India: Legality Of Restriction On Period Of Limitation

Section 28 of the Indian Contract Act, 1872 provided as under :

" Every agreement, 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, is void to that extent. "

One of the earliest cases in regard to the above related to interpretation of terms and conditions of a policy of insurance restricting the time period for challenging rejection of the claim, reported as The Vulcan Insurance Co Ltd v Maharaj Singh & another : (1976) 1 SCC 943. The restrictive clause in the said case ran as follows :

" 13. If the claim...... be made and rejected and an action or suit be not commenced within three months after such rejection, ...... within three months after the Arbitrator or Arbitrators or Umpire shall have made their award, all benefit under this Policy shall be forfeited. "

The Supreme Court upheld the said provision, without giving any reasons for the decision, presumably on the ground that the provision dealt with the extinguishing of a right rather than restricting the remedy, since the term 'benefit' related to the right rather than the remedy. As a matter of fact, in the said case, Clause 18 of the policy stipulated as under :

" 18. If any difference arises as to the amount of any loss or damage such difference shall independently of all other questions be referred to the decision of an Arbitrator........... "

As per the clause, arbitration was to be resorted to only if there was a dispute regarding the quantum of loss, the liability being otherwise accepted. In spite of rejection of the claim, the insured resorted to arbitration, which was struck down by the Supreme Court holding that the proper remedy was by way of filing of a suit within three months, and not resorting to arbitration.

The next important case that came up before the hon'ble Supreme Court was that of Food Corporation of India v The New India Assurance Company Limited : (1994) 3 SCC 324. In that case, the restrictive clause in the Fidelity Insurance Guarantee, specified as under :

" ...... the Corporation shall have no rights under this bond after the expiry of (period) six months from the date of termination of the contract. "

The Supreme Court held that the above clause did not amount to saying that the suit ought to have been filed against the insurance company within six months. It was therefore held that the suit filed after a period of six months, but within the period of limitation prescribed under the Limitation Act, 1963 was legal, valid and proper.

The Supreme Court next dealt with the issue in the case reported as Muni Lal v The Oriental Fire & General Insurance Company Limited : (1996) 1 SCC 90. In that case, clause 8 of the policy stipulated that in case of rejection of the claim, a suit ought to be instituted within one year. The actual wording of the said restrictive clause is not quite clear, as the same is not reproduced in the judgment. However, the fact remains that in the said case, rather than filing a suit for recovery of money, one for a declaration was sought that the insured under the policy was entitled to the insurance claim, and not the consequential remedy of recovery of the amount, which was barred under Section 34 of the Specific Reliefs Act. The insured belatedly, after the expiry of limitation of three years, sought amendment of the plaint, which was rejected by the Supreme Court.

In the above circumstances, the judgment in Muni Lal's case (supra) did not have a direct bearing on the issue being discussed, since the question decided ultimately, was quite different. However, from the following observations in para 4 of the judgment, it can be inferred that in the said case, the court in fact held that the restrictive clause in the said policy, was barred under Section 28 of the Contract Act :

" ..... It is true, as rightly pointed out by Shri Rakesh Khanna, that Section 28 of the Contract Act prohibits prescription of shorter limitation than the one prescribed in the Limitation Act. An agreement which provides that a suit should be brought for the breach of any of the terms of the agreement within a time shorter than the period of limitation prescribed law is void to that extent. The reason being that such an agreement is absolutely to restrict the parties from enforcing their rights after the expiration of the stipulated period, although it may be within the period of general limitation. But acceptance of that contention does not per force solve the controversy in this appeal...."

In the circumstances, what is relevant to note is that the court in the said case as well drew a fine distinction between the extinguishing of a right and the restriction of a remedy.

