Pannalal Jankidas Vs. Mohanlal and Anr.

Citation: AIR 1951 SC 144

Facts

Plaintiffs, as agents of the defendants had stored the goods in Government godowns, requiring permit to supply them to the defendants. In the meanwhile, due to the fire in godown, the goods got burned up and plaintiffs got compensation of 50% of damage caused in respect of the goods as they were uninsured. However, plaintiffs sued defendants to be indemnified against the rest 50% of damages caused to the goods while handling those as latter’s agent. The defendants pleaded, and it was found as a fact that plaintiffs had agreed to insure the goods and even charged defendants, nevertheless omitted to insure the goods; they further pleaded that they were entitled to set off or counter claim for the value of the goods destroyed as damages caused to them by the neglect or breach of duty of the plaintiffs.

Issues: What damages are plaintiffs liable to pay to the defendants for failure to insure the goods which were destroyed?

Contention of the Plaintiffs: 

• The intervention of Government in passing this Ordinance could not increase or add to the liability of the appellants for the breach of contract or breach of duty and therefore they were not liable to pay the compensation which would have been receivable by the respondents if the goods had been insured.
• Granting that they were in default and had committed a breach of duty in not insuring the goods according to the instructions or the agreement, defendants could not recover anything more from them than the nominal damages for breach, because the policy of fire insurance, if taken out, would not have given to the defendants money in respect to damage due to fire in godown. For this purpose they relied on a statement Mayne on Damages as follows:

“Therefore if an agent is ordered to procure a policy of insurance for his principal and neglects to do it, and yet the policy, if procured, would not have entitled the principal, in the events which have happened, to recover the loss or damage, the agent may avail himself of that as a complete defence.”

In the alternative it was argued on their behalf that the intervention of Government in passing this Ordinance broke the chain of causation and could not increase or add to the liability of the appellants for the breach of contract or breach of duty and therefore they were not liable to pay the compensation which would have been receivable by the respondents if the goods had been insured.

As per Majority: 

“Where two parties have made a contract which one of them has broken the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract, as the probable result of the breach of it.” (HADLEY v. BAXENDALE)

Restitutio In Integrum: “the party who has suffered the loss should be placed in the same position, as far as compensation in money can do it, as if the party in breach had performed his contract or fulfilled his duty”

As full compensation under the Ordinance was payable on proof of the existence of a fire insurance policy irrespective of the terms of the policy, and the non-recovery of half the value of the goods from the Government under the Ordinance was due to the absence of a fire insurance policy, the loss to the defendants arose directly from the neglect or breach of duty of the plaintiffs to insure the goods as they had been instructed and agreed to do; intervention of the Ordinance did not break the chain of causation or make the loss remote or indirect as the liability of plaintiffs arises not because of the Ordinance but because of the breach of their duty in failing to insure, which has taken place apart from the Ordinance and which is not affected by the Ordinance.

Even when there would have been no such ordinance passed, defendants could have filed a suit against the fire insurance policy contending that the fire, and not the explosion, was the cause of destruction of goods such that court would then have decided the liability and rights of the parties. Therefore, contending that had the ordinance not there, only nominal damages would have been given, cannot hold true.

Ordinance did not create any new liability but only quantified the damages such that failure of plaintiffs to insure the goods must now be measured on new basis; and the fact that it did not exist at the time of the explosion and could not have been in the contemplation of the parties was irrelevant for deciding the question of liability. Therefore, plaintiffs must put the defendants in the same position as they would have been had the goods been insured.

As per Minority:  The defendants’ inability to recover the full value of the goods from the Government under the Ordinance did not arise directly and naturally in the usual course of things from the plaintiffs’ failure to insure, but from independent and disconnected events, namely, the Government’s scheme for compensation, embodied in the Ordinance, the agreement with the insurance companies regarding contribution and the consequent discrimination made by the Government between insured and uninsured goods. Even when the plaintiffs would have insured the goods, then such an explosion would not be ‘naturally’ covered under the insurance; it was only when the ordinance was promulgated that the defendants would have become entitled to whole value of goods had they been insured, the consequence which could never have naturally arose in due course of things.

If the Ordinance had provided for partial compensation in both cases, the respondents could have no claim to recover the balance from the appellants, notwithstanding that the supposed direct causal connection between the appellants’ default and the respondents’ loss would still be there. The truth is there was no such connection and it was because of the provisions of the Ordinance which made a distinction between insured and uninsured property in the matter of compensation and the defendants were unable to recover the balance of the value of their goods destroyed by fire. But such inability cannot be regarded as flowing naturally or directly from the plaintiffs’ default.

The Ordinance did not, displace the ordinary rules of law as to remoteness of damage or amend or abrogate any terms in the fire insurance policies and it was further difficult to see how by virtue of an Ordinance passed some months after the explosion, the right to damages could become enlarged. The broad principle of restitutio in integrum upon which the assessment of the quantum of damages is based cannot be carried to its utmost logical results but must be qualified by the rule of remoteness.

Author: Vishrut Kansal