“Agreement in restraint of legal proceedings” – Judicial Inroads.

Introduction-

The legal arena has faced several dimensions over how to construe the clause of “agreement in restraint of legal proceedings” incorporated in Insurance agreement in specific and other agreements in general which was made clear by the Parliament by amending Section 28 of the Indian Contract Act but, still there seems to be some uncomfortableness on this issue. There have been instances where Courts have interpreted this clause in the lines of National Insurance Company case which have roots primarily in English law, which may not appreciate the well established mischief rule of interpretation and the intention behind the legislation.

This article endeavors to answer the above issue faced by lawyers and the courts for some time now, that is, the question of whether or not to follow the law laid down by the Supreme Court in National Insurance Co. Ltd case in the light of the Amendment to Section 28 of the Indian Contract Act.

Is waiver of a claim to sue under an agreement valid in the light of Section 28(b) of the Indian Contract Act?

This question has a controversial and very interesting history behind it and squarely falls within the ambit of Section 28 of the Contract Act. Section 28 declares any agreement that absolutely restrains a person from enforcing a contract as void but it has been the general practice of Insurance and other companies to incorporate clauses in their agreement to such effect, for example, ‘‘if a claim be made and rejected an action or suit cannot be commenced within 6 months or 1 year after the rejection of the claim”. These kinds of clauses have been held to be in conformity with Section 28 of the Contract Act by the courts time and again.

    The law on this point has been interpreted in the following manner so as to enforce such an agreement which amounts, in reality, to an agreement in restraint of legal proceedings. There is undoubtedly a marked distinction between a condition which so limits the time within which a suit may be brought to enforce rights and one which provides that there shall no longer be any rights to enforce. Such a condition is not illegal in itself. This position was given legal sanctity by the Supreme Court in the case of National Insurance Co. ltd., which held that “an agreement which in effect seeks to curtail the period of limitation and prescribes a shorter period than that prescribed by the law would be void as offending Section 28 of the Contract Act. This is because such an agreement would seek to restrict the party from enforcing his rights in Court after the period prescribed under the agreement has expired even though the period prescribed by law for the enforcement of his rights would have not yet expired. There could, however, be agreements which do not seek to curtail the time for enforcement of rights but which provide for the forfeiture or waiver of rights if no action is commenced within the period stipulated by such agreement. Such a clause in the agreement would not fall within the mischief of Section 28 of the Contract Act[2].

The relevant aspect of this judgment is based on the provisions of Section 28[3] of the Contract Act that stood prior to the Amendment. An amendment was made to Section 28[4] of the Indian Contract Act and a new clause was added.

 The unrest legal position –

Even though the phraseology of Section 28 is explicit and strikes at the very root by declaring any agreement curtailing the normal statutory period of limitation to be void courts in India having been influenced by the distinction drawn by English Courts in case of ‘extinction of rights by agreement’ and ‘curtailment of limitation’[5] which was done by drawing a distinction between forfeiture of rights by terms of contract and curtailment of time for enforcement of contract, with the former being barred and the latter not being barred by Section 28.

The settled position of law before the Amendment was that Section 28 would invalidate only a clause in an agreement which restricts a party from enforcing his right absolutely or which limits the time within which he may enforce his right. Section 28 before the Amendment, did not come into operation when contractual terms spelt out the extension of right of a party to sue or spelt out the discharge of a party from any liabilities[6].

A distinction is assumed to exist between remedy and right and this distinction is the basis on which a clause barring remedy is void, but a clause extinguishing rights is valid. This approach may be sound in theory, but in practice it causes serious hardship and might even be abused. In order to remove these anomalies, Section 28 was amended by the Indian Contract (Amendment) Act 1996 (Act 1 of 1997)[7].  Thus, the artificial distinction between a clause providing for extinction of rights after a specified period has been eliminated[8], however, there are cases wherein it has been held that clauses filed after the specified period of limitation in the agreement would be void because the Amendment to Section 28 (b) does not have any retrospective operation[9].

