The Evolving Jurisprudence 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 critical bulwark safeguarding the fundamental right of access to justice. It declares void, to a certain extent, 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 provision reflects a core public policy principle: that parties cannot, by private agreement, oust the jurisdiction of courts or unduly fetter their ability to seek legal redress. Over the decades, Section 28 has been the subject of considerable judicial interpretation, culminating in a significant amendment in 1997. This article seeks to analyze the historical context of Section 28, its judicial evolution prior to and after the 1997 amendment, its interplay with jurisdiction and arbitration agreements, and its contemporary relevance in Indian contract law.

Section 28: The Original Framework and Early Judicial Scrutiny

The original text of Section 28 of the Act, prior to its amendment, read:

“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.”

Despite its seemingly unambiguous language, judicial interpretation carved out a significant distinction. Courts differentiated between agreements that merely curtailed the statutory limitation period for enforcing a right (which were held void under Section 28) and those that provided for the extinguishment or forfeiture of the right itself if not asserted within a stipulated timeframe. The latter were generally upheld as valid, not falling foul of Section 28.

The Supreme Court in Food Corporation Of India v. New India Assurance Co. Ltd. And Others (1994 SCC 3 324, 1994) clarified this. It held that a clause stipulating a six-month period for making a claim under a Fidelity Insurance Guarantee was a condition precedent for asserting the right to claim, not a restriction on the statutory limitation period for filing a suit. The Court reasoned that Section 28 was not violated as the clause did not curtail the statutory limitation for legal action but merely set a deadline for making a demand under the guarantee. This principle was echoed in several pronouncements. For instance, in National Insurance Co. Ltd. v. Sujir Ganesh Nayak & Co. And Another (1997 SCC 4 366, 1997), the Supreme Court upheld a clause in an insurance policy which stated that the insurer would not be liable for any loss or damage after twelve months from the occurrence of the loss unless a claim was pending action or arbitration. The Court interpreted this as a clause that extinguished the right to claim itself, not merely as one limiting the time to enforce an existing right, thereby deeming it outside the prohibition of the original Section 28.

The Jammu and Kashmir High Court in Pt. Prithvi Nath Malla v. Union Of India (Jammu and Kashmir High Court, 1961) also articulated this distinction, stating that an agreement where parties agree that the right and liability will stand extinguished if a specified event occurs does not fall within the mischief of Section 28, as it does not preclude a party from instituting a suit, though such a suit might be dismissed for want of a cause of action if the right itself has been extinguished.

This judicial dichotomy, while perhaps sound in theory, often led to practical hardships, particularly for parties with weaker bargaining power who might be compelled to accept clauses that effectively extinguished their rights if not acted upon within very short periods, distinct from the statutory limitation periods.

The Catalyst for Change: The 1997 Amendment to Section 28

The perceived anomalies and potential for injustice created by the judicial interpretation of the original Section 28 led to calls for reform. The Law Commission of India, in its 97th Report (March 1984), suo motu examined the issue. The Commission noted, as cited in Union Of India And Another v. Indusind Bank Limited And Another (2016 SCC ONLINE SC 944, 2016) and Union Of India v. Bhagwati Cottons Ltd. (Bombay High Court, 2008), that the existing position created "serious anomalies and hardship, apart from leading to unnecessary litigation." The Commission observed that while clauses barring a remedy were void, clauses extinguishing rights were valid, a distinction that "caused serious hardship and might even be abused," particularly harming consumers and economically disadvantaged parties dealing with large corporations.

The Statement of Objects and Reasons for the Indian Contract (Amendment) Act, 1996 (Act 1 of 1997), which came into force on January 8, 1997, explicitly referred to the Law Commission's recommendation to rectify this anomalous situation. The amendment renumbered the existing provision as sub-clause (a) and inserted a new sub-clause (b). 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.”

The primary objective of this amendment was to nullify contractual clauses that, while ostensibly extinguishing a right or discharging a liability upon the expiry of a specified period, effectively restricted a party from enforcing that right through legal proceedings.

Interpreting the Amended Section 28: Key Judicial Developments

The 1997 amendment has significantly reshaped the jurisprudence surrounding Section 28. Courts have since addressed its applicability and impact on various contractual clauses.

