This article is written by Shweta Kumari, a student of Lloyd Law College. This article is an overview of Section 28 of the Indian Contract Act, 1872 and its exceptions.
Table of Contents
Introduction
An agreement to restrict enforcement of contractual rights through legal proceedings is void under Section 28 of the Indian Contract Act, 1872. Section 28 has three exceptions. An important judgement was passed by Delhi High Court in the case Larsen and Toubro Limited v. Punjab National Bank and Another on July 28, 2021, wherein Exception 3 of Section 28 was interpreted. This article is an overview of Section 28 and its exceptions in light of the recent judgement. It also discusses important case laws.
Section 28 of the Indian Contract Act, 1872
Section 28 of the Indian Contract Act, 1872 states that an agreement in absolute restraint of legal proceedings is void.
Section 28 (a) of the Indian Contract Act, 1872 states that:
- No agreement can debar enforcement of rights through a court of law.
- No agreement can oust the jurisdiction of a court.
- No agreement can stipulate a time limit below the time limit prescribed under the Indian Limitation Act, 1963.
The 97th Law Commission suo moto analyzed Section 28 and proposed an amendment. Section 28(b) of the Indian Contract Act, 1872, inserted via the Indian Contract (Amendment) Act, 1997, states that:
- No agreement can extinguish the rights of any party on the expiry of a specified period.
- No agreement can discharge any party from any liability on the expiry of a specified period.
Insertion of the aforesaid provisions to restrict any party from enforcement of their rights will render a contract void to that extent. The amendment blurred the lines between ‘right’ and ‘remedy’.
Exceptions to Section 28
Section 28 of the Indian Contract Act, 1872 is not absolute. It has three exceptions.
The first exception states that an agreement must refer all disputes to arbitration that may arise between the parties will not be void. Further, a mere arbitration award will be recoverable in the disputes referred. The second clause of Exception 1 was repealed by the Specific Relief Act, 1877.
The second exception states that an agreement to refer to questions that arose before the insertion of the clause to arbitration between the parties will not be void.
The third exception states that a bank’s or financial institution’s guarantee agreement with a provision to extinguish the rights of any party or discharge any party from any liability upon the expiration of a specified period (>1 year) from the date of occurrence/non-occurrence of a specified event will not be void. Exception 3 was inserted via The Banking Laws (Amendment) Act, 2012 in 2013 on the recommendations of the Indian Banks’ Association. It functioned as a redress mechanism for the banks post 1977 amendment.
The expression “bank” in Exception 3 includes the terms:
| Term | Section (Definition) |
| Banking company | Section 5(c) of the Banking Regulation Act, 1949 |
| A corresponding new bank | Section 5(da) of the Banking Regulation Act, 1949 |
| State Bank of India | Section 3 of the State Bank of India Act, 1955 |
| A subsidiary bank | Section 2(k) of the State Bank of India (Subsidiary Banks) Act, 1959 |
| A Regional Rural Bank | Section 3 of the Regional Rural Bank Act, 1976 |
| A Co-operative Bank | Section 5(cci) of the Banking Regulation Act, 1949 |
| A multi-State co-operative bank | Section 5(cciiia) of the Banking Regulation Act, 1949 |
The expression ‘a financial institution’ in Exception 3 means any public financial institution within the meaning of Section 4-A of the Companies Act, 1956.
The insertion of Exception 3 of Section 28 of the Indian Contract Act, 1872 via the 2013 Amendment created a dichotomy in law. There are two viewpoints.
- The minimum claim period of a bank guarantee must not be less than 12 months.
- While banks have the right to set the minimum claim period of a bank guarantee to less than 12 months, banks must not extinguish the obligations altogether.
The case Larsen and Toubro Limited v. Punjab National Bank and Another held the first viewpoint erroneous.
Arbitration agreement
Section 7 of the Arbitration and Conciliation Act, 1996 states that an ‘arbitration agreement’ is an agreement between the parties to refer all or specific disputes that may arise or have arisen between the parties to the arbitration. The agreement can be a clause in a contract or a separate agreement. The agreement must be written. A dispute cannot be referred to arbitration in absence of an arbitration agreement unless the parties provide written consent via joint memo or joint application.
