Abstract

A suit refers to proceedings by a party/parties against another party/parties in the court of law in
which the plaintiff seeks the remedy that the law provides for the redress of an injury. It has been
observed that parties in their agreements attempt to curtail the right to sue of other parties either
by forfeiting their rights after stipulated time or by limiting the time within which only they can
sue. It has been held that access to justice is a fundamental right which cannot be curtailed by
any party even by signing the contract. If the parties are allowed to reduce the time period
allowed by Limitation act to claim, it would be indirectly taking the fundamental right of a party.
It would mean that the party would have the right but won’t be able to seek the remedy. It has
been said that right without remedy is no remedy at all. Hence , Sec 28 of the Indian Contract
Act, 1872 makes any clause in the agreement which curtails the right to sue to be void.

This paper tries to analyze the situations that when and how right to sue can be curtailed by way
of exceptions provided by legislature. It seeks to provide that jurisdictions of which courts can be
only curtailed and how the remedy can be enforced even after signing the contract. It also
explains the new amendment of Sec 28 in the year 1997 and its effects of removing the artificial
difference which parties used to create by curtailing the right itself instead of limiting the time
period to sue.

What the Act says

Sec 28. Agreements in restraint of legal proceedings void – i[Every agreement, -

(a) By which any party thereto is restricted absolutely from enforcing his rights under or 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
(b) Which extinguishes the rights of any party thereto, or discharges any party thereto from
any liability, under or in respect of ay 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. – Saving 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.

iiSuits barred by such contracts - When such a contract has been made, a suit may be brought
for its specific performance; and if a suit, other than for such specific performance, or for the
recovery of the amount so awarded, is brought by one party to such contract against any other
such party, in respect of any subject which they have so agreed to refer, the existence of such
contract shall be a bar to the suit.

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.

iiiException 3 – Saving of guarantee agreement of a bank or a financial institution. – This

section shall not render illegal a contract in writing by which any bank or financial institution
stipulate a term in a guarantee or any agreement making a provision for guarantee for
extinguishment of the rights or discharge of any party thereto from any liability under or in
respect of such guarantee or agreement on the expiry of a specified period which is not less
than one year from he date of occurring or non-occurring of a specified event for
extinguishment or discharge of such party from the said liability.

Explanation – (i) In exception 3, the expression “bank” means –

(a) a “banking company” as defined in clause (c) of Section 5 of the Banking Regulation Act,
1949 (10 of 1949);
(b) “a corresponding new bank” as defined in clause (da) of Section 5 of Banking Regulation
Act, 1949 (10 of 1949);
(c) “State Bank of India” constituted under Section 3 of the State Bank of India Act, 1955 (23
of 1955);
(d) “a subsidiary bank” as defined in clause (k) of Section 2 of the State Bank of India
(Subsidiary Banks) Act, 1959 (38 of 1959)
(e) “a Regional Rural Bank” established under Section 3 of the Regional Rural Bank Act, 1976
(21 of 1976);
(f) “a Co-operative Bank” as defined in clause (cci) of Section 5 of the Banking Regulation
Act, 1949 (10 of 1949);
(g) “A multi-State co-operative bank” as defined in clause (cci) of Section 5 of the Banking
regulation Act, 1949 (10 of 1949);

(ii) In exception 3, the expression “a financial institution” means any public financial
institution within the meaning of Section 4-A of Companies Act, 1956 (1 of 1956.]

Restriction on legal proceedings by a contract

It should be noted down that in the section, it is expressly written that an agreement restricting
the legal proceedings would be void only to that extent. In simple words, the whole agreement
will not be not void, but that particular clause which restricts the right would be held void by
the court. In Koegler v Coringa Oil Co Ltd:iv, the section was explained as such that “this
section applies to agreements which wholly or partially prohibit the parties from having
recourse to a court of law. If, for instance, a contract were to contain a stipulation that no action
should be brought upon it, that stipulation would …. be void, because it would restrict both
parties from enforcing their rights under the contract in ordinary legal tribunals.” One of the
most important rights which is not covered by this section is that the right to appeal. Hence, a
party to a suit by a contract may agree to not to appeal against the decision.v

