AGREEMENT IN RESTRAINT OF LEGAL PROCEEDINGS
(SEC. 28)
Sec. 28 [as amended by the Indian Contract (Amendment) Act,1997] states that an agreement absolutely restraining a party from enforcing his rights through a court of law, Oran agreement which places a limit as to the time within which a right can be enforced, is void.
The section reads as under:
"28.Agreement in restraint of legal proceedings void.—
Every agreement,—
By which any party thereto is restricted absolutely from enforcing his rights under 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 which extinguish 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."
Exception 1.—Savings 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.
Exception 2.—Saving of contract to refer questions that have already arisen.--Nor shall this section render illegal any contract in writing, by which two or more persons agree to refer to arbitration any question between them which has already arisen, or affect any provision of any law in force for the time being as to references to arbitration.
This section makes two kinds of agreements void:
(1) Agreement, by one party is absolutely debarred from enforcing his rights through usual legal proceeding
(2) Agreement, which places a time limit for enforcing a rightthrough legal proceedings.
(1) Agreement absolutely restrai ing legal proceedings
If an agreement restricts a party thereto absolutely from enforcing his contractual rights by bringing usual legal proceedings, the same is void. An agreement to oust the jurisdiction of a court is opposed to public policy and the same is void both in India and England. The agreement is void if restraint is an absolute one.
In case the parties agree to a partial restriction on the right to go to the Court of law, such a contract is enforceable. Therefore, if two competent courts can possibly deal with the subject-matter of litigation, it is open to the parties to a contract to agree that dispute in respect thereof should be adjudicated upon by one of the two competent courts, and not by the other.[Ajamera Brothers v. Suraj Naresh Kumar Jain, A.I.R. 1968 Pat. 44.]
Such an agreement which restricts jurisdiction to only one of several competent courts is not against public policy and therefore not void under section 23.35[Angle Insulations v. Davy Ashmore India Ltd., A.I.R. 1995 SC 1766; M/s Thakral & Sons v. Indian Petro Chemicals Corp n Ltd., A.I.R. 1994 Delhi 266.]
In Hakam Singh v. Gammon (India) Ltd.36[A.I.R. 1971 S.C. 740.],
Facts of the case:
a clause in the agreement between the parties provided that the "Court of law in the City of Bombay abne shall have jurisdiction to adjudicate thereon".
The plaintiff filed a suit at Varanasi, but the same was dismissed in view of the above stated agreement.
The Supreme Court held that the agreement was not opposed to public policy and it did not contravene section 28, and, therefore, the suit filed at Varanasi was rightly dismissed. The position would be different if the Bombay Court has no jurisdiction, but the parties say that Bombay Court alone can entertain the suit. Such an agreement is void, because the parties by an agreement cannot confer jurisdiction on a court which does not in fact exist.
In order that the agreement stipulating that a particular court alone has jurisdiction is enforceable, it is further necessary that the agreement should have been properly entered into.
In United India Ins. Co. Ltd. v. Associated Transport Corpn. Ltd.37[A.I.R. 1988 Ker. 36.], the consignment note contained printed words "subject to Bombay jurisdiction -alone". The note was signed only by the employee of the carrier. Apart from what was printed on the note, there was nothing else to suggest that there was meeting of minds between the consignor and the carrier or an agreement between the parties to confer exclusive jurisdiction on the Bombay Court.
It was held by the Kerala High Court that the printed words by themselves and without anything more were not sufficient to constitute an agreement to oust jurisdiction f all Courts other than the court specified.
Similar was also the decision of the A.P. High Court in C. Satyanarayana v. K.L. Narasimham.38[A.I.R. 1968 A.P. 330.]
Facts of the case:
In that case the defendant wrote a letter to the plaintiff on the top of which was printed :"Subject to
It was held that such words could not become a part of the contract unless it was expressly agreed to by the plaintiff, and therefore, these words did not bind the parties to the contract as to the jurisdiction of the Court.
Similarly, if an invoice contained the words "Subject to Shimoga jurisdiction" in a contract entered into through brokers, and the knowledge of the purchasers to this clause could not be proved, the clause was not binding.39[Melur G. Venkatappa & Sons v. T.V.R. Ramlingam Pillai, A.I.R. 1974 Mad. 186.]
Similar will also be the position if at the time of delivery of goods to a carrier, the Consignment Note excluding the jurisdiction of one of the two courts, having concurrent jurisdiction in the matter, is not got signed from the consignor. In such a case, the suit may be filed in any of the courts having the jurisdiction. [Road Transport Corp. v, Kirloskar Brothers Ltd., A.I.R. 1981 Bom. 299.]
If, however, the contract has been properly entered into, the same is binding.
Thus,when the agreement contains a clause that the litigation, if any, will be subject to Bombay Courts only, it simply curtails the choice which a party has under the ordinary la by confining the right to a particular court only, and the same is not vitiated by section 28.41[Libra Mining Works v. Baldota Brothers, A.I.R. 1962 A.P. 452.]
In Dilip Kumar Ray v. Tata finance Ltd.42[A.I.R. 2002 Orissa 29.],
Facts of the case:
1. the parties entered into a hire-purchase agreement in respect of sale of a Tata Estate Car.
2. The agreement was executed at Madras.
3. The parties agreed that all disputes or claims shall be settled at Bombay.
4. No cause of action had arisen at Bhubaneshwar except showing some payment being made at Bhubaneshwar.
It was held the plaintiff did not get the right to file a suit at Bhubaneshwar. The suit can, therefore, be held only at the place agreed to between the parties, le., Bombay.