In M/s Elite Engineering and Construction (HYD.) Private Ltd. v. M/s Techtrans Construction India Private Ltd. (2018), the court established specific rules and regulations for the insertion of the arbitration clause.
- There must be a clear reference to the document with the arbitration clause.
- The reference of the arbitration clause must indicate the intention to incorporate the arbitration clause.
- The arbitration clause must extend to any and all types of disputes that may arise or have arisen with respect to the contract.
- The contract with reference to another contract with an arbitration clause will be inadmissible.
- The contract with reference to another contract with terms and conditions is inadmissible unless there is a reference to the arbitration clause of the other contract in the contract.
- There must be a reference to the arbitration clause stated in an institution’s terms and conditions in the contract.
Important cases related to Section 28
In Tapash Majumdar v. Pranab Dasgupta (2006), the East Bengal Club authorized the Executive Committee to take action against the members of the club who challenged the election process of the Executive Committee in the court. The Calcutta High Court ruled that such a restriction was against public policy and violated Section 28 of the Indian Contract Act, 1872.
In Bharat Sanchar Nigam Ltd. v. Motorola India Pvt. Ltd. (2008), the amount of liquidated damages in an advance purchase order, evaluated and imposed by the purchaser, was declared unchallengeable by the supplier. The Court ruled that the unilateral right of the purchaser to determine liquidated damages was in restraint of legal proceedings and thus void under Section 28 of the Indian Contract Act, 1872.
In Hakam Singh v. Gammon (India) Ltd. (1971), the agreement between the parties stated, “The Court of law in the City of Bombay alone shall have the jurisdiction to adjudicate thereon”. A suit filed in Varanasi was dismissed. The Supreme Court ruled that the agreement did not contravene Section 28 of the Indian Contract Act, 1872. The agreement would be void if the Bombay Court did not have the jurisdiction. An agreement cannot confer non-existent jurisdiction on a court.
In Delhi Bottling Co. Ltd. v. Times Guaranty Financials Ltd. (2001), a hire purchase agreement of commercial vehicles executed in Bombay conferred Bombay courts exclusive jurisdiction in case of any dispute. The Court ruled that the agreement did not violate Section 28 of the Indian Contract Act, 1872 as parties can assign exclusive jurisdiction to any court having jurisdiction.
In United India Ins. Co. Ltd. v. Associated Transport Corpn. Ltd. (1987), the printed words “Subject to Bombay jurisdiction alone” on the consignment note with the signature of the carrier did not amount to an agreement. The Kerala High Court ruled that there was no meeting of the minds between the consignor and the carrier and thus the parties did not enter into an agreement.
In Dilip Kumar Ray v. Tata Finance Ltd. (2001), a hire purchase agreement of Tata Estate Car executed in Madras set the exclusive jurisdiction of all disputes to Bombay. A suit filed in Bhubaneshwar was dismissed.
In C. Satyanarayana v. K.L. Narasimham (1966), the defendant printed the words “Subject to Madras jurisdiction” on the letter to the plaintiff. The Court ruled that the words did not amount to an agreement and the parties were not bound to the Madras jurisdiction because the plaintiff did not give his consent for the same.
In Baroda Spinning and Weaving Co. Ltd. v. Satyanarayan Marine & Fire Ins. Co. Ltd. (1913), the fire insurance policy required an action/suit against the rejection of a claim within the period of three months. All benefits were dissolved if no action/suit was taken within the prescribed time frame. The Court ruled the agreement valid. Kapur, J. in Ruby General Insurance Co. Ltd. v. Bharat Bank Ltd. and Others (1950) explained that the parties can agree that a promisor will be liable to indemnify the promisee if he is notified within a specific time frame. It is common in insurance agreements where time is of the essence.