A. Prospective Application of the Amendment

A crucial question that arose post-amendment was its retrospective effect. The Supreme Court, in Union Of India And Another v. Indusind Bank Limited And Another (2016 SCC ONLINE SC 944, 2016), definitively settled this issue. The Court held that the 1997 amendment to Section 28 is not retrospective in nature and therefore applies only to contracts entered into on or after January 8, 1997. For contracts executed before this date, the original Section 28, along with the judicial interpretations distinguishing between extinguishment of rights and curtailment of remedy, would continue to apply. This position was also affirmed by the Delhi High Court in M/S. Continental Construction Ltd. v. Food Corporation Of India And Others (Delhi High Court, 2002), which noted that the amendment is not retrospective in its operation. Consequently, as observed in Tarapore v. United India Insurance (Madras High Court, 2017), cases like *Indusind Bank* and *Sujir Ganesh Nayak* were examined in light of the unamended Section 28 due to the timing of the contracts in question.

B. Impact on Clauses Extinguishing Rights or Discharging Liability

For contracts governed by the amended Section 28, the pre-amendment distinction between clauses that extinguish rights and those that merely limit the time for remedy has been largely effaced. Sub-clause (b) now expressly voids agreements that extinguish rights or discharge liability if their effect is to restrict a party from enforcing those rights. The Delhi High Court in Ms. Chander Kant & Co. v. The Vice Chairman, DDA & Ors. (Delhi High Court, 2009) observed that in view of the amended section, the distinction carved out earlier by legal pronouncements would not hold good. The court held that a clause in a bank guarantee stipulating that any suit or claim must be filed within one month of its expiry, failing which the right to institute legal proceedings would be extinguished, would "fly in the face of the amended Section 28."

Similarly, the Supreme Court in Grasim Industries Ltd. v. State Of Kerala (2017 SCC ONLINE SC 877, 2017) opined that a contractual stipulation prescribing a time limit for raising claims, if interpreted as restricting the enforcement of rights, would be invalid under the amended Section 28(b). The Delhi High Court in MUNICIPAL CORPORATION OF DELHI v. NATRAJ CONSTRUCTION COMPANY (2023 SCC ONLINE DEL 1709, 2023) also noted that a contention regarding a claim being time-barred due to a contractual clause was of no merit in view of the amended Section 28.

C. Time Limits for Invoking Arbitration and Asserting Claims

The amended Section 28(b) has also been invoked in the context of clauses that prescribe short periods for invoking arbitration. In National Highways Authority India Petitioner v. Mecon - Gea Energy Systems India Ltd. Jv (2013 SCC ONLINE DEL 1273, 2013), the Delhi High Court, considering a clause that required a demand for arbitration within 90 days, suggested that such clauses should not be applied strictly and that the right of the contractor to claim the amount due remained alive irrespective of such a clause, due to the amended Section 28(b).

However, a somewhat nuanced perspective was presented by the Bombay High Court in Visakha Petroleum Products Pvt. Ltd. v. B.L. Bansal (Bombay High Court, 2015). In this case, the court observed that "clauses which mandate to assert rights within stipulated time is permissible and binding" and are "not prohibited under Section 28(b) of the Contract Act." This suggests that if a clause is framed as a condition precedent for the accrual or assertion of a claim itself (e.g., a requirement to notify a claim with supporting documents within a specific period for it to be considered), rather than as a direct bar on initiating legal proceedings for an accrued right, it might still be permissible. The court emphasized consistency with "commercial sense and certainty." This indicates that the precise wording and intent of such clauses remain crucial, and there may be a distinction between procedural conditions for claim substantiation and outright limitations on seeking redress for established rights.

Section 28 and Agreements on Jurisdiction of Courts

Section 28's overarching principle is to prevent parties from being absolutely restricted from enforcing their rights in ordinary tribunals. This has implications for "ouster clauses" or forum selection clauses in contracts. It is well-settled that parties cannot by agreement confer jurisdiction upon a court which it does not otherwise possess under the law, nor can they divest a court of jurisdiction which it legally has, if such divesting amounts to an absolute restriction. 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 of the Act.

