Agreements in Restraint of Legal Proceedings: An Analysis of Section 28 of the Indian Contract Act, 1872

Introduction

The right to legal recourse is a fundamental tenet of any civilized legal system. In India, this principle is statutorily safeguarded by Section 28 of the Indian Contract Act, 1872 (hereinafter "the Act"). This provision declares void, agreements that absolutely restrict a party from enforcing their contractual rights through ordinary legal proceedings or which limit the time within which such rights may be enforced. The underlying public policy is to ensure that access to justice is not curtailed by private contractual stipulations. This article undertakes a comprehensive analysis of Section 28, tracing its legislative evolution, examining judicial interpretations of its various facets, including time-limitation clauses and jurisdiction-ousting agreements, and discussing its recognized exceptions. The analysis will draw upon key statutory provisions and landmark judgments of the Indian judiciary to elucidate the scope and application of this significant provision.

The Statutory Framework: Section 28 of the Indian Contract Act, 1872

Section 28 has undergone significant amendment, primarily in 1997, to address judicial interpretations that, in the legislature's view, diluted its intended protective ambit.

The Original Provision (Pre-1997)

The unamended Section 28, as cited in several judicial pronouncements (e.g., Pandit Construction Company v. Delhi Development Authority & Anr, Delhi High Court, 2007; Himachal Pradesh State Forest Company Limited v. United India Insurance Company Limited, Supreme Court Of India, 2008), read as follows:

“Agreements in restraint of legal proceedings, void—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.
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.”

This original wording targeted agreements that either absolutely barred legal proceedings or curtailed the statutory limitation period for initiating such proceedings.

The 1997 Amendment

The Indian Contract (Amendment) Act, 1996, which came into effect on January 8, 1997, substantially altered Section 28. The Statement of Objects and Reasons for this amendment indicated that it was necessitated by judicial pronouncements distinguishing between clauses that barred a legal remedy (held void) and those that extinguished the right itself (often held valid). The legislature found that this distinction, while theoretically sound, could lead to practical injustice and abuse. (Union Of India Through Textile Commissioner v. Bhagwati Cottons Ltd. & Anr., Bombay High Court, 2008; Union Of India And Another v. Indusind Bank Limited And Another, Supreme Court Of India, 2016).

The amended Section 28, as quoted in Union Of India And Another v. Indusind Bank Limited And Another (2016) and CENTRAL ORGANISATION FOR RAILWAY ELECTRIFICATION v. M/S ECI SPIC SMO MCML (JV) (Supreme Court Of India, 2024), reads:

“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.”

The exceptions relating to arbitration were largely retained, with Exception 1 being slightly reworded over time but maintaining its core. The crucial addition was clause (b), specifically designed to invalidate agreements that extinguish rights or discharge liabilities upon the expiry of a specified period if the effect is to restrict a party from enforcing their rights.

The Supreme Court in Union Of India And Another v. Indusind Bank Limited And Another (2016) definitively held that the 1997 amendment to Section 28 is not retrospective in its application. It introduced substantive changes rather than being merely declaratory or clarificatory, and thus, contracts entered into before January 8, 1997, would be governed by the unamended Section 28. This view was also supported by the Bombay High Court in Union Of India Through Textile Commissioner v. Bhagwati Cottons Ltd. & Anr. (2008).

Judicial Interpretation of "Restraint of Legal Proceedings"

The judiciary has played a pivotal role in interpreting the contours of Section 28, balancing contractual autonomy with the imperative of access to justice.

Curtailment of Limitation Period and Extinguishment of Rights

Prior to the 1997 amendment, a significant body of case law developed around clauses that prescribed a shorter period for making a claim than that provided by the Limitation Act, 1963.

The Supreme Court, in cases like Food Corporation Of India v. New India Assurance Co. Ltd. And Others (1994), distinguished between clauses that curtailed the statutory limitation period for filing a suit (which were void) and clauses that set a deadline for making a demand or claim as a condition precedent to liability. In the Food Corporation of India case, a clause requiring a claim under a fidelity insurance guarantee to be made within six months of the contract's termination was upheld as a condition precedent for asserting the right, not a restriction on the statutory limitation for filing a suit. The Court reasoned that Section 28 was not violated as the clause did not curtail the statutory limitation but merely set a deadline for making a demand under the guarantee.

Similarly, in National Insurance Co. Ltd. v. Sujir Ganesh Nayak & Co. And Another (1997), the Supreme Court held that a clause in an insurance policy stating that the insurer would not be liable for any loss or damage after twelve months from its occurrence, unless a claim was the subject of pending action or arbitration, was valid. The Court interpreted this as a forfeiture or extinguishment of the right to claim itself if not acted upon within the stipulated time, rather than a limitation on the period to enforce an existing right. Such clauses extinguishing the right itself were generally not considered to violate the unamended Section 28. This principle was also affirmed in Himachal Pradesh State Forest Company Limited v. United India Insurance Company Limited (2008).

The 1997 amendment, particularly the insertion of clause (b), was a direct legislative response to this line of judicial reasoning. Post-amendment, agreements that extinguish the rights of a party or discharge them from liability upon the expiry of a specified period, if such expiry restricts the enforcement of rights, are rendered void. This significantly curtails the ability of parties, especially those in a dominant bargaining position like insurance companies, to impose short contractual limitation periods that effectively extinguish a claimant's rights.

Agreements Ousting Jurisdiction of Courts

Another common form of agreement potentially falling foul of Section 28 are those that attempt to oust the jurisdiction of courts.

