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

Introduction

Section 28 of the Indian Contract Act, 1872 (hereinafter "the Act") stands as a significant provision safeguarding the right of individuals to access justice. It declares void, to a certain extent, agreements that restrain legal proceedings. The section, in its essence, prohibits parties from contracting out of their right to enforce their contractual rights through ordinary legal tribunals or from limiting the time within which such rights can be enforced, beyond the periods stipulated by the general law of limitation. Over the years, judicial interpretation has played a crucial role in delineating the contours of this provision, particularly concerning the distinction between clauses that merely bar a remedy and those that extinguish the right itself. This distinction led to what was perceived as an "anomalous situation," prompting a critical amendment to Section 28 in 1997. This article seeks to provide a comprehensive analysis of Section 28, tracing its evolution, examining its judicial interpretation both pre and post the 1997 amendment, its interplay with other legal principles such as public policy, and its application in specific contractual contexts like jurisdiction clauses, arbitration agreements, and bank guarantees, drawing extensively from statutory provisions and judicial precedents under Indian law.

Historical Context and the 1997 Amendment

Prior to its amendment in 1997, Section 28 of the Indian Contract Act, 1872, read as follows:

"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."

This original formulation was interpreted by courts to invalidate only those clauses in an agreement that restricted a party from enforcing its rights absolutely or which limited the time prescribed by the Limitation Act for enforcing such rights. However, a significant distinction emerged in judicial pronouncements: if a contractual term did not merely bar the remedy but stipulated the extinguishment or forfeiture of the right itself if not exercised within a specified period, such a clause was often held to be valid and outside the mischief of Section 28. (National Insurance Co. Ltd. v. Sujir Ganesh Nayak & Co., AIR 1997 SC 2049 [Ref. 6, Ref. 16]; Vulcan Insurance Co. Ltd. v. Maharaj Singh, (1976) 1 SCC 943 [cited in Ref. 1, Ref. 6, Ref. 16]). The reasoning was that Section 28 targeted agreements relinquishing the remedy, not those extinguishing the right itself. (Larsen & Toubro Limited v. Punjab National Bank, 2021 SCC OnLine Del 4709 [Ref. 17]).

This judicial interpretation was seen as creating an "anomalous situation" and causing hardship, particularly to consumers and economically disadvantaged parties dealing with large corporations. (Union Of India v. Bhagwati Cottons Ltd., 2008 (3) Bom CR 539 [Ref. 12]; Statement of Objects and Reasons, Indian Contract (Amendment) Act, 1996). The Law Commission of India, in its 97th Report, recommended an amendment to Section 28 to rectify this anomaly. (Union Of India And Another v. Indusind Bank Limited And Another, (2016) 9 SCC 720 [Ref. 14]; Larsen & Toubro Limited v. Punjab National Bank [Ref. 17]).

Consequently, Section 28 was amended by the Indian Contract (Amendment) Act, 1996 (Act No. 1 of 1997), which came into effect on January 8, 1997. The amended Section 28 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.
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."

The key change was the insertion of clause (b), which explicitly brought agreements extinguishing rights or discharging liability within the fold of Section 28 if they had the effect of restricting a party from enforcing its rights. (Sunil Goyal v. Haryana State Agriculture Marketing Board, 2011 SCC OnLine P&H 13184 [Ref. 15]).

Judicial Interpretation of Section 28

A. Pre-Amendment Interpretation: The Right-Remedy Dichotomy

As noted, pre-amendment jurisprudence largely validated clauses that extinguished a right if not acted upon within a stipulated time, distinguishing them from clauses that merely curtailed the limitation period for seeking a remedy. In Food Corporation Of India v. New India Assurance Co. Ltd., (1994) 3 SCC 324 [Ref. 1], the Supreme Court held that a clause in a fidelity insurance guarantee requiring a claim to be made within six months of the contract's termination was a condition precedent for asserting the right, not a restriction on the statutory limitation period for filing a suit, and thus not violative of Section 28.