In Delhi Bottling Co. Ltd. v. Times Guaranty Financials Ltd.43[A.I.R. 2003 NOC 7 (Delhi).]it has been held that when two courts have jurisdiction parties are free to vest jurisdiction on in one of those courts only.
Facts of the case:
1. In this case there was a hire-purchase agreement in respect of supply of commercial vehicles.
2. The agreement was executed in Bombay.
3. An agreement in such a case by the parties that in case of any dispute Bombay courts shall have exclusive jurisdiction.
The agreement was held to be valid and not hit by section 28 of the Contract Act.
(2) Agreement limiting time for a legal action
According to the Indian Limitation Act, 1963 there is a time limit for various actions. If an agreement between the parties stipulates a smaller time limit than prescribed under the Indian Limitation Act, the agreement is void under section 28.
For example:if an agreement prohibits an action if brought after one year of the breach of contract, the same is void, because it takes away the right to bring an action after one year, though the period of limitation for such an action prescribed in the Limitation Act is 3 years.
Agreement extinguishing the rights on expiry of a specified period
An agreement curtailing the period of limitation has been distinguished from an agreement resulting in the release or forfeiture of the rights if an action is not brought within a certain period. Such clauses are generally there in insurance agreements.
In BarodaSpinning and Weaving Co. Ltd. v. Satyanarayen Marine & Fire Ins. Co. Ltd.44,[I.A.R. (1914) 38 Bom. 344; GirdhariLalv. Eagle Star & British Dominions Ins. Co., (1923) 27 Cal.W.N. 955; A.N.Ghosev. Reliance Insurance Co., A.I.R. 1934 Rang 15.]
a clause in a policy of fire insurance provided that if a claim was made and rejected and an action or suit is not commenced within three months after such rejection, all benefits under the policy shall be forfeited.
It was held that the agreement contained in the policy is valid and binding.
Justification for the forfeiture of claims by the lapse of time was explained by Kapur J. in Ruby General Insurance Co. v. Bharat Bank in the following words :45[A.I.R. 1950E.P. 352, at 353.]
"I do not see how such a clause is void as contravening the Law of Limitation. It is open to any two parties to agree that the promisor would only be liable if he is informed of the indemnification within the stipulated period, and there seems to be a great deal of sense in it particularly in the case of fire insurance or insurance against accident where the liability to the extent of damage caused, when the matters are fresh, can be measured with a certain amount of accuracy. Lapse of time in such cases may result in all kinds of claims which are not capable of determination with any amount of exactitude and when memories of men may be become rather hazy."
In such cases, the provision regrading limitation of time has been held not to offend the provisions of section 28 of the Indian Contract Act. The agreement in essence is one where the contract between the parties’ states that the right to indemnify in case of loss and the liability of the insurers in respect thereof would not become absolute unless the remedy is sought within a certain period of time mentioned in the insurance policy. The agreement does not curtail the time period for an action; it rather extinguishes the right because of the delay in bringing the action. Since the right itself is extinguished because of the delay, the question of enforcing the right thereafter does not arise.
In National Ins. Co. Ltd. v. S.G. Nayak &Co.,46[A.I.R. 1997 S.C. 2049; S.G Nayak & Co. v. National Ins. Co. Ltd., A.I.R. 1996 Ker. 49 reversed.]
In this case there was a clause in the insurance agreement that if the claim for loss or damage is not pressed within 12 months, the insurance company shall cease to be liable. The right of the claimant had been held to be extinguished and, therefore, the insurance company was not liable as the case was brought after the expiry of 12 months of the loss or damage caused by strike.
it has been held that an agreement which in effect seeks to curtail the period of limitation and prescribes shorter period than that prescribed by law would be void as offending sec. 28 of the Contract Act.If, however,there is a clause in an agreement which provides the forfeiture or waiver of the right itself, the agreement will be void as it would not fall within the mischief of section 28 of the Contract Act.
Amendment Act, 1997
Section 28 of the Contract Act has been amended by the Indian Contract (Amendment) Act, 199747.The new provision contained in section 28 (b) states that every agreement 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 thereto from enforcing the rights, is void to that extent.
In view of the above stated provision any agreement whereby the right of any party thereto is extinguished by not bringing an ction within a specified period, will also be void under section 28. Thus, even in contracts of insurance, etc. as stated above, any agreement which in effect curtails the period of limitation will be void.
Exceptions
1. Contract to refer future dispute to arbitration
Exception 1 to section 28 allows an agreement to be made between two or more person by which, they are to refer any dispute which may arise between them in future to arbitration, and only the amount awarded in such arbitration shall be recoverable in respect of the dispute so referred. In such a case there is no absolute restraint on a party to go to the court of law. It may only stay the right of the plaintiff to go to the court until compensation to be awarded has been ascertained by arbitration.48[Coringa Oil Co. v. Koegler, A.I.R.(1876) 1 Cal. 466.]
An agreement to refer dispute to arbitration "does not close the final door to a court of law. If it does so, it would be void; but it does not do so. The approach to the Court may not be by the straight path, but by the by lanes or in other words, the approach may be a staggered one and that would not be a contravention of S. 28."49[New Great Insurance Co. v. United Equipments and Stores (Pvt.) Ltd., A.I.R. 1970 Cal. 221, at p. 224.]
If the parties agree under a contract to refer their disputes for adjudication to the arbitration the mere fact that the arbitrators are situated in foreign countries, will not be sufficient to nullify the arbitration agreement .50[M/s Atlas Export Industries v. M/s Kotak & Co., A.I.R. 1999 S.C. 3286]
2. Contract to refer existing question to arbitration
Exception 2 to sec. 28.states that questions which have already arisen between the parties may be referred by them to arbitration by a contract in writing. Such an agreement is also valid.