In National Ins. Co. Ltd. v. S.G. Nayak & Co. (1997), the Court ruled an insurance agreement clause, which released the insurance company of all liability if a loss/damage claim was not filed within 12 months, not in violation of Section 28 of the Indian Contract Act, 1872. The agreement did not seek to curtail the period of limitation. An agreement to forfeit/waive rights before the lapse of a specified time period is not void.
In Union of India v. Indusind Bank Ltd. (2016), the Union of India submitted that the bank guarantees which limited the time period within which they could be invoked would not be affected by an amendment introduced a year later. The Supreme Court ruled that Section 28 is substantive law. It operates prospectively and not retrospectively. The court did not delve into the repercussions of the addition of Section 28(b) on the bank guarantees but stated that the Parliament addressed the grievances of the banks through the addition of an exception in Section 28.
Delhi High Court Judgment on Exception 3
In Larsen and Toubro Limited v. Punjab National Bank and Another, Punjab National Bank’s and the Indian Banks Association’s interpretation of Exception 3 of Section 28 of Indian Contract Act, 1872 was challenged.
Facts
The Indian Banks Association in an attempt to interpret Exception 3 of Section 28 issued circulars wherein a minimum claim period of less than 12 months was declared void on the basis of which Punjab National Bank compelled Larsen and Toubro to set the minimum claim period of bank guarantee to one year.
Issues Raised
The misinterpretation of Exception 3 of Section 28 by the respondents cost the petitioner superfluous commission charges. The petitioner was also required to maintain collateral security for an extended period. The misinterpretation put an impediment on the petitioner to conduct their business and thus affected their fundamental right under Article 19(1)(g) of the Constitution of India.
A writ petition was filed seeking to quash and set aside the letters issued by Punjab National Bank dated 18.08.2018 and 28.03.2019 to Larsen and Toubro and the letters issued by Indian Banks Association dated 10.02.2017 and 05.12.2018 to all member banks. The petition also sought any interpretation of Section 28(b) read with Exception 3 of the Indian Contract Act, 1872 which prescribed a minimum claim period of less than 12 months void to be set aside.
Observation of the Court
Section 28 does not deal with the claim period but the rights of the creditor to enforce his rights. The circular of the Indian Banks Association and Punjab National Bank’s communication is erroneous. The claim period is a grace period that extends beyond the guarantee’s validity period and may or may not even exist in a bank guarantee.
Judgment
The Delhi High Court ruled that Exception 3 did not set a minimum claim period for bank guarantees.
Conclusion
Section 28 of the Indian Contract Act, 1872 and its exceptions safeguard the indispensable interests of the parties. Section 28, amended several times, is still an enigma in the field of law. The recent judgement in Larsen and Toubro Limited v. Punjab National Bank and Another was a piece of the puzzle.
References
- https://www.ibanet.org/article/A5C81FF9-2E1F-4D7C-B7F2-E758483D6E99
- https://www.mondaq.com/india/arbitration-dispute-resolution/695360/if-there-is-no-arbitration-agreement-between-the-parties-the-court-cannot-refer-the-parties-to-arbitration-without-a-joint-memo-or-written-application-by-the-parties
- https://www.scconline.com/blog/post/2016/09/17/1997-amendment-to-section-28-of-contract-act-1872-applicable-prospectively/#:~:text=1997%20Amendment%20to%20Section%2028%20of%20Contract%20Act%2C%201872%20applicable%20prospectively,-Case%20BriefsSupreme&text=1996%20which%20restricted%20the%20period,year%20later%20i.e.%20on%208.1.
- https://www.mondaq.com/india/government-contracts-procurement-ppp/1098554/the-third-exception-to-section-28-of-the-contract-act-1872-and-claim-periods-under-bank-guarantees
- https://www.livelaw.in/top-stories/exception-3-to-section-28-contract-act-mandatory-claim-period-bank-guarantees-delhi-high-court-178543
Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.
LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join:
https://t.me/joinchat/J_0YrBa4IBSHdpuTfQO_sA
Follow us on Instagram and subscribe to our YouTube channel for more amazing legal content.
