This article has been written by Filma Varghese pursuing a Diploma in International Contract Negotiation, Drafting and Enforcement course from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Introduction

A contract is a legally binding promise by one party to fulfil an obligation to another party to do or not to do a specific act. The Statute of Limitations (SOL) is applicable primarily to various general acts that set a time limit within which a legal claim must be filed. In the realm of contract claims, the SOL specifies a time limit within which a party can initiate legal proceedings to enforce a contract or seek damages for breach of contract.

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What is the limitation period and what do contract claims entail

The limitation period sets a timeline for the claimant to bring a claim against a defendant. It is the time frame for initiating legal proceedings by the contracting party or an aggrieved party, due to the actions of another party, to initiate a legal claim. By setting clear boundaries, the limitation period helps maintain efficiency and fairness in the resolution of legal matters.

The concept of the limitation period is rooted in the idea that justice delayed can be justice denied. Over time, evidence may become harder to gather, memories may fade, and witnesses may become unavailable, potentially compromising the integrity of a legal case. To prevent such situations and ensure the preservation of evidence, the law imposes a time limit on bringing claims.

The duration of the limitation period can vary depending on the jurisdiction and the nature of the claim. It is typically calculated from the date on which the cause of action arises, which may be the date of an accident, breach of contract, or other legally cognizable wrong. Different types of claims may have specific limitation periods, such as personal injury, property damage, or contractual disputes.

It is essential for individuals to be aware of the applicable limitation period for their specific claim to avoid missing out on their legal rights. Failure to file a claim within the prescribed time frame can result in the claim being time-barred, which means it will no longer be legally enforceable. This emphasises the significance of seeking legal advice promptly to ensure that claims are filed within the appropriate time frame.

A contract claim results from a breach of contract when one party alleges that the other party has failed to perform or not satisfactorily performed their obligations under the contract.

Understanding of limitations in contract claims

For a contractual claim, it is necessary to show a breach. A breach of contract occurs if the rights of one party under a contract are breached by any of the other parties; the wronged party then has the legal right to compensation, which may include damages and cancellation. The running of time for a contractual claim usually starts on the day on which the breach occurs, regardless of whether the claimant is aware of the breach or the damages they have suffered.

Applicability of limitations in contractual claims in India

Applicable law

The Limitation Act of 1963 governs the time limits for bringing legal action. This Act applies to all civil proceedings and arbitrations, and it outlines specific time periods for various types of suits and actions. These time limits are listed in the Schedule to the Act.

One important aspect of the Limitation Act is its applicability to claims arising under the Indian Contract Act of 1872. The Indian Contract Act governs the formation and enforcement of contracts in India, and it sets out the rights and obligations of parties to a contract. The Limitation Act provides specific time limits for filing lawsuits or taking other legal actions to enforce contractual rights or seek remedies for breaches of contract.

For instance, according to the Limitation Act, a suit for breach of contract must be filed within three years from the date on which the breach occurs. Similarly, a suit for the recovery of money due under a contract must be filed within three years from the date on which the money becomes due.

It’s worth noting that the Limitation Act may provide for different time limits for different types of contractual claims. Additionally, there are certain exceptions and circumstances that may extend or modify the applicable limitation period. It is crucial to consult with a legal professional to determine the specific limitation period applicable to a particular contractual claim.

Overall, the Limitation Act of 1963 plays a vital role in ensuring that legal actions are brought within a reasonable timeframe, promoting the efficient administration of justice and preventing unnecessary delays in the resolution of disputes.

Prescribed period for contractual claims 

Under normal circumstances, the Indian Limitation Act of 1963, under Section 14 of the Limitation Act, provides that a claim for breach of contract must be made within three years from the date of such breach. In India, in view of the wording of Section 3, there cannot be any extension of time by agreement of the parties. Under Section 9 of the Limitation Act, once time has begun to run, no subsequent disability or inability to sue stops it.

Exceptions to the general rule

There are certain circumstances in which the limitation period does not apply. Sections 17, 18, and 19 of the Limitation Act of 1963 and Section 25(3) of the Indian Contract Act provide exceptions to the general rule. These instances are explained below:

Fraud or mistake

Section 17 of the Limitation Act of 1963 protects creditors who have been wronged by debtors by fraud, mistake, or concealment of facts. In such cases, the limitation period is extended until the creditor discovers  the fraud, mistake or concealment of facts.  

Here are instances illustrating the application of Section 17: 

A debtor induces a creditor to sign a contract by making deceptive promises about the debtor’s financial situation. The creditor discovered the fraud later on and filed a lawsuit. Even though the usual time limit has elapsed for filing the lawsuit, the court could potentially extend the time limit under Section 17.

If a debtor makes a mistake on a bill, causing the creditor to overpay, and the creditor only discovers the mistake after the regular timeline for filing a lawsuit has passed, Section 17 may provide a basis for the creditor to pursue the legal action.

A debtor conceals that they have filed for bankruptcy from a creditor. If the creditor uncovers this fact after the usual time limit for filing a lawsuit has expired, Section 17 may provide a basis for the creditor to initiate legal proceedings.

Acknowledgment in writing

Section 18 of the Limitation Act of 1963 provides for an extension of the limitation if the defendant acknowledges the dues in the existing contract and expresses a willingness to perform its obligations. The limitation period can be extended from the date of the acknowledgment. In this case, the new limitation period will start from the said date of acknowledgement. 

An agreement to resolve a dispute through arbitration and the subsequent award is deemed an acknowledgment of the debt. This acknowledgement doesn’t establish a new right but merely prolongs the limitation period. An acknowledgment does not create a new right; rather, it extends the limitation period. The creditor seeking extension must act in good faith, and the onus lies on the creditor to prove that the acknowledgement was made within the stipulated time.

Acknowledging the existing contract doesn’t renew the contract and therefore differs from a novation of contract under Section 62 of the Contract Act. Consequently, a time-barred debt cannot be revived simply through acknowledgment; instead, it requires a new contract, specifically a promise to pay under Section 25(3) of the Indian Contract Act, 1872. 

Payment on account of debt or of interest on legacy

Section 19 of the Limitation Act of 1963 provides for the extension of the limitation period in which the debtor makes part payment of debt or interest before the expiry of the limitation period.

Continuing breach

Section 22 of the Limitation Act states that in cases of continuing breach, the claimant gets a new cause of action for every breach. A fresh period of limitation will only arise where the source of legal injury is continued. In M. Siddiq v. Suresh Das (2020), the Supreme Court has distinguished between a “continuing wrong” and a “continuing injury,” clarifying that in the case of a continuing injury, the damage resulting from a wrongful act may continue, but the same does not avail the plaintiff the right to seek recourse under the section.

Time limits in agreements

The Indian Contract Act’s Section 28 deals with agreements that try to limit the time frame for filing legal proceedings. It states that any agreement that sets a shorter time limit for initiating a lawsuit than the one prescribed by the Limitation Act is considered invalid.

The Limitation Act is crucial legislation that establishes the time limits within which legal actions must be commenced. It aims to prevent unnecessary delays in the justice system and ensure that disputes are resolved promptly. By setting a standard time frame for filing lawsuits, the Limitation Act promotes efficiency and discourages parties from deliberately prolonging legal proceedings.

Section 28 of the Contract Act recognises the importance of the Limitation Act and seeks to uphold its provisions. It declares that agreements that attempt to shorten the limitation period are legally unenforceable. This provision serves to safeguard the rights of individuals by ensuring that they are not deprived of their legal remedies due to restrictive agreements.

The rationale behind Section 28 is to prevent parties from contracting out of the Limitation Act’s provisions. Allowing such agreements would undermine the purpose and effectiveness of the Act, leading to potential injustice and a lack of uniformity in the legal system. By rendering such agreements invalid, Section 28 upholds the principles of fairness, equity, and access to justice.

It is essential to note that Section 28 does not apply to agreements that extend or modify the limitation period. Parties are free to enter into agreements that extend the time frame for filing a lawsuit, provided they adhere to the guidelines set forth in the Limitation Act. However, any attempt to shorten the limitation period will be deemed invalid and will not be recognized by the courts.

Expiry of the limitation period

A contract claim that is filed after the expiration of the SOL is considered time-barred, precluding its enforcement in a court of law. The defendant can raise a plea of statute of limitations as a defence to the claim, rendering the claim unenforceable. 

Rationale for limitation periods 

The purpose of limitation periods is to prevent legal claims from being brought too long after the cause of action has accrued. The reasons for limitation periods are to protect the defendants from stale claims and encourage prompt action by claimants, as the evidence becomes less reliable over time and memories fade, making it difficult for a defendant to defend themselves effectively. 

Limitations provide a sense of finality, ensuring that disputes are resolved within a reasonable timeframe. 

Why is limitation in litigation important?

Where a party has a strong case but the limitation period has expired, the claim will be likely to fail. Even in unusual circumstances, where a party is prevented from issuing its claim in time for reasons beyond its control, the court has no discretion to extend the limitation period for this type of claim. It is, therefore, crucial that limitation issues are considered at the outset of any potential claims. However, it should be noted that, when a debt becomes time-barred, it does not become extinguished but only unenforceable in a court of law.

Case laws

There are numerous cases in India that have dealt with the application of the SOL in contract claims. A very few have been mentioned below:

In the case of Syndicate Bank vs. Channaveerappa Beleri and Ors. (2006), the Supreme Court ruled that if a guarantee agreement specifies payment upon demand,. The limitation period starts when the demand is made and the guarantor commits a breach by not complying with the demand.

In the case of Dena Bank (now Bank of Baroda) vs. C. Shivakumar Reddy (2020), the Supreme Court emphasised that acknowledgment of a debt in a company’s balance sheet extends the limitation period.

The Hon’ble Delhi High Court in Kotak Mahindra Bank Ltd. vs. Anuj Kumar Tyagi (2015), observed that: “the period of limitation would, though, commence from the date of the last defaulted EMI, which is made the subject matter of the notice and not from the date of the notice itself.”

Conclusion

The Limitation Act of 1963 provides definite timeframes for filing appeals and initiating legal proceedings for all civil proceedings and arbitrations, including claims arising under the Indian Contract Act, 1872. The essence of this Act revolves around the notion of imposing strict time limits to encourage diligence in pursuing legal action. Parties who fail to initiate legal action within the statute of limitations may find themselves barred from asserting their claims. Parties to a contract should be mindful of the statute of limitations and safeguard their rights within the prescribed timelines. Once the statutory limitation period expires, courts are generally reluctant to revive claims.

References

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