The general principle, as affirmed in A.B.C Laminart (P) Ltd. And Another v. A.P Agencies, Salem (1989), is that if parties to a contract agree to oust the jurisdiction of all courts which would otherwise have jurisdiction to decide the cause of action under the law, such an agreement is contrary to public policy and void under Section 28. Parties cannot by agreement confer jurisdiction on a court which inherently lacks it.

However, where two or more courts have concurrent jurisdiction to try a suit or proceeding, an agreement between the parties that disputes between them shall be tried in one of such courts is not contrary to public policy and does not contravene Section 28. This was laid down by the Supreme Court in Hakam Singh v. Gammon (India) Ltd. (1971) and consistently followed in numerous cases including A.B.C Laminart, A.V.M Sales Corporation v. Anuradha Chemicals Private Limited (2012), and Maharashtra Chess Association v. Union Of India And Others (2019). In A.B.C Laminart, the Court emphasized that for such an ouster clause to be effective, the language must be clear and unambiguous, using words like "only," "alone," or "exclusive" to signify the intention to exclude other competent courts.

The rationale is that choosing one among several competent forums does not absolutely restrict a party from enforcing their rights in "ordinary tribunals" but merely channels the dispute to a specific, mutually agreed-upon competent tribunal.

Exceptions to Section 28

Section 28 itself carves out exceptions, primarily concerning arbitration agreements.

Exception 1: Agreements to Refer Future Disputes to Arbitration

This exception saves contracts where parties agree that any future disputes shall be referred to arbitration and that only the amount awarded in such arbitration shall be recoverable. This promotes alternative dispute resolution. The Supreme Court in World Sport Group (Mauritius) Limited v. Msm Satellite (Singapore) Pte. Limited (2014) observed that arbitration clauses are consistent with legislative policy and saved by Exception 1 to Section 28.

However, the scope of the arbitration clause is crucial. In Vulcan Insurance Co. Ltd. v. Maharaj Singh And Another (1975), the Supreme Court held that if an insurer repudiates a claim in toto (denies all liability), an arbitration clause limited to differences regarding the *quantum* of loss or damage would not apply to the fundamental question of liability itself. The dispute over liability would have to be adjudicated by a court, unless the arbitration clause was wide enough to cover such repudiation.

In Shin Satellite Public Co. Ltd. v. Jain Studios Ltd. (2006), the Supreme Court dealt with an arbitration clause that also included a waiver of "all rights of appeal or objection in any jurisdiction." While upholding the reference to arbitration, the Court's jurisprudence generally suggests that a complete waiver of the right to challenge an award on grounds permitted by the Arbitration and Conciliation Act, 1996 (e.g., public policy) might itself be problematic if it amounts to an absolute ouster of judicial oversight.

The arbitration agreement itself must be valid. As discussed in THE NAIHATI JUTE MILLS LTD. v. HYALIRAM JAGANNATH (1967), an arbitration clause can survive even if the performance of the main contract is frustrated, allowing disputes arising from such termination to be arbitrated.

Exception 2: Agreements to Refer Existing Disputes to Arbitration

This exception protects written agreements to refer disputes that have already arisen to arbitration. This is a standard provision facilitating the resolution of present conflicts through arbitration.

Interplay with Other Legal Principles

Public Policy (Section 23 of the Contract Act)

Agreements in restraint of legal proceedings are often viewed not only as violating Section 28 but also as being contrary to public policy under Section 23 of the Act. The Supreme Court in A.B.C Laminart noted that contracts attempting to completely oust court jurisdiction on legal questions are against public policy. The objective of Section 28, as stated by the Supreme Court in CENTRAL ORGANISATION FOR RAILWAY ELECTRIFICATION v. M/S ECI SPIC SMO MCML (JV) (2024), is to secure access to justice by declaring agreements in restraint of public law remedies void.

Pre-Dispute Resolution Mechanisms

Contracts, particularly in construction and infrastructure, often contain multi-tiered dispute resolution clauses, requiring parties to first refer disputes to a designated authority or engage in negotiations before resorting to arbitration or litigation. In State Of M.P And Another v. Kamal Kishore Sharma (2005), the Madhya Pradesh High Court considered a clause requiring reference to a final authority as per the works contract. The Court implied that such procedural requirements, if not absolutely ousting legal remedy or unduly curtailing limitation, might be permissible as steps preceding formal legal action, provided they do not contravene Section 28 by imposing an unreasonable restraint or limitation.

Conclusion

Section 28 of the Indian Contract Act, 1872, stands as a crucial safeguard for the right of access to justice, striking a balance between contractual freedom and public policy. The original provision, while clear in its intent to void agreements absolutely restricting legal proceedings or limiting the time for enforcement, was interpreted by courts in a manner that allowed certain clauses extinguishing rights to survive. The 1997 amendment significantly fortified the section by expressly targeting such extinguishment clauses, thereby providing greater protection to parties, particularly against potentially oppressive contractual terms.

Judicial pronouncements have clarified that while parties cannot oust the jurisdiction of all competent courts, they are free to choose one among several competent forums for dispute resolution. Similarly, agreements to arbitrate are expressly saved, promoting alternative dispute resolution mechanisms. The non-retrospective application of the 1997 amendment ensures that contractual rights and obligations are determined by the law in force at the time of the contract's execution, upholding legal certainty.

The evolution and interpretation of Section 28 reflect a continuous endeavor by the legislature and the judiciary to ensure that contractual stipulations do not unduly impede a party's ability to seek legal redress, thereby upholding the rule of law and the fundamental right to an effective remedy.