19 February 2014

Restraining legal proceedings - Recent trends

by Shikha S. Jaipuriar

The general law of contract recognizes promises made for consideration as legally enforceable agreements. However, it frowns upon certain promises and prohibits their enforcement, including those that are in restraint of legal proceedings.


Section 28 of the Indian Contract Act, 1872 contains one of the seven governing principles to determine when an agreement is void[see end note 1]. It provides that an agreement is void if it:-

  • (a)restricts absolutely a party from enforcing his contractual rights by usual legal proceedings in ordinary tribunals
  • (b)limits the time within which a party may enforce his rights as aforesaid
  • (c)extinguishes the contractual rights of a party on expiry of a specified period so as to restrict enforcement of rights by any party; or
  • (d)discharges a party from his contractual liability on expiry of a specified period so as to restrict enforcement of rights by any party.

The Law Commission of India, in its 97th Report [see end note 2] had expressed concerns over the inadequacy of Section 28 in dealing with contractual clauses extinguishing the rights. The recommendations led to the amendment of this section in 1997 [see end note 3] whereby aforesaid conditions (c) and (d) were added. ‘The proposal to disallow prescriptive clauses (which extinguished rights or provided for forfeiture of rights or discharge of liability on failure to sue within a certain time) rested on the basis of economic justice, avoidance of hardship to consumers and certainty and symmetry of law.’ [see end note 4]

Section 28 comes with a handful of exceptions:

  • (a)Contracts that mandate reference to arbitration to resolve disputes and cap the claims at the amount awarded in such arbitration.
  • (b)Contracts that refer an existing dispute to arbitration.
  • (c)Reference to arbitration [see end note 5] through statutory provisions.

New exception for bank guarantees

Another exception [see end note 6] has been carved out permitting banks and financial institutions to stipulate that rights under a guarantee shall be extinguished if no claim is made within specified period not being less than one year.

Genesis of this amendment may also be traced to Law Commission's 97th Report, which noted serious hardship being caused to consumers dealing with big business due to the clause on extinguishment of right under contracts. It, inter alia, cited a Kerala case [see end note 7] where the rights of a person to enforce a bank guarantee were extinguished on expiry of six months from the date of expiry of bank guarantee, which, according to the Law Commission, was a short period. Accordingly, Section 28 was amended in 1997 whereby a clause on extinguishment of right was made impermissible [see end note 8].

In 1998, the Narasimham Committee [see end note 9] highlighted the apprehension of banks that they could no longer limit their liabilities under bank guarantees to a specified period. They would have to carry such guarantee commitments for long periods as outstanding obligations. The concern was accentuated by the fact that government departments do not generally return the original guarantee papers and claims under such guarantees could be enforced as late as 30 years [see end note 10] causing banks to keep securities and margins for long periods.

As a sequel, the Andhyarujina Committee was set up in 1999, which recommended that a proviso be added to Section 28 to permit banks to stipulate that rights under a guarantee would be extinguished if no claim was made within the specified period which shall not be less than one year. Eventually, the Government decided to amend Section 28 accordingly "to bring finality to redemption of such guarantees” [see end note 11].

Choice of jurisdiction

A key aspect of Section 28 is that it only bars absolute restriction on seeking legal recourse. By implication, a limited restriction would not be barred. But parties cannot oust the jurisdiction of all the courts having jurisdiction to decide the cause of action. Similarly, parties cannot confer jurisdiction on a court which it does not possess under law.

The construction of a clause providing for choice of jurisdiction has been the subject matter of several judgements. In A.B.C. Laminart Pvt. Ltd. v. A.P. Agencies, Salem [see end note 12], the Supreme Court was called upon to decide the effect of one such clause. The court examined the maxim of ‘expressio unius est exclusio alterius’ [see end note 13] and held:

“When the clause is clear, unambiguous and specific accepted notions of contract would bind the parties and unless the absence of ad idem can be shown, the other Courts should avoid exercising jurisdiction. As regards construction of the ouster clause when words like 'alone', 'only ', 'exclusive' and the like have been used there may be no difficulty. Even without such words in appropriate cases the maxim 'expressio unius est exclusio alterius' - expression of one is the exclusion of another may be applied. What is an appropriate case shall depend on the facts of the case.”

In the said case, the Court finally held that other jurisdictions having connecting factor were not clearly, unambiguously and explicitly excluded.

More recently, the judicial opinion has veered towards applying the maxim 'expressio unius est exclusio alterius' more decisively. In Swastik Gases P. Ltd. v. Indian Oil Corporation Ltd [see end note 14]., the three-judge bench of the Supreme Court of India delivered two concurring judgements. R.M. Lodha, J. speaking for himself and Kurian Joseph, J. held:

“... for construction of jurisdiction clause, like clause 18 in the agreement, the maxim expressio unius est exclusio alterius comes into play as there is nothing to indicate to the contrary ...  Where the contract specifies the jurisdiction of the courts at a particular place and such courts have jurisdiction to deal with the matter, we think that an inference may be drawn that parties intended to exclude all other courts.”

Madan B. Lokur, J., after adverting to the judgements on exclusion clauses using the word like “only”, “alone” etc. and those not employing any such word, held: ... in the jurisdiction clause of an agreement, the absence of words like “alone”, “only”, “exclusive” or “exclusive jurisdiction” is neither decisive nor does it make any material difference in deciding the jurisdiction of a court. The very existence of a jurisdiction clause in an agreement makes the intention of the parties to an agreement quite clear...

It appears that the judicial opinion is now somewhat entrenched in honouring the choice of jurisdiction in domestic contracts, unless of course it agitates against the very basic premises of Section 28.

Evolution of Section 28

Among the seven provisions on void agreements in the Act, Section 28 has seen the maximum legislative action. After many recommendations, amendments and judicial pronouncements, Section 28 has evolved to its present form and interpretation (though it is not yet fully settled). Providing a clause on choice of jurisdiction in contracts is a common practice. With its critical impact on enforcement of commercial contracts, it is important that the parties to contract have a clear understanding of its meaning and import so that they may overcome this preliminary objection in any enforcement action with ease.

[ The author is a Principal Associate, Corporate Practice, Lakshmikumaran & Sridharan, New Delhi ]

End Notes:

  1. As per Clause (g) of Section 2 of the Act, an agreement not enforceable by law is said to be void.
  2. Law Commission of India, Ninety-seventh Report “Section 28, Indian Contract Act, 1872 : Prescriptive Clauses in Contracts”, March, 1984
  3. The Indian Contract (Amendment) Act, 1996 (1 of 1997) (w.e.f. January 8, 1997)
  4. Pollock & Mulla, Indian Contract & Specific Relief Acts, 13th Edition, 2006, at page 879
  5. For instance, Section 18 of the Credit Information Companies (Regulation) Act, 2005 provides that if any dispute arises amongst, credit information companies, credit institutions, borrowers and clients on matters relating to business of credit information and for which no remedy has been provided under that Act, such disputes shall be settled by conciliation or arbitration as provided in the Arbitration and Conciliation Act, 1996 (26 of 1996), as if the parties to the dispute have consented in writing for determination of such dispute by conciliation or arbitration.
  6. Banking Laws (Amendment) Act, 2012 (4 of 2013)
  7. Kerala Electrical and Allied Engineering Co. Ltd. v. Canara Bank, AIR 1980 Ker 151
  8. SLP (C) 16166-16168 of 2011, titled Union of India  v. Indusind Bank Ltd.  is presently pending before the Supreme Court of India wherein the court has been called upon to adjudicate on the validity of a term in a bank guarantee limiting period for lodging of a claim in light of the 1997 amendment of Section 28.
  9. Committee on Banking Sector Reforms (1998)
  10. By virtue of a longer period of limitation for claims by government
  11. ‘Salient Features of Banking Laws (Amendment) Bill 2012’, Press Release of Ministry of Finance, Government of India, dated December 21, 2012
  12. (1989) 2 SCC 163
  13. A canon of construction holding that to express or include one thing implies the exclusion of the other, or of the alternative.(Black’s Law Dictionary, 9th Ed.)
  14. (2013) 9 SCC 32

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