The Jammu and Kashmir High Court in Pt. Prithvi Nath Malla v. Union Of India, AIR 1961 J&K 5 [Ref. 13], articulated this "fundamental distinction," stating that where parties agree that the right and liability will stand extinguished if a specified event occurs (or fails to occur within a time), Section 28 would not apply, as the suit would fail for want of a cause of action, not because the remedy was barred.

B. Post-Amendment Interpretation: Widening the Scope

The 1997 amendment, particularly clause (b), aimed to nullify the distinction between extinguishing a right and barring a remedy if the effect was to restrict a party from enforcing its rights. The Supreme Court in Grasim Industries Ltd. v. State Of Kerala, 2017 SCC OnLine SC 877 [Ref. 19], observed that a contractual stipulation requiring a claim to be raised within the same year and settled by arbitration within 30 days would, under the amended Section 28(b), not be valid if it restricted the enforcement of rights. The Delhi High Court in MUNICIPAL CORPORATION OF DELHI v. NATRAJ CONSTRUCTION COMPANY, 2023 SCC OnLine Del 1709 [Ref. 20], also noted that a contention regarding a claim being time-barred due to a contractual clause would be of no merit in view of the amended Section 28.

In Ms. Chander Kant & Co. v. The Vice Chairman, DDA & Ors., 2009 SCC OnLine Del 1380 [Ref. 16], the Delhi High Court explicitly acknowledged that the 1997 amendment now prohibits clauses seeking to extinguish rights or discharge a party from liability if they restrict enforcement. The court in Explore Computers Pvt. Ltd. v. Cals Ltd., 2006 SCC OnLine Del 701 [Ref. 23], dealt with a challenge to a bank guarantee clause limiting the right to file a suit/claim up to the claim period, alleging it to be void under Section 28. While the judgment's specifics depend on whether the contract predated the amendment, it illustrates the type of clauses that came under scrutiny.

The Delhi High Court in Larsen & Toubro Limited v. Punjab National Bank [Ref. 17] extensively discussed the Law Commission's 97th Report and the Statement of Objects and Reasons for the 1997 amendment, emphasizing that the legislative intent was to render invalid contractual clauses that extinguish, on the expiry of a stated period, the rights accruing from the contract, thereby addressing the "right versus remedy" distinction.

C. Retrospectivity of the Amendment

A crucial aspect of the 1997 amendment is its prospective application. The Supreme Court in Union Of India And Another v. Indusind Bank Limited And Another [Ref. 14] definitively held that the amendment to Section 28 introduces substantive changes in the law, is remedial in nature, and therefore cannot have retrospective effect. This means that contracts entered into before January 8, 1997, would be governed by the unamended Section 28 and the judicial interpretations prevalent at that time.

This position has been consistently followed by High Courts. For instance, the Delhi High Court in M/S. Continental Construction Ltd. v. Food Corporation Of India And Others, AIR 2003 Delhi 32 [Ref. 11], held that the amended Section 28 is not retrospective, a view reiterated by the Punjab & Haryana High Court in Sunil Goyal v. Haryana State Agriculture Marketing Board [Ref. 15], citing Continental Construction. The Bombay High Court in M/S. Visakha Petroleum Products Pvt. Ltd. v. B.L Bansal, 2015 SCC OnLine Bom 3794 [Ref. 27], also engaged with arguments regarding retrospective application, ultimately aligning with the view of prospectivity. The Madras High Court in Tarapore v. United India Insurance, 2017 (2) CTC 156 [Ref. 24], and the Bombay High Court in Union Of India Through Textile Commissioner v. Bhagwati Cottons Ltd. & Anr., 2008 (4) Mh.L.J. 138 [Ref. 25], also noted cases decided under the unamended Section 28 due to the non-retrospective nature of the amendment.

