AGREEMENT IN RESTRAINT OF LEGAL PROCEEDINGS

Agreement in restraint of the legal proceedings is void”. Explain the given statement in light of the provisions of the Indian Contract Act 1872.

According to Section 28 of the Indian Contract Act, Every agreement,— (a) by which any party thereto is restricted absolutely from enforcing his rights under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals, or which limits the time within which he may thus enforce his rights; or (b) which extinguishes the rights of any party thereto, or discharges any party thereto, from any liability, under or in respect of any contract on the expiry of a specified period so as to restrict any party from enforcing his rights, is void to the extent.

Exception 1.—Saving of contract to refer to arbitration dispute that may arise.—This section shall not render illegal a contract, by which two or more persons agree that any dispute which may arise between them in respect of any subject or class of subjects shall be referred to arbitration, and that only the amount awarded in such arbitration shall be recoverable in respect of the dispute so referred.

Exception 2.—Saving of contract to refer questions that have already arisen.—Nor shall this section render illegal any contract in writing, by which two or more persons agree to refer to arbitration any question between them which has already arisen, or affect any provision of any law in force for the time being as to references to arbitration.

Exception 3.—Saving of a guarantee agreement of a bank or a financial institution.—This section shall not render illegal a contract in writing by which any bank or financial institution stipulate a term in a guarantee or any agreement making a provision for guarantee for extinguishment of the rights or discharge of any party thereto from any liability under or in respect of such guarantee or agreement on the expiry of a specified period which is not less than one year from the date of occurring or non-occurring of a specified event for extinguishment or discharge of such party from the said liability.

Prior to the Indian Contract (Amendment) Act, 1997 the part of the provision of section 28 was as under:

“Every Agreement by which any party thereto is restricted absolutely from enforcing his rights under or in respect of any contract by the usual legal proceedings in the ordinary tribunals or which limits the time within which he may thus enforce his rights is void to that extent.”

In Vulcan Insurance Co. Ltd v. Maharaj Singh, the Supreme Court held that a clause in an insurance policy to the effect that the insurer will not be liable for any loss if the claim is made 12 months after the loss, is not void as it only provides for the right accruing under the contract to a party to be forfeited and does not attract the mischief of Section 28 of the Contract Act.

In Food Corporation of India v. New India Assurance Co. Ltd., the Supreme Court, also considering a clause in the fidelity insurance bond, held that it was clear from the agreement that it did not contain any clause that was found to be contrary to Section 28 of the Contract Act because it did not impose any restriction on filing a suit within six months of the date of termination of the contract as claimed by the insurance company, but what was agreed was that after the expiry of six months from the date of termination of the contract, Food Corporation would have no right under this bond and this clause could not be construed as curtailing the normal limitation period for filing the suit.

In National Insurance Corporation Ltd. vs. Sujir Ganesh Nayak and Co., it was held that the condition in an insurance policy relieving the insurer from liability for loss and damage unless the claim was raised before the expiry of the specified period from the beginning of the loss or damage, such a condition even if the period specified therein was shorter than that prescribed by the statute for filing a suit for that purpose is not hit by Section 28 of the Contract Act.

On the basis of the judgments in the above cases, the effect of the erstwhile Section 28 was as follows: –

The parties to an agreement were prohibited from inserting their own periods of limitation in place of the period laid down by the law of limitation; however, they were free to assert that if a party does not make a claim within a specified period, then the rights accruing under the contract shall be extinguished or that a party shall be discharged from all liability under the contract.

The said amendment divided the erstwhile Section 28 into two sub-sections (a) and (b).
Clause (a) with the addition that even agreements that limit the time within which rights may be enforced will be barred.
Clause (b) further prohibited agreements that extinguished the rights of any party or discharged any party from liability on the expiry of a specified period so as to restrict the enforcement of rights.

Effect of amendment-

1. If any clause in an agreement not only bars a remedy but also extinguishes the right, it will be void to that extent. It will, therefore, make a substantial change in contract law.
2. Amended Section 28 was not retrospective i.e. it is prospective in nature. The contract entered prior to the amendment, is held to be valid in the light of the provisions of Section 28 prior to its amendment.

In the case of Rajendra Singh vs. Seesh Pal Singh (2014), an undertaking by the landlord to a bank that he would not evict the tenant until the tenant repaid the entire bank loan was held to be void.

In the case of Mr A. Chandrasekaran vs. M/s Yoha Securities Limited (2013), Stock exchange bylaws containing restrictions on members from initiating the arbitration and requiring them to initiate within a specific timeline were held to be void.

In the case of Bharat Sanchar Nigam Ltd. vs. Motorola India Pvt Ltd (2009), an agreement that the quantification of liquidated damages shall not be challenged was held to be in restraint of legal proceedings and void.

In the case of Dilip Kumar Kar vs. Hindustan Steel Works Construction Ltd (2015), the jurisdiction of civil courts cannot be barred by an in-house dispute resolution mechanism that is not similar to arbitration.