Decoding Jurisprudence And Applicability Of Section 28 Of Indian Contract Act,1872 – An Analysis

History

Before we delve into the history of this section, it would be meaningful to know the present provisions that have derived from the old provisions that had undergone with radical changes in the past due to trade and industry requirements.

The present provision of Section – 28 of the Indian Contract Act'1872 (with amendments) provides for the following provisions. ^[1]

“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 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.”

[Explanation to this Section, not being material, not quoted]

History of and Amendments to Section 28 of the Indian Contract Act'1872: -

Transformations, reforms, and revolutions have been the need of the hour across every field in our society and the Indian Contract Act'1872, more particularly Section 28, was also not exempted. Though, it did not witness many changes in it, since its enactment on 25^th April 1872, the Indian Law makers had made few amendments to this Act on two occasions in the span of 150 years and amendments made to Section – 28 are meaningful and crucial – which are considered here for discussion and analysis.

The Indian Contract Act'1872 was enacted on 25^th April 1872 and came into force on 1^st September 1872. This Act is based on the principles of English Common Law. This act was first time amended on 8^th January 1997 through the Indian Contract (Amendment) Act'1996^[2]. Later on, the Government of India through Act No. 4 of 2013 to the Banking Law (Amendment) Act 2012 (enacted on 5^th January 2012 and came into force on 18^th January 2013)^[3] made amendments on the recommendation made by the Indian Bank Association. Coincidentally, on both the occasions, amendments were also made to Section – 28, which is a topic of discussion in this article.

During the earlier amendment, sub-section 2 (b) was introduced, whereas during the latter amendment, the Law Makers made changes to various sections of different enactments that contained Section – 28 of the Indian Contract Act'1872 too under Section 17 of the Banking Law (Amendment) Act 2012. In that amendment, the “Exemption-3” was inserted after Exemption-2.

Law Commission Reports: - The Law Commission plays a vital role in formulating any law, as it entails and explains the rationale behind recommending any new law or amendment to any existing law. There have been three occasions when the Law Commission made its reports and recommended a few amendments to the then-existing law (Indian Contract Act, 1872). The gist of all three Reports has been enumerated as under:-

1. 1^st Law Commission Report on Indian Contract Act, 1872^[4] – That Report was finalized and presented on 26^th September 1958 by the Committee led by Mr. M C Setalvad, who was also the first attorney-general of India, which was indeed the 13^th Law Commission Report. The Committee had suggested a few changes in many Sections but did not suggest any amendment to Section – 28, except one change in Exception – 1 to Section 28. It was suggested that the word “only the amount awarded in such arbitration shall be recoverable” shall be substituted with the words “the parties will be bound by the award”. The draft amendment was embodied under APPENDIX – I of the Report. But unfortunately, none of the suggestions were taken up for incorporation through a Bill in the Parliament.

2. 2^nd Law Commission Report on Indian Contract Act, 1872^[5] – Unlike 13^th Law Commission Report, the 97^th Law Commission Report, which was recommended on 31^st March 1984 by the Committee led by Justice K.K Mathew, was exclusive to suggest predominant amendments in Section – 28 of the Principal Act. The Law Commission took up this subject suo moto and explained the reasons for taking such initiative under para – 1.1 of the Report. It was basically observed by the Committee that the prescriptive clauses in Contracts (clauses extinguishing rights under a contract on expiry of a specified period) has created anomalous situation that prevailed under the then existing law and it was of great importance to do reform from the point of view of economic justice, avoidance of hardship to the consumers and certainty and symmetry to the law.

Before we proceed to analyze and discuss further about the 2^nd Law Commission Report a little more, it is significant to know what the then prevailing existing law was to understand the radical suggestions given by the Committee. The then existing law referred to in para–2.2 of the Report is stated below in verbatim.

“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.”

The moot point which was observed and considered by the Committee, through para – 1.2, is that under Section – 28 of the Indian Contract Act, 1872 “an agreement which limits the time within which a party to an agreement may enforce his rights under any contract by proceedings in a court of law is void to that extent. But the section does not invalidate an agreement in the nature of prescription, that is to say, an agreement which provides that, at the end of specified period, if the rights thereunder are not enforced, the rights shall cease to exist.” The effect of that Section identified by the committee was that the parties to an agreement are not allowed to substitute their own periods of limitations in place of the period laid in the general law of limitations, but are allowed to substitute their own periods of prescriptions for enforcing the rights. It was stated in para – 2.3 of the report that “a clause limiting the time for enforcing a remedy is prohibited, but a clause limiting the duration upto which the rights remain alive, and extinguishing those rights at the end of such period, is permissible”. Since that did not sound in justice and logical, and beneficial in practice, emphasis was given to address problematic areas.

In its report, the Law Commission also observed and explained that a condition in a contract which relinquishes the remedy only of a party to sue or take legal action within the specified period is hit by Section – 28 and hence, void to the extent, is inconsistent with the time limit prescribed under the Limitation Act, 1963. On the contrary, a condition which extinguishes the rights of a party, arising out of the contract, unless an action is brought within a specified period, does not violate Section – 28^[6]. In simple terms, it can be said that a clause which extinguishes the right of the party to sue within a specific period described in the contract, shorter than the statutory time limit, such a clause is regarded as void by reason of Section – 28. However, if a clause keeps alive the rights of a party even beyond the statutory period or the rights themselves are extinguished within the prescribed period, then the clause is not violative of the limitation law.

The Law Commission also found grave demits in the then existing law as the same was causing serious hardship and economic injustice to a party who was not in equal bargaining power^[7]. It was observed that “By giving a clause in an agreement that shapes and characterizes a provision extinguishing the rights (and not merely affecting the remedy), a party standing in a superior bargaining position can achieve something which could not have been achieved by merely barring the remedy. In other words, under the law, a more radical and serious consequence – the abrogation of rights – becomes permissible, while a less serious device – the extinction of the mere remedy – becomes impermissible.”