D. Exceptions to Section 28: Arbitration Agreements

Section 28 contains two exceptions, both pertaining to arbitration agreements. Exception 1 saves contracts where parties agree to refer future disputes to arbitration and stipulate that only the amount awarded in such arbitration shall be recoverable. Exception 2 protects agreements to refer existing disputes to arbitration. These exceptions recognize arbitration as a valid and alternative dispute resolution mechanism. (See text of exceptions in M/S. Continental Construction Ltd. [Ref. 11] and Union Of India v. Bhagwati Cottons Ltd. [Ref. 12]).

In Ganges Manufacturing Company, Limited v. Indra Chand And Anr., (1906) ILR 33 Cal 1169 [Ref. 22], an arbitration clause was held to be covered by Exception 1. However, the interaction of arbitration clauses with the main provisions of Section 28, especially Section 28(b), can be complex if the arbitration clause itself imposes very restrictive time limits for invoking arbitration. The Delhi High Court in National Highways Authority India v. Mecon - Gea Energy Systems India Ltd. Jv, 2013 SCC OnLine Del 1273 [Ref. 21], discussed cases like J.K Anand v. DDA and Hindustan Construction Corporation v. DDA, where clauses requiring invocation of arbitration within very short periods (e.g., 90 days) were considered. The court noted that such restrictive clauses might be treated as directory or could even be hit by Section 28(b) if they effectively extinguish the right to claim. The Supreme Court in Grasim Industries Ltd. [Ref. 19] also indicated that an unduly restrictive time limit within an arbitration clause could be invalidated by Section 28(b).

While not directly about Section 28, Bharat Sanchar Nigam Limited And Another v. Motorola India Private Limited, (2009) 2 SCC 337 [Ref. 8], dealt with the scope of arbitration and "excepted matters," underscoring the importance of carefully drafted arbitration clauses, which are the subject of Section 28's exceptions.

Section 28 and Clauses Ousting Jurisdiction of Courts

Section 28(a) voids agreements by which any party is "restricted absolutely from enforcing his rights under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals." This targets clauses that completely oust the jurisdiction of courts. However, Indian law permits parties to choose one among multiple competent forums. If two or more courts have jurisdiction to try a suit, an agreement between parties that disputes shall be tried in one such court is not contrary to public policy and does not contravene Section 28. (Hakam Singh v. Gammon (India) Ltd., (1971) 1 SCC 286 [Ref. 7, cited in Ref. 5, Ref. 9]).

The Supreme Court in A.B.C Laminart (P) Ltd. And Another v. A.P Agencies, Salem, (1989) 2 SCC 163 [Ref. 9, cited in Ref. 2, Ref. 5], elaborated on this. If a clause ousts all courts which would otherwise have jurisdiction, it is void. But where parties select one of several competent courts, the clause is valid. The Court also noted that the ouster must be explicit. In A.B.C Laminart, the clause "any disputes arising from the sale would be subject to Kaira's jurisdiction" was held not to oust Salem's jurisdiction as words like "exclusive," "only," or "alone" were absent. However, the Supreme Court in Swastik Gases Private Limited v. Indian Oil Corporation Limited, (2013) 9 SCC 32 [Ref. 5], held that a clause stating, “The agreement shall be subject to jurisdiction of the courts at Kolkata,” implied exclusion of other jurisdictions under the principle of expressio unius est exclusio alterius, even without explicit exclusionary words. This refined the understanding of when an ouster is considered effective for selecting a specific forum.

Cases like Globe Transport Corporation v. Triveni Engineering Works And Another, (1983) 4 SCC 707 [Ref. 4, cited in Ref. 5], and Angile Insulations v. Davy Ashmore India Ltd. And Another, (1995) 4 SCC 153 [Ref. 3, cited in Ref. 5], upheld explicit jurisdiction clauses conferring jurisdiction on a specific court, thereby ousting others that might have had concurrent jurisdiction.

