Tolling Agreement: A Breather Before Battle

“Controversies are limited to a fixed period of time lest they should be immortal while men are mortal” John Voet

What Is Statute Of Limitation

The Statute of Limitation is a statute of repose, consisting of a set of principles that rests on public policy that prescribes the time limit for enforcing one's rights. It prevents resurrection of claims that have become dormant due to the negligence of the party. In simple words, statute of limitation stipulates the time limit for the filing or service of any legal action, notice, motion, or other proceedings, providing a haven from the adverse consequence of deferred filing. It is of paramount important to meet the ends of justice, by extinguishing stale demands.

The idea of 'limitation' is based on the maxim 'vigilantibus, nor dormientibus jura subveniunt', meaning the laws serve the vigilant, not those who sleep over their rights. Being a trusted sentinel, the Judiciary serves and aids those who are watchful, attempting to strike a balance between the interests of the state and litigants. Law of Limitation limits the life span to avail the legal remedy, placing both the Plaintiff and the Defendant on an equal footing, and hence preventing 'time shopping' by the plaintiff. The essence of Limitation is well captured in the words of Lord Plunkett:

“Time holds in one hand scythe and in other an hour glass; the scythe owes down the evidence of our rights, the hour glass measures the period which renders the evidence superfluous”.

With the passage of time, human memory fades away, raising questions on its veracity as evidence. In research conducted, it was deduced that anything encoded into human memory is fashioned by what a person attends to, their expectations, needs and emotional state. Absence of a definite limitation period may subject the witnesses to what is known as 'Misinformation Effect'. The misinformation that the witnesses are exposed to, after the event, apparently contaminates their memories of what they witness, with erroneous information. Thus, to prevent evidences from being destroyed and losing their credibility, law of limitation becomes critical.

But the laws of limitation are not without exceptions. There arise certain situations, where the suspension of the limitation period proves to be more beneficial.

Tolling Agreements: A Global Perspective

The word “toll” basically means to delay, suspend or hold off the effect of a statute. When the statute of limitation is 'tolled', the time period to bring legal action is temporarily frozen. In other words, the clock stops running for a certain period of time. Limitation period can be tolled on account of a legal disability, executive orders or an agreement entered into by the parties.

Tolling agreements are extrajudicial agreements where the parties mutually agree to “toll” the statute of limitation for a certain period of time. Tolling Agreements have been recognized valid by different countries, including the United Kingdom, the United States of America, and Australia.

All the Australian States have specific legislations that deal with limitation periods. The statute of limitation applicable in Western Australia is The Limitation Act, 2005. Section 45 of the said act expressly deals with the tolling (or extension) of period of limitation. The section says:

“(1) Nothing in this Act prevents a person from agreeing to extend or shorten a limitation period provided for under this Act.

(2) Despite subsection (1), a provision in, or condition of, an agreement is of no effect if it purports to —

(a) exclude the operation of section 33, 36 or 38; or (b) extinguish (rather than bar) a right or title in relation to an action in a manner that would be inconsistent with a provision of Part 5.”

In the United Kingdom, tolling agreements have been recognized valid by the courts. The England and Wales High Court in the case of Oxford Architects Partnership v Cheltenham Ladies College^[2] made it crystal clear that that setting a contractual time limit for claims and counter claims is absolutely valid. In the words of the court:

“The Limitation Act 1980 provides a statutory defence which a party may rely on. A party is not obliged to rely on a statutory limitation defence but is generally entitled to do so. It is possible for a party to agree that it will not rely on a statutory limitation defence or for the parties to agree that a statutory limitation defence will apply from an agreed date, for instance in a standstill agreement. In certain circumstances a party may be precluded from relying on a statutory defence because of an estoppel. However, absent such an agreement or an estoppel a party is entitled to rely on a statutory limitation defence. In common with all other such rights any provision which seeks to exclude a party's right to rely on a statutory limitation defence must do so in clear terms.”