The Supreme Court in Hakam Singh v. Gammon (India) Ltd. (1971 SCC 1 286, 1971) upheld a clause stipulating that the courts in Bombay alone would have jurisdiction, as Bombay was one of the places where a part of the cause of action arose. In A.B.C Laminart (P) Ltd. And Another v. A.P Agencies, Salem (1989 SCC 2 163, 1989), the Court elaborated that for a clause to oust the jurisdiction of other competent courts, it must be clear and unambiguous, often using words like "exclusive," "only," or "alone." The absence of such explicit exclusionary language might mean that the jurisdiction of other competent courts is not entirely ousted. This principle was applied in Angile Insulations v. Davy Ashmore India Ltd. And Another (1995 SCC 4 153, 1995), where an unambiguous clause vesting jurisdiction in the courts within the territorial limit of the High Court of Karnataka was upheld.

More recently, in Swastik Gases Private Limited v. Indian Oil Corporation Limited (2013 SCC 9 32, 2013), the Supreme Court held that a clause stating, “The agreement shall be subject to jurisdiction of the courts at Kolkata,” implied the exclusion of other jurisdictions under the principle of expressio unius est exclusio alterius, even without explicit exclusionary words like "only" or "exclusive." The Calcutta High Court in Continental Drug Company Ltd. v. Chemoids & Industries Ltd. (1954 SCC ONLINE CAL 181, 1954) also held that an agreement choosing one of two competent courts (Bombay, in that case) is not void under Section 28. Thus, forum selection clauses are generally permissible provided they designate a court that already has jurisdiction and do not absolutely restrict access to legal proceedings.

The Interplay of Section 28 and Arbitration Agreements

Section 28 contains exceptions, the first of which is crucial for arbitration agreements:

“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.”

This exception validates agreements to refer future disputes to arbitration. The Calcutta High Court in Ganges Manufacturing Company, Limited v. Indra Chand And Anr. (1906 ILR CAL 33 1169, 1906) recognized that an arbitration clause in a contract is covered by this exception. The Supreme Court's decision in Centrotrade Minerals And Metal Inc. v. Hindustan Copper Limited (2017 SCC 2 228, 2016), which upheld the validity of two-tier arbitration agreements, while not directly interpreting Section 28, reinforces the principle of party autonomy in choosing arbitration as a dispute resolution mechanism, a principle that underpins Exception 1.

It is important to distinguish this from cases like Vulcan Insurance Co. Ltd. v. Maharaj Singh And Another (1976 SCC 1 943, 1975). In *Vulcan Insurance*, the arbitration clause was narrowly worded to cover only disputes regarding the quantum of loss, not the fundamental liability of the insurer. When the insurer repudiated the claim entirely, the arbitration clause was held inapplicable. The case also involved a clause requiring legal action within three months of repudiation, which was considered in the pre-amendment context of Section 28. The validity of time limits for invoking arbitration itself, as discussed earlier, is now viewed through the lens of the amended Section 28(b).

Conclusion

Section 28 of the Indian Contract Act, 1872, has undergone a significant transformation from its original formulation to its amended state. The judiciary initially permitted a distinction between clauses limiting the time for remedy (void) and those extinguishing the right itself (valid). However, recognizing the potential for injustice, the legislature, through the 1997 amendment, broadened the scope of Section 28 to also invalidate clauses that extinguish rights or discharge liabilities if their effect is to restrict a party from enforcing those rights. The amendment, however, has been held to be prospective in its application.

The jurisprudence on Section 28 continues to evolve, particularly concerning the interpretation of clauses that prescribe time limits for making claims or invoking arbitration under the amended provision. While the general trend is to strike down clauses that unduly restrict access to legal remedies, courts also consider commercial realities and the precise contractual language. The principles governing forum selection clauses and the validation of arbitration agreements under Exception 1 remain vital aspects of Section 28's application.

Ultimately, Section 28 reflects an enduring balance between the freedom of contract and the overriding public policy of ensuring access to justice. Its interpretation and application by the Indian judiciary play a critical role in maintaining fairness and preventing the imposition of oppressive terms in contractual relationships, thereby underscoring its profound importance in the landscape of Indian contract law.