Courts view on ‘agreement in restraint of legal proceedings’ clause–

 The effect of the Amendment to Section 28 made it clear that any clause extinguishing the right of a party or discharging any party from the liability in respect of any contract on expiry of a specific period would be void[10]. An arbitration agreement limiting the time during which a claim can be made by a party, was held to be clearly against public policy and in view of Section 28 of the Contract Act, void[11].

In the case of Explore Computers, [12] the Delhi High Court held, “it is not open to contend that if any suit or claim is not filed within one month of the expiry of the bank guarantee, the right of the plaintiff to institute any legal proceedings itself is extinguished. Such a plea would fly in the face of the amended Section 28 and cannot be discharged from the liability nor can the rights of the plaintiff be extinguished by inclusion of the clause providing so”.

The contention that the contractor’s right to claim arbitration comes to an end after the expiry of 90 days from the date of intimation was also held to be not sustainable[13]. In the case of Pandit Construction[14], the Court held that in view of the said pronouncement, the reasoning of the learned arbitrator could not be sustained that the claim was time – barred. The award to the extent that it holds that the claim of the petitioner is barred by time would, thus, be liable to be set aside.

An understanding of the above judgments thus, makes it amply clear that Court’s should consider the ramifications of the Amendment to Section 28 of the Indian Contract Act and refrain from ignoring the intention behind the Amendment which is the mandate of the legislature.

However, very recently the Supreme Court in the case of H.P. State Forest Co. [15] endorsed the view and held that “curtailment of the period of limitation is not permissible in view of Section 28 but extinction of the right itself unless exercised within a specified time is permissible and can be enforced. If the policy of insurance provides that if a claim is made and rejected and no action is commenced within the time stated in the policy, the benefits flowing from the policy shall stand extinguished and any subsequent action would be time-barred. Such a clause would fall outside the scope of Section 28 of the Contract Act. This, in brief, seems to be the settled legal position[16]”.

When the issue of Section 28 (b) vis-à-vis a negative covenant was raised before the Supreme Court in the Unit Trust of India case,[17] the Court went on to say that “it is not necessary for us to enter into the question as to whether clause 7.5 of the agreement is hit by Section 28 of the Indian Contract Act or not” –  the High Court, however, held that the disputed clause would be hit by Section 28 of the Indian Contract Act and kept silent on this particular issue.

Thus, after reading the above two Hon’ble Supreme Court judgments there seems to be some unrestness with regard to Section 28 (b) of the Act, which results in untold inconvenience to the many hapless individuals who enter into Standard Form Contracts with absolutely zero negotiating power. This unrestness may be interpreted in a manner close to the contractual rights of citizens. It would be sensible, therefore, to avoid any blanket rule applicable to limitation clauses and leave examination of such clauses to the context of the legislation[18]. The provisions of the Limitation Act are based on public policy and if a contract is made fettering or cutting down the period of limitation, such a contract being against the provisions of the Limitation Act should be construed as being opposed to the principles of public policy. Such a clause would then be hit by Section 23 of the Indian Contract Act. Hence, such a stipulation in a contract, fettering or curtailing the period of limitation ought to be considered to being operative and even if such a stipulation were present, the option to institute legal proceedings within the period of limitation prescribed by the Limitation Act should be made available.[19]

The Madras High Court in the case of Oriental Insurance Co[20]held, It is clear that by the Indian Contract (Amendment) Act, 1997, the original Section 28 has been replaced by a new paragraph in which extinction of right unless exercised within specific period of time, the law stands after this Amendment not only the curtailment of limitation period is permissible, but also the extinction of right, if sought to be brought by the agreement within a specific period, which period is less than the period of limitation prescribed for the suit under the contract in question is also rendered void. The period of limitation is three years[21]. The National Insurance Co. judgment dealt with the unamended part of Section 28 (b) and therefore does not hold good in law[22].