The Law of Limitation prescribes the time-limit for different suits within which an action may
be brought by an aggrieved party for redress. Any clause in an agreement which attempts to
reduce this time period will be void as per Sec 28. For instance, if law of limitation provides 5
years for a particular suit within which any party can bring it claim and an agreement provides
only 3 years in which the party can bring its claim, then it would be a void clause in that
agreement. Thus, a clause in a policy of life insurance providing a clause in an agreement that
no suit to recover under this policy shall be brought after one year from the death of assured
was held void by court.vi Similarly , a clause in the policy of life insurance provided that suit
must be filed within 12 months from the date of disclaimer. This clause was held void by the
court. Hence, suit filed within 3 years from that date was held to be maintainablevii

Amendment

There used to be a practice among the parties of creating a distinction between a clause
reducing the time limit within which they can bring claims and a clause which provides for
extinction of rights after a specified period. This difference was eliminated by the legislature
by an amendment in the section in year 1997. Now, all the clauses which reduce the normal
period of limitation would be void.

Before Amendment: - Clauses in agreements which used to forfeit the rights if no action is
brought within the stipulated time were held valid by courts. A clause in policy of life insurance
provided that if a claim is made and rejected and an action or suit is not brought within 3
months after such rejection, all benefits under the policy would be forfeited. This clause was
held valid by the court.viii Court explained the distinction between the forfeiting or rights and
limitation of time ix :- “The distinction may be a fine one but it is nonetheless a fundamental
distinction. The arrangement in the one case takes it for granted that the right as well as the
liability exists, but the time for enforcing it is sought to be limited. While in the other case, the
parties agree that the right as well as liability shall stand extinguished if a specified event
occurs.”

“ What Sec 28 forbids, is not extinguishment of the rights or liabilities of a party to a

contract on the happening of a specified event, but the limiting of the time within which a party
may enforce his rights. It is obvious that a party will have no right to enforce, if the rights have
already been extinguished under the contract. In such a case, there can be no question of the
time for the enforcement of rights being limited. What happens is that the right itself ceases to
exist.”

In a casex , court deemed it necessary to explain that a contract which was made before the
amendment under which the work was also executed before the amendment, would be
governed according to unamended section and would not be declared void according to new
provisions.
 Partial restriction applicable to jurisdiction

Partial restriction as to jurisdiction is allowed subject to some conditions. In a case xi , contract

was falling under the jurisdiction of two courts i.e Bombay and Alipore courts. However, the
contract provided that “any dispute arising between the parties, settlement of the same legally
or otherwise, will be decided in Bombay.” This clause was held valid by court. Lahiri J
explained that “If there are two courts which are equally competent to try the suit, an agreement
between the parties that the suit should be instituted in one of those two courts cannot be said
to be an absolute restriction on the right of talking legal proceedings. It has been established
by a long line of judicial decisions that such an agreement does not contravene the provisions
of Section 28 if the chosen court has jurisdiction to try the suit under ordinary law. However,
in various decisions, court has also made it clear that it the parties cannot confer the jurisdiction
on courts which they do not posses under the Civil Procedure Code. However, if two or more
courts possess jurisdiction to try that suit under the powers give by CPC, then a clause in the
agreement conferring power to try the suit on one of these courts will be valid. xii Whether
subsequent parties will be bound by contract made by original contracting parties is a question
of fact to be decided in each case. If a original party is not bound, then subsequent party will
not be bound.xiii It is to be decided in each case whether the subsequent parties were also made
aware by the terms.xiv

However, only the territorial jurisdiction of civil courts can be extinguished and not the High
court or Supreme Courtxv. Also, a Lok Adalat is not a court hence its jurisdiction cannot be
extinguished by way of contract. Hence a contract extinguishing the jurisdiction of Hyderabad
court and a party instituted suit in Lok Adalat at Hyderabad was held to be valid, as restriction
was not applicable to it.xvi It is to be noted that the clause will be valid only when a contract is
formed and not when the contract ends before conclusion.xvii