The Supreme Court in the case reported as National Insurance Company Limited v Sujir Ganesh Nayak & Co & another : (1997) 4 SCC 366, had the occasion to examine the law on the subject with regard to the bar of Section 28 of the Contract Act qua the restrictive clause in the policy with regard to institution of the suit within a specified time. In that case, the relevant clause 19 of the policy, provided as under :

" In no case whatever shall the company be liable for any loss or damage after the expiration of 12 months from the happening of loss or the damage unless the claim is the subject of pending action or arbitration. "

The court held in para 10 of the judgment, as under :

" The clause meant nothing more than this, namely, if the suit is not filed within three months of rejection of the claim, the rights under the policy shall be forfeited. "

It is pertinent to mention here that the judgment in the case of Sujir Nayak (supra) was decided by the Supreme Court on 21.03.1997. As a matter of fact, the line of demarcation between extinguishing of a right and restriction on the period of limitation is so thin, that the same is often non existent. Realizing the same, the Parliament in its wisdom, Parliament amended Section 28 of the Contract Act, presumably to dilute the rigours of the said judgment, by way of Indian Contract (Amendment) Act, 1996 (Act 1 of 1997), effective from 01.08.1997, as per recommendation of the Law Commission of India in its 97th report, whereby the amended Section 28 read as under :

" 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 any contract on the expiry of a specified period so as to restrict any party from enforcing his rights, is void to the extent. "

Thereafter, the National Consumer Disputes Redressal Commission had the occasion to consider the validity of the restrictive clause requiring filing of a suit within 12 months, in the case of H.P. State Forest Company Ltd v United India Insurance Co Ltd, OP No. 95 of 1994. The restrictive clause 6(ii) of the policy, read as under :

" In no case whatsoever shall the company be liable for any loss or damage after the expiration of 12 months from the happening of the loss or damage unless the claim is the subject of pending action or arbitration: it being expressly agreed and declared that if the company shall declaim liability for any claim hereunder and such claim shall not within 12 calendar months from the date of the disclaimer have been made the subject matter of a suit in a court of law then the claim shall for all purposes be deemed to have been abandoned and shall not thereafter be recoverable hereunder. "

The National Commission, based on the judgment of the Supreme Court in Sujir Nayak's case (supra), vide order dated 16.08.2000 dismissed the original petition as barred.

H.P. State Forest Produce Company Ltd challenged the order dated 16.08.2000 of the National Commission by way of Civil Appeal No. 6347 of 2000 before the Supreme Court. During the pendency of the said appeal however, the Parliament, for some inexplicable reasons, vide the Repealing and Amending Act, 2001, repealed the Indian Contract (Amendment) Act, 1996, whereby the position reverted to status quo ante, i.e. prior to the said amendment, and in turn, to the judgment of the Supreme Court in Sujir Nayak's case.

In the meantime, the issue once again came up before the National Consumer Disputes Redressal Commission in the case of Real Laminates Pvt Ltd v The New India Assurance Company Limited, First Appeal No. 450 of 1995, where it was erroneously argued that the Amendment Act 1 of 1997 had come into force prior to the date when the judgment in Sujir Nayak's case was pronounced by the Supreme Court. The National Commission vide judgment dated 18.07.2001 held that the law laid down by the hon'ble Supreme Court under Article 141 of the Constitution of India was supreme, but that, in view of the amendment, the restrictive clause in the said policy, was not valid. The restrictive clause 4(iii) of the policy read as under :

" .... In no case whatsoever shall the Company be liable for any loss or damage after the expiration of 12 months from the happening of the loss or damage unless the claim is the subject of pending action or arbitration; it being expressly agreed and declared that if the Company shall disclaim liability for any claim hereunder and such claim shall not within 12 calendar months from the date of the disclaimer have been made the subject matter of a suit in a court of law then the claim shall for all purposes be deemed to have been abandoned and shall not thereafter be recoverable hereunder."

It is pertinent to mention here that the restrictive clause in the said policy was in the nature of extinguishing of a 'right' rather than reducing the period of limitation for 'enforcing' such right, as in the present case.

The Supreme Court thereafter passed the judgment reported as HP State Forest Produce Company Ltd v United India Insurance Company Ltd on 18.12.2008, reported as (2009) 2 SCC 252, wherein it has been held that in view of the repealing of the Indian Contract (Amendment) Act, 1996 in the year 2001, the position reverts to pre-amendment. Thus sub-section (b) of Section 28 of the Indian Contract Act, 1872 apparently does not stand in the statute book.

The law laid down by the hon'ble Supreme Court is binding on all courts and Tribunals in India. However the judgment in HP Forest Company case (supra) has been distinguished by Punjab & Haryana High Court in the case of Sunil Goyal vs Haryana State Agriculture Marketing Board & others : