurance policies being
contracts of indemnity, only entitle the insured to recover the actual loss
suffered. However, in the present case, the amount sought by the
Respondent does not stem from any loss due to the Settlement Agreement
arrived at between the Respondent and the Buyer. The concept of Protracted
Default under the Policy presupposes existence of a continuing failure to pay
by the Buyer. However, upon settlement, the loss as alleged, crystallized to
the reduced amount agreed upon, and no claim in the form of loss remains
for which the Appellant was liable to pay.
81. In Trustees of the Port of Madras v. Home Insurance Co., Ltd. 1967
SCC OnLine Mad 206, a Division Bench of the Madras High Court held as
under:
“Contracts of insurance are considered really as contracts of
indemnity and the principle of subrogation is applied to it being an
equitable arrangement incidental to all contracts of indemnity and
to payments on account of the indemnity. Subrogation is an equity
rule and the equity of subrogation arises as the assured has
concurrent remedies for relief from the loss against the person
responsible for the loss, say on contract or tort, and also against the
insurer on the contract of insurance, each independent of the other.
And equity will not permit the injured to be doubly compensated by
the insurer and the person liable for the loss. On payment to the
assured by the insurer in terms of his policy the doctrine of
subrogation steps in and vests in the insurer the rights the assured
has against the person who has caused the loss. He succeeds to all
the ways and means by which the assured may have reimbursed
himself for the loss from the person responsible for the loss. Arnould
in his classic on Marine Insurance (British Shipping Laws Vol. 10,
page 1193) states the position thus:
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Signed By:NEELAM
SHARMA
Signing Date:14.07.2025
17:38:31
“……it is entirely foreign to the spirit of contracts of indemnity
that a person damnified should recover his loss more than once;
it is, therefore, clear that if he has already recovered from a
third party, there can be no liability under the contract of
indemnity. On the other hand, if he has not previously recovered
from such third party, but has the right to do so, there is no
reason why such third party, should be allowed to allege that his
liability has been satisfied or reduced by a payment made by a
stranger to him, under a contract with which he has nothing to
do. The third party remains liable to the person indemnified just
as if there had been no contract of indemnity. But the person
indemnified can only take the sum recovered from the third
party as trustee for the indemnifier, and similarly, if he has not
himself received any sum to which he is entitled, he is bound to
afford the latter all facilities for doing so. In practice, the
commonest way in which the principle of subrogation is applied
to insurance, is for the insurer to pay the claim of the assured,
and then to institute proceedings in the name of the latter, but
for his own benefit, against the party ultimately liable”–Para.
1215.
In the Law of Insurance by Preston and Colinvaux, 2nd Edition, at
page 128 we find the position stated thus:
“The right of ‘subrogation’ rests upon the ground that the
insurer’s contract is in the nature of a contract of indemnity and
that he is therefore entitled, upon paying a sum for which others
are primarily liable to the assured, to be proportionately
subrogated to the right of action of the assured against them.”
In Macgillivray Insurance Law, 5th Edition, para. 1882 the learned
author points out that the right of subrogation is a corollary of the
general principle that insurance, is only a contract to indemnify the
assured, that the insurer’s right of subrogation arises whenever be
pays a loss for which he is liable under his policy, and that it arises
upon payment of a partial as well as upon payment of a total loss.
The learned author states in para. 1886:
“The legal right to compensation remains in the assured, and,
therefore unless there has been an express assignment of the
legal right, actions at law brought for the benefit of the insurer
are brought in the name of the assured, In Courts of Equity or ofSignature Not Verified RFA(COMM) 256/2024 Page 32 of 36
Signed By:NEELAM
SHARMA
Signing Date:14.07.2025
17:38:31
Admiralty the insurer has always been allowed to sue in his own
name.”
In Porter’s Laws of Insurance, 8th Edition, at page 232 the position
is stated thus:
“The insurer having contracted to indemnify, could not insist on
others being sued first who were primarily liable, or on
consolidation of his action with others by the same assured
against other insurers in respect of the same loss. The mere
payment of a loss by the insurer does not afford any defence to a
person whose fault has been the cause of the loss in an action
brought against the latter by the assured. But the insurer
acquired by such payment a corresponding right in any damages
recoverable by the assured against the wrongdoer or other party
responsible for the loss.”
At page 237, the learned author points out:
“An insurer suing the party through whose fault the loss
occurred can only assert the right of the assured, and will be
subject to any defences or equities which would be good against
him. The insurer stands in no relation of contract or privity with
such a party. His title arises out of the contract of insurance,
and is derived from the assured alone, and can only be enforced
in right of the latter. Thus, where damage occurred through
contributory negligence, that defence would be an answer to the
action of the subrogated insurer. Again, if two ships of the same
owner collided by the fault of one to the destruction of the other,
the insurer could not sue the owner, since they claim under
him.”
82. Once the Buyer was released through the Settlement Agreement,
the Respondent‟s right to sue the Buyer ceased, and resultantly,
the Appellant‟s subrogation rights were extinguished. As noted above, the
insurer‟s right of action is not independent as it flows through the insured.