The Amendment to Section 28 prohibits clauses which seek to extinguish the rights of any party thereto, or discharge 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 to such extent, is void.[23]. Thus, the law as it now stands after this Amendment, can be stated thus-not only is the curtailment of limitation period impermissible, but also the extinction of rights, if sought to be brought by an agreement within a specified period, which period is less that the period of limitation prescribed for the suit under the contract in question is also rendered void[24].

Intention behind the Amendment-

It is imperative to understand the history behind the enactment of Section 28 (b) of the Contract Act in order to appreciate the real and proper intention behind it. It was intensively debated in Parliament, particularly the anomaly caused by Section 28 and the real need to bring in an Amendment. The Union Law Minister who presented the Bill said “Presently, Section 28 allows parties to an agreement to substitute their own period of limitation in place of the period laid down in the general law of limitation. But they are free to provide that if a party does not sue within a specified period, within the rights accruing under the contract, it shall be forfeited or extinguished or that party shall be discharged from all liability under the contract. This distinction is very fine and a  number  of litigating  contracting  parties  have  found  it  difficult  in  practice  to ascertain this very fine difference between what is meant by extinguishing  of a right and what is meant by extinction of a remedy. This anomaly is sought to be cleared by virtue of this Section 28”[25].

Section 28 of the Indian contract Act has been substituted by a new paragraph. The impact of this new paragraph is considerable, because it changes the entire basis of the original Section 28. The Amendment has a very chequered history. It was first introduced in the Rajya Sabha on 27-07-1992 as “The Indian Contract (Amendment) Bill 1992. However, after the chequered history in Parliament, the Bill became a Statute in 1996 and received the assent of the President and was published in the Gazette of India, Extraordinary, Part – II dated 8-01-1997h and come into force with effect from that date[26].The statement of objects and reasons of the Amendment Bill reads as follows:

“The Law commission of India has recommended in its 97^th report[27] that Section 28 of the Indian Contract Act, may be amended so that the anomalous situation created by the existing Section may be rectified:

It has been held by the courts that the said Section 28 shall invalidate only a clause in any agreement which restricts any party thereto from enforcing his rights absolutely or which limits the time within he may enforce his rights. The courts have, however, held that this Section shall not come into operation when the contractual term spells out an extinction of the right of a party to sue or spells out the discharge of a party from all liability in respect of the claim. What is thus hit by Section 28 is an agreement relinquishing the remedy only i.e., where the time-limit specified in the agreement is shorter than the period of limitation provided by law. A distinction is assumed to exist between remedy and right and this distinction is the basis of the present position under which a clause barring a remedy is void, but a clause extinguishing the right is valid. This approach may be sound in theory but in practice it caused serious hardship and might even be abused. It is felt that Section 28 of the Indian Contract Act of 1872 should be amended as it harms the interest of the consumer dealing with big corporations and causes serious hardship to those who are economically dis-advantaged. The Bill seeks to achieve the above objects”[28].

While construing a Statute, the Court is not bound to forget the history behind the legislation and the surrounding circumstances, which existed at the time, and the mischief[29] which the new enactment intended to cure. Historical back ground (Law Commission’s recommendations) may have to be looked in to discover the real intent of legislature[30]. The main purpose of interpretation of an Act is to ascertain the real and actual intention behind the legislation and the Courts cannot override the legislative intent specifically expressed in the enactment[31]. If the intention of the legislature is clear, that intention constitutes the law.

Committee reports are among the most useful sources of enacting history. As to the statutory objective of particular provisions of an Act, a report leading to the Act is likely to be the most potent aid; it would be mere obscurantism not to avail of it[32]. Where the Act has been laid before parliament and the legislation is introduced in consequence of that report, the report itself may be looked at by the court for the limited purpose of identifying the mischief that the Act was intended to remedy, and for such assistance as is derivable from this knowledge in giving the right purposive construction to the Act[33]. It would be very clear after a perusal of the Objects and reasons for the Amendment, the Law commission report and also the Parliamentary debate, that the real intention in bringing in an Amendment to Section 28 of the Indian Contract Act. While ascertaining the true canon of construction applicable to Section 28 (b) of the Indian Contract Act, these aspects stare us in the face.

What would be the consequences if there is a settlement etc. after a breach of contract. Will Section 28 (b) have any application?

A very interesting question that arises in the light of the legal uncertainty is as to the consequences when a settlement has been arrived at between the parties after a breach of contract, and the parties have agreed not to raise any dispute regarding the settlement in the Courts of law, with respect to the application of Section 28 (b) to any dispute to the settlement which has been arrived.

Where an agreement for compromise and entire claim of maintenance on receipt of full and final settlement was accepted by the parties, the Court held, giving effect to an agreement which overrides this provision of law, i.e., Section125 of the Cr. P.C., would be tantamount to not only giving recognition to something which is opposed to public policy but would also amount to a negation of it[34]. That is what exactly Section 23 of the Contract Act provides for the agreement pleaded being opposed to public policy and against the clear intendment of Section 125 of the Cr. P.C cannot be enforced or be a shield in Court of law[35].

However, if under a particular bargain, the rights of the parties were extinguished, that would be permissible and, that will not hit the provisions of Section 28 of the Contract Act and as such would not be violative of Section 23 of the Contract Act. But if rights are not extinguished but only the remedies are barred different consideration would apply[36].

The general principle is that everyone has a right to waive and to agree to waive the advantage of a law or rule made solely for the benefit and protection of the individual in his private capacity which may be dispensed with without infringing any public right or public policy[37]

As a general rule, any person can enter into a binding contract to waive the benefits conferred upon him by an Act of Parliament, or, as it is said, can contract himself out of the Act, unless it can be shown that such an agreement is in the circumstances of the particular case contrary to public policy. Statutory conditions may, however, be imposed in such terms that they cannot be waived by agreement, and, in certain circumstances, the legislature has expressly provided that any such agreement shall be void[38].

The Madras High court held that in the view of Section 28 of the Contract Act, which prohibits agreements which have, for their object, restraining independence from enjoying the fundamental right of resorting to Court of law for redressal of relief., the agreement did not restrain the Contractor from taking legal recourse or compelled him to have his right to take legal remedy[39].

Thus, from the above judgments, it may be inferred that where through a settlement after a breach of contract, one of the parties to an agreement waives or forfeits his right to adequate consideration, it is valid provided he does not waive away or abridge a right provided under an Act or law which may be considered as void to that extent. Therefore, a person cannot forfeit his right to approach the court through a settlement which is arrived at after the breach of the contract which is prohibited by Section 28 of the Indian Contract Act[40]. It is thus clear, that the object of this new paragraph in Section 28 is to declare that when any clause in an agreement not only bars a remedy, but also extinguishes the right, it shall be void to that extent. Therefore, many earlier decisions of different High Courts and of the Supreme Court in which a clause which does not debar the remedy, but extinguishes the right is held to be valid shall no longer be treated as a good law.[41]

Conclusion-

The argument that the curtailment of the period of limitation is not permissible in view of Section 28 (b) but extinction of the right itself unless exercised within a specified time is permissible and can be enforced is sound in common law or it is backed by judicial decisions is a negation of the fundamental right to approach the Court and would fly away in the light of the Amendment to Section 28 of the Indian Contract Act. The law declared by the Supreme Court in National Insurance case is no more the binding law and Section 28 (b) which is self explanatory, a plain reading of which leads to the construction that limiting the period lesser than as prescribed by the statue is void, time has now arisen to evolve a jurisprudence close to the lives of the citizens by protecting their right to move the Court.

The Amendment rectifying the defect in Section 28 of the Indian Contract Act should be given a literal and logical interpretation by properly appreciating the intention of the legislature in the light of Parliamentary debates, objects and reasons for the Amendment, Law commission report and thereby upholding the intention behind the enactment of Section 28 (b) of the Indian Contract Act.