Agreements in restraint of legal proceedings is void u/s 28

Indian Contract Act 1872

Section 28 of the Contract Act was introduced on the recommendation of the Law Commission in order to remove the anomalies created by the earlier Act. The position of law settled before the amendment[ 1997 amendment to the Section] was that Section 28 would invalidate only a clause in an agreement which restricts a party from enforcing his right absolutely or which limits the time within which he may enforce his right. Section 28 before the amendment does not come into operation when contractual term spell out an extension of a right of a party to sue or spell out the discharge of a party from the liabilities.

Indian Contract Act 1872

28. Agreements in restraint of legal proceedings, void.-

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 that 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.L

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.

(a) Explanation.—

(i)In Exception 3, the expression “bank” means—a “banking company” as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949).
(b)”a corresponding new bank” as defined in clause (da) of section 5 of the Banking Regulation Act, 1949 (10 of 1949);
(c)”State Bank of India” constituted under section 3 of the State Bank of India Act, 1955 (23 of 1955);
(d)”a subsidiary bank” as defined in clause (k) of section 2 of the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959);
(e)”a Regional Rural Bank” established under section 3 of the Reg, tonal Rural Banks Act, 1976 (21 of 1976);
(f)”a Co-operative Bank” as defined in clause (cci) of section 5 of the Banking Regulation Act, 1949 (10 of 1949);
(g) “a multi-State co-operative bank” as defined in clause (cciiia) of section 5 of the Banking Regulation Act, 1949 (10 of 1949); and
(ii)In Exception 3, the expression ‘a financial institution” means any Public financial institution within the meaning of section 4A of the Companies Act, 1956 (1 of 1956).[ Inserted dt. 5.1.2013]

In respect of the arbitration clause in an agreement requiring the claim to be filed within 90 days from the date the final bill was raised for payment. It was held that the said clause in the arbitration agreement limiting the time during which a claim can be made by a party would be clearly against public policy and would be void under Section 28 of the Contract Act. Supreme Court in National Insurance Co. Ltd v. Sujir Ganesh Nayak and Co. and Anr. ; It was held that an agreement which curtails the period of limitation and prescribes a shorter period than prescribed by law would be void as offending Section 28 of the Contract Act. This was so because such an agreement would seek to restrict a party from enforcing his right in court after the period prescribed under the agreement expires even though the period prescribed by law for enforcement of his relief has yet not expired. However, there was possibility of agreements which do not seek to curtail the time for enforcement of the right but which provide for forfeiture or waiver of a right itself if no action is commenced within the period stipulated by the agreement and such a clause would not fall within the mischief of Section 28 of the Act.

Undoubtedly when the parties have agreed on a particular forum, the Courts will enforce sauch agreement. This is not because of a lack or ouster of its own jurisdiction by reason of concensual conferment of jurisdiction on another Court, but because the Court will not be party to a breach of an agreement. Such an agreement is not contrary to public policy nor does it contravene Section 28 or Section 23 of the Contract Act. This has been held in Jakkam Singh vs. M/s. Gammon (India) Ltd., AIR 1971 SC 740; A. B. C. Laminart Pvt. Ltd. vs. A. P. Agencies, (1989) 2 SCC 163 and Modi Entertainment Network vs. W. S. G. Cricket Pte. Ltd., (2003) 4 SCC 341, 351. The decision of the Delhi High Court in Rajendra Sethia vs. Punjab National Bank, AIR 1991 Del. 285 relied on by the Commission which holds to the contrary is, therefore, clearly erroneous. Man Roland Druckimachinen AG Vs Multicolour Offset Ltd. and another[SC 2004 APRIL]