The insurer can only sue in the name of the insured, and once that right is
barred by the insured itself, no remedy survives in favour of the insurer.
Signature Not Verified RFA(COMM) 256/2024 Page 33 of 36
Signed By:NEELAM
SHARMA
Signing Date:14.07.2025
17:38:31
83. The Madras High Court in the case of E.I.D. Parry (India) Limited v.
Far Eastern Marine Transport Co. Ltd. 1983 SCC OnLine Mad 61 has
observed that:
“…It is therefore incumbent upon the assured to keep alive his
remedies against the carrier or other third party and any default
committed by the assured either by allowing the remedy to get time
barred or by abdicating or abandoning, his rights against the
carrier or the third party will deprive the insurer of its remedies
against the third party for indemnity. In such cases, it is open to the
insurer to repudiate the liability under the policy, the loss is not paid
to the assured or to lay a counterclaim against the assured for
damages if it has paid the loss to the assured. The law is thus stated
in MacGiilvray & Parkington Insurance Law, seventh edition,
paragraph 1172 :–
“The assured is under an obligation not to deal with any claim
he possesses, or will possess, against a third party in such a
manner as to prejudice the insurer’s rights of subrogation in
relation to it. The insurer’s remedy will be to repudiate liability
on the policy, or to counterclaim for damages for the loss of, or
diminution of their rights, depending on the circumstances. The
position varies slightly, depending on whether the insurer has
paid for the loss”.
84. Thus, by entering into the Settlement Agreement without insurer‟s
consent, withdrawing its complaint, and requesting removal of the Buyer‟s
name from BSAL, the Respondent has prejudiced the insurer‟s right of
subrogation, disentitling it to any claim under the Policy against the Buyer.
85. Learned Counsel for the Respondent has placed reliance on the
judgment of the Division Bench of the Bombay High Court in Ramchandra
B. Loyalka (supra) wherein Sir John Beaumont, C.J., while differentiating a
contract of guarantee with that of indemnity, held that the former requires an
additional/a third contract between the principal debtor and surety whereby
the principal debtor requests the surety to act as surety. Thus, the surety has
Signature Not Verified RFA(COMM) 256/2024 Page 34 of 36
Signed By:NEELAM
SHARMA
Signing Date:14.07.2025
17:38:31
the right to seek recovery from the principal debtor, whereas the insurer
cannot effect the same with a third party at fault as there is no contract
between them.
86. We are unable to accept this argument as the well-established
equitable right of subrogation ensures that the insurer can seek recovery
from the third party at fault, that caused loss to the insured, which is
indemnified by the insurer.
87. The reliance placed on Alla Venkataramanna (supra) by the learned
counsel for the Respondent is also not helpful to the Respondent as the same
was specific to the facts of that case in which it was held that a compromise
without notice to the indemnifier was binding on the indemnifier as the
notice would have been an empty formality as the circumstances of that case
led to the inference that the indemnifier knew all about the plaintiff‟s claim
against the defendants in execution proceedings.
88. It is not the case of the Respondent that the Respondent entered into
the Settlement Agreement in view of the exclusion clause contained in Part
III Clause 3(b) of the Policy. The Settlement Agreement was an independent
transaction without reserving any right of the Respondent to claim the
balance amount from the Appellant. In fact, the Respondent withdrew its
complaint against the Buyer after entering into the Settlement Agreement.
89. There is nothing on record to show that the Settlement Agreement was
entered into with the knowledge of the Appellant and even a copy of the
same was not sent by the Respondent to the Appellant until the filing of the
Suit. Hence, the impugned judgment incorrectly holds that the Appellant
was informed about the Settlement Agreement.
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Signed By:NEELAM
SHARMA
Signing Date:14.07.2025
17:38:31
90. By unilaterally entering into the Settlement Agreement, the
Respondent has deprived the Appellant of its right of subrogation available
under the contract of indemnity. Hence, the Appellant has no remedy against
the Buyer in view of the release of claims given by the Respondent, which is
binding on the Appellant, even though there is no admission of liability by
the Respondent.
91. In view of the above, the impugned judgment has incorrectly held that
the Appellant is liable to pay the Respondent for the loss suffered by the
Respondent in the Policy as no loss has been suffered by the Respondent in
view of the Settlement Agreement, which prevents any further claim against
MS. If the Appellant is made to pay under the Policy to the Respondent, the
Appellant will not have any remedy against the Buyer in view of the
Settlement Agreement, which is against the settled law of the right of
subrogation by the insurer in case of discharging its liability under the
insurer‟s policy.
92. In view of the above, the impugned judgment is liable to be set aside.
Accordingly, the present Appeal is allowed and the impugned judgment
passed by the learned Commercial Court is set aside. Pending application(s),
if any, stand disposed of. No orders as to cost.
TEJAS KARIA, J
VIBHU BAKHRU, J
July 14, 2025
‘SMS’/’ST’
Signature Not Verified RFA(COMM) 256/2024 Page 36 of 36
Signed By:NEELAM
SHARMA
Signing Date:14.07.2025
17:38:31