An interesting dimension was added in Interglobe Aviation Limited v. N. Satchidanand, (2011) 7 SCC 463 [Ref. 2], where the Supreme Court clarified that Permanent Lok Adalats are not "courts" in the traditional sense for the purpose of exclusive jurisdiction clauses. Thus, a clause conferring exclusive jurisdiction on a particular "court" would not oust the jurisdiction of a Permanent Lok Adalat established under the Legal Services Authorities Act, 1987, if it otherwise has jurisdiction over the subject matter (e.g., public utility services).

Section 28, Public Policy (Section 23), and Unconscionable Bargains

Agreements that contravene Section 28 are often also considered opposed to public policy under Section 23 of the Act. The very foundation of Section 28 is to prevent parties, especially those in a weaker bargaining position, from being deprived of their legal remedies or rights by oppressive contractual terms. In Central Inland Water Transport Corporation Limited And Another v. Brojo Nath Ganguly And Another, (1986) 3 SCC 156 [Ref. 10], the Supreme Court, while primarily dealing with Articles 12 and 14 of the Constitution in the context of a government company, struck down a service rule (Rule 9(i)) that allowed termination of a permanent employee's services with three months' notice or pay in lieu thereof, without assigning any reason. The Court found such a term to be unconscionable, arbitrary, and opposed to public policy, relying on Section 23 of the Contract Act. While not a direct Section 28 case, the principles of unconscionability and public policy against oppressive terms resonate with the objectives of Section 28.

The Supreme Court in A.B.C Laminart [Ref. 9] also touched upon public policy, noting that contracts attempting to completely oust court jurisdiction are against public policy. The court in Pt. Prithvi Nath Malla [Ref. 13] found that a specific clause was not hit by Section 23, indicating that public policy considerations are relevant in such analyses.

Application in Special Contexts

A. Bank Guarantees

Clauses in bank guarantees often stipulate periods within which claims must be made or suits must be filed. The interpretation of such clauses under Section 28 has been a subject of litigation. As seen in Food Corporation Of India v. New India Assurance Co. Ltd. [Ref. 1] (a fidelity insurance guarantee), a pre-amendment case, a time limit for making a claim was upheld as a condition precedent. Post-amendment, the analysis would involve Section 28(b). In Explore Computers Pvt. Ltd. v. Cals Ltd. [Ref. 23], the plaintiff challenged a bank guarantee clause limiting the right to file a suit/claim up to the claim period as void under Section 28. The Delhi High Court in Larsen & Toubro Limited v. Punjab National Bank [Ref. 17] specifically considered the impact of amended Section 28 on bank guarantee clauses that seek to extinguish rights if a claim is not made or a suit is not filed within a specified period, indicating such clauses would now be vulnerable under Section 28(b).

Conclusion

Section 28 of the Indian Contract Act, 1872, serves as a vital legislative tool to protect the fundamental right of access to justice. It ensures that parties cannot, through private agreements, wholly divest themselves of the right to seek legal recourse or be subjected to unreasonably truncated periods for enforcing their contractual rights. The 1997 amendment significantly fortified this protection by explicitly bringing within its ambit clauses that purport to extinguish rights or discharge liabilities if not acted upon within a specified timeframe, thereby addressing a long-standing anomaly in judicial interpretation.

The judiciary continues to play a critical role in interpreting and applying Section 28, balancing the principle of freedom of contract with the overriding considerations of public policy and statutory mandates. The distinction between clauses that absolutely oust jurisdiction versus those that provide for a choice of forum, the non-retrospective application of the 1997 amendment, and the careful scrutiny of time-limiting clauses in various contracts, including arbitration agreements and bank guarantees, demonstrate the nuanced application of this provision.

Ultimately, Section 28, in its amended form, reflects a clear legislative intent to prevent contractual terms from becoming instruments of oppression that deny or unduly restrict the enforcement of legitimate rights, thereby upholding fairness and equity in contractual dealings.