EXCEPTIONS

1. Future disputes to arbitration

A contract made by parties to refer the disputes which may arise between them to arbitration
and only that award would be recoverable is a valid contract but the clause in the agreement to
 exclude the right to proceed against the award given by arbitration is held to be void. The
arbitration clause would remain binding even when the contract ends. Hence, it would be right
to say that a contract may end but the arbitration clause may not and also, an arbitration clause
may not be valid but the rest of the contract may be validxviii. A clause providing for arbitration
and simultaneously for the non-applicability of Arbitration act would be a void clause and only
that clause would be struck downxix. In Koegler v Coringa Oil Co Ltdxx , Garth CJ said : “If a
contract were to contain a double stipulation that any dispute between the parties should be
settled by arbitration, and that neither party should enforce his rights under it in a court of law,
that would be a valid stipulation so far as regards to its first branch, viz., that all disputes
between the parties should be referred to arbitration, because that of itself would not have the
effect of ousting the jurisdiction of courts, but the latter branch of the stipulation would be void
because by that the jurisdiction of courts would be naturally excluded.”

2. Existing questions to arbitration

If the parties make an agreement to refer the disputes already arisen to arbitration , that would
be a valid agreement and parties would be bound by it.xxi

3. To safeguard banks and financial institutions

This exception allowed banks and financial institutions to invent their own rules of
prescriptions. It also allowed the banks from keeping their guarantee instruments open and
valid till the expiry of period of limitation under the Limitation Act, 1963.

CONCLUSION

i
Subs. By Act 1 of 1997, S.2
ii
This clause was repealed by the Specific Relief Act, 1877 ( 1 of 1877), S.2 and Sch.1. However, it is written here
because Contract Act is in force in some Scheduled Districts to which the Specific Relief Act does not apply.
iii
Ins. By Act 4 of 2013, S.17 and Sch. (w.e.f 18-1-2013).
iv
ILR (1876) 1 Cal 466, 468-69.
v
Munshi Amir Ali v Inderjit Koer, (1871) 9 Ben LR 460, a decision of the Privy Council before the Contract Act was
passed and has been followed by Allahabad HC in Ashburner & Co v Anant Das, ILR (1876) 1 All 267.
vi
Ma Ywes v Chin Mutual Life Insurance Co Ltd, 91 IC 622.
vii
State of A.P v United India Insurance Co Ltd, (1998) 2 An LT 74.
viii
Girdharilal Hanumanbux v Eagle Star & British Dominions Insurance Co Ltd, (1923) 27 CWN 955; DDA v Bhardwaj
Bros, 2014 SCC OnLine Del 1581: AIR 2014 Del 147, an agreement providing for forfeiture or waiver of right if no
action is commenced within the period stipulated in the agreement has been held to be not void.
ix
Followed, Kasim Ali v New India Insurance Co, AIR 1968 J&K 3. See also Governor General in Council v Firm Badri
Das Gauri Dutt, AIR 1951 All 702.
x
Continental Construction Ltd v Food Corporation of India, AIR 2003 Del 32.
xi
Continental Drug & Co Ltd v Chemoids & Industries Ltd.
xii
L.T Societa v Lakshminarayanan, AIR 1959 Cal 669 , this principle was enunciated .
xiii
Govt of Rajasthan v Venkataramana Seshiyer
xiv
East India Transport Agency v National Insurance Co Ltd, AIR 1991 AP 53
xv
P.R Transport Agency v Union of India, (2005) All LJ 3568: AIR 2006 All 23 (DB)
xvi
Inter Globe Aviation Ltd N. Satchidananad, (2011) 7 SCC 463 : (2011) 3 KLT 295 : ( 2011) 3 CPJ 1 (SC)
xvii
Orissa Agro Industries Corpn Ltd v KCS (P) Ltd, 2004 AIHC 1788 (Ori).
xviii
Jawahar Lal Barman v Union of India, AIR 1962 SC 1810 : 1963 3 SCR 183
xix
Rajasthan Housing Board v Engineering Projects (India) Ltd, AIR 2000 Raj 200
xx
ILR (1876) 1 Cal 466
xxi
See UOI v Kishorilal Gupta & Bros, AIR 1959 SC 1362: (1960) 1 SCR 493