In the case of Cowan v. Foreman^[3], the judge issued a controversial statement, saying that standstill agreements “should come to an immediate end. It is not for the parties to give away time that belongs to the court”. Describing the decision of the judge as “plainly wrong”, the Appellate Court^[4] reversed the decision of the High Court and encouraged clearly drafted standstill agreements, observing that “without prejudice negotiations, rather than the issue of proceedings should be encouraged”.

Similarly, different states in the United States have codes allowing the parties to draft agreements setting their own time frames to initiate legal proceedings. To illustrate, Section 17-103 (Agreements waiving the statute of limitation) of the New York General Obligations says:

“1. A promise to waive, to extend, or not to plead the statute of limitation applicable to an action arising out of a contract express or implied in fact or in law, if made after the accrual of the cause of action and made, either with or without consideration, in a writing signed by the promisor or his agent is effective, according to its terms, to prevent interposition of the defense of the statute of limitation in an action or proceeding commenced within the time that would be applicable if the cause of action had arisen at the date of the promise, or within such shorter time as may be provided in the promise.

2. A promise to waive, to extend, or not to plead the statute of limitation may be enforced as provided in this section by the person to whom the promise is made or for whose benefit it is expressed to be made or by any person who, after the making of the promise, succeeds or is subrogated to the interest of either of them.

3. A promise to waive, to extend, or not to plead the statute of limitation has no effect to extend the time limited by statute for commencement of an action or proceeding for any greater time or in any other manner than that provided in this section, or unless made as provided in this section…”

A simple and plain interpretation of the abovementioned provisions manifests that the parties can enter into an agreement to extend the period of limitation, but only after the accrual of cause of action.

Therefore, international practice suggests that clauses in the contract, tolling the limitation period are not invalid, and are enforceable.

In the background of this global perspective, let's analyze the position in India with respect to 'Tolling Agreements'.

India: Legally Distant From Tolling Agreements

In India, the Limitation Act, 1963 is the primary statute dealing with law of limitation. It does not expressly provide for any provision, permitting the parties to “toll” the statute of limitation. A careful perusal of the following statutes exhibits the current status of tolling agreements in India:

Limitation Act, 1963

Section 3(1) says: “Subject to the provisions contained in sections 4 to 24 (inclusive), every suit instituted, appeal preferred, and application made after the prescribed period shall be dismissed, although limitation has not been set up as a defence.”

Indian Contract Act, 1872

Section 23 says:

“The consideration or object of an agreement is lawful, unless—

it is forbidden by law; or

is of such a nature that, if permitted, it would defeat the provisions of any law; or

is fraudulent; or

involves or implies, injury to the person or property of another; or

the Court regards it as immoral, or opposed to public policy.

In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void.”

Section 28 says “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 right...is void to that extent.”

A simple and plain interpretation of section 28 of Indian Contract Act makes it clear that any agreement that 'limits' or 'shortens' the time within which a party may enforce his right is void, to that extent. The provision nowhere speaks about 'extending' the time limit to enforce the right. For this, we may turn to Section 23 of the Indian Contract Act, 1872.

Section 23 of the Indian Contract Act, 1872, when read along with section 3 of the Limitation act, 1963 may make tolling agreement void. Section 23 of the Indian Contract Act, 1873 declares any agreement with an unlawful object or consideration as void. The object or consideration can be unlawful, inter alia, if it defeats the provisions of law. Owing to the fact that tolling agreement may defeat the provision of section 3 of the Limitation Act, 1963 by extending the limitation period, it may be declared void under section 23.

The courts in India have strictly (not liberally) interpreted the statute of limitation. In the words of the Supreme Court in the case of Manindra Land & Building Corporation Ltd. v. Bhutnath Banerjee^[5]:

"Section 3 of the Limitation Act enjoins a Court to dismiss any suit instituted, appeal preferred and application made, after the period of limitation prescribed therefore by Schedule I irrespective of the fact whether the opponent had set up the plea of limitation or not. It is the duty of the Court not to proceed with the application if it is made beyond the period of limitation prescribed."

Similarly, the Kerala High Court in the case of Abdul Hameed v. Government of India^[6] held:

“22… In our view in construing the provisions of the Limitation Act equitable consideration is out of place. The fixation of period of limitation in the Limitation Act, to some extent, may result in hardship. Even then the Limitation Act is to be construed by a court of law as the language of the statute in its plain meaning imparts. While dealing with the provisions of the Limitation Act the courts should not be concerned with the policy of the Legislature or with the result, however injurious it may be, in giving effect to the language used; nor it is the function of the court, where the meaning is clear, not to give effect to it merely because it would lead to hardship. Therefore, in our opinion a Judge cannot on equitable grounds extend the time allowed by the law of limitation or postpone its operation or introduce extension not recognised by the statute of limitation. The court should not also take into extraneous consideration, such as hardship in construing the provisions of the Limitation Act, in construing a statutory provision. There is no scope for adopting a liberal approach in the matter of condonation of delay.”

Tolling Agreements: Inoculation Against Hasty Litigation

The seismic jolt of COVID-19 unleashed a catena of contractual disputes. It acted like an invisible monster, profoundly impacting not only human lives but also the commercial world. Many businesses were shuttered, while the others were compelled to inject endless efforts to keep their businesses operational coupled with elimination of non-essential expenditures and closure of poorly-performing ventures etc.

The domino effect of the COVID-19 pandemic has profoundly hit different sectors of the economy, the companies still being under a massive financial burden. Due to the diverse resources and services required to perform contractual obligations, many contracting parties were unable to perform their obligations, especially due to the lockdown imposed. Small and medium sized industries are under the fret of becoming NPAs. Borrowers failed to clear their debts; contractors did not deliver projects as per the time scheduled; employers suspended the payments of their employees, triggering legal claims of compensation from the counterparties.

The Supreme Court, through its orders, accorded succour to the legal fraternity. The Court through its order dated 23.03.2020 and its subsequent orders directed extension of period of limitation in all the proceedings before Courts/Tribunals. Further, the court vide an order dated 10.01.2022, acknowledged the difficulties faced by the bar and bench, and restored the order dated 23.03.2020. It had directed that “the period from 15.03.2020 till 28.02.2022 shall stand excluded for the purposes of limitations as may be prescribed under any general or special laws in respect of all judicial or quasi-judicial proceedings”.

Despite the relief provided by the Court, the exigency of tolling agreements cannot be dispensed with. This unprecedented situation has compelled us to think and weigh the role of 'Tolling Agreement' against the rigidity of limitation period. It serves as the right tool to empower the businesses and settle the disputes in a cost-efficient manner, free from the encumbrance of meeting the deadlines as set out. Crafted for individual cases, tolling agreement, synonymously called as an agreement for a “time-out”, provides the parties to the dispute with a breathing room, working out a solution and avoiding the financial burden of litigation.

The tolling period would perhaps enable the parties to recommence their contract, looking for better solutions, rather than hastily filing claims and counter claims due to the fear of the limitation period running out. But we have to be wary of the situation where the parties to an agreement are not on equal footing. The party occupying a superior position may arm-twist the other party to enter into a tolling agreement, abridging the period of limitation, thereby causing grave prejudice. While it may be coherent not to endorse such agreements, but the agreements elongating the period of limitation should not be opposed, provided the parties have agreed on fair terms. Thus, 'Private Limitation' is, without a doubt, a tool to a better legal world.

The author is an Advocate, practicing in Delhi. Views Are Personal.

2. [2006] EWHC 3156 (TCC) ↑

3. [2019] EWHC 349 (Fam) ↑

4. [2019] EWCA Civ 1336 ↑

5. A.I.R. 1964 S.C. 1336 ↑

6. 1999 SCC OnLine Ker 655 ↑