The Law Commission Report strongly suggested that the parties should not be allowed to invent their own rules of prescription under the garb of fixing substantive rights through contract, when they are not allowed to invent something lesser – their own rules of limitation^[8]. Furthermore, the Commission briefly discussed about the Court cases viz. Kerala case, Bombay case and Punjab case in support to demonstrate the hardship and injustice being faced due to the demerits of Section-28^[9].

Recommendations received by the Law Commission on the Working Paper:-

The Law Commission received fourteen replies in response, out of which five were from High Courts, Six were from State Governments, and three were from associations of businessmen. It is found that almost all the concerned had expressed their agreement with the need for invalidating unfair clauses in the Contract and agreed with the suggestions to make changes in the then existing law. Interestingly, a few concerned like the Government of Punjab, had suggested some good points, which were eventually accepted by the Commission. It was suggested that, other than a failure to institute a “suit”, where there is a failure to institute a legal proceeding should also be declared an invalid clause.

Recommendations of the Law Commission:-

While giving its recommendation, the Law Commission mainly highlighted four principal defects (demits) about the then existing law, which regarded prescriptive clauses as valid while invalidating time limit clauses, which merely bar the remedy. The Law Commission recommended^[10] the following for re-drafting the “main paragraph” of the section 28.

“28. Every Agreement –

(a) by which any part 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

(b) which limits the time within which he may thus enforce his rights, or

(c) which extinguishes the rights of any party thereto under or in respect of any contract on the expiry of a specified period or on failure to make a claim or to institute a suit or other legal proceeding within a specified time, or

(d) which discharges any party thereto from any liability under or in respect of any contract in circumstances specified in clause (c), is void to that extent.”

3. 3^rd Law Commission Report on Indian Contract Act, 1872 – The 103^rd Law Commission Report was recommended on 28^th July 1984 by the Committee led by Justice K.K Mathew on “Unfair Term in Contract”. This matter was taken up by the committee suo moto as mentioned in its recommendation letter dated 28^th July 1984. The Committee touched upon several clauses of the Indian Contract Act that had a direct or indirect close relation with unfairness in contracts viz. S-16(3), S-23, S-28, S-74 and concluded that the solution is not available in such sections. Therefore, it recommended the inclusion of a separate Section – 67A through New Chapter – IV-A to deal with such unfair terms in a contract^[11]. The new section was prepared by borrowing the principles and ideas from the English Unfair Terms Act'1977 and Section 2.302 of the Uniform Commercial Code of the United States.

Section – 67A

(1) Where the court, on the terms of the contract or on the evidence adduced by the parties, come to the conclusion that the contract or any part of it is unconscionable, it may refuse to enforce the contract or part that holds it to be unconscionable.

(2) Without prejudice to the generality of the provisions of this section, a contract or part of it is deemed to be unconscionable if it exempts any part thereto from – (a) the liability for wilful breach of the contract, or (b) the consequence of negligence.

Key Judgments

There are not less than 20 Judgments in India pronounced either by the Hon'ble Supreme Court or by the various High Courts of the Country that cover and provide clarity about the implications and legal standing of Section – 28 and its Exemptions. Out of many, I found the ratio derived in two judgments is remarkable, as they shed light on the true intent of the legislation. In case of Larsen & Toubro Ltd. & Anr. Vs. Punjab National Bank & Anr. (28.07.2021)^[12] the Hon'ble Delhi High Court clarified that Section 28 of the Contract Act does not deal with the claim period mentioned in Bank Guarantee. They said that it deals with the creditor's right to enforce their rights under the bank guarantee in case of refusal by the guarantor to pay before an appropriate court or tribunal. In another case, Grasim Industries Ltd. Vs. State of Kerala^[13] (19.04.2017), the Supreme Court of India stated that Section 28(b) unequivocally provides that an agreement, which extinguishes the right to have a legal remedy of a party on the expiry of a specified period, would be void. Broadly speaking, in most of the Judgments, the common ratio i.e. “Section 28 of the Contract Act prohibits prescription of shorter limitation than the one prescribed in the Limitation Act” was endorsed and validated.

Suggestions

“I am the boss and will dictate the terms of the Contract!” Such an approach by one party that holds strong bargaining power imbalances the contractual in the contract, thereby causing hardship and injustice to the injured party. Inventing own rules of limitation by one party is called a 'prescriptive clause', which can never be balanced and logical. The Amendments serves a purpose more than envisaged by the reports of the Law Commission we discussed herein. The Amendments not only gave equal footing to Parties to a contract but also ensured the compliance of the Law of Limitation. The Amendment eyes that the Contracts should not violate the Law of Limitation, as these 'prescriptive clauses' do not only forbid a party from availing the legal remedy, but limit the time to avail such remedy through a contractual term. The Amendment in Section 28 ensures that Parties to the Contract shall get the minimum period to avail legal remedy provided by law, though there is no bar for extending such period in the Law of Contracts. A big sector like the construction industry still faces the problem of prescription of shorter limitation than the one prescribed in the Limitation Act. Though late but proper corrective measures have been taken by the Government to regulate unfair terms. It is observed and found that whenever any amendments are made in existing enactments, the changes are generally made in the main provisions and fail to make changes in the “title or heading” of the provision, which makes it difficult for the law practitioner and especially the general public to properly interpret and understand the statute. Therefore, it is suggested that the heading “Agreements in restraint of legal proceedings, void” of Section – 28 of ICA must also be changed to cover the intent captured in sub-section 28 (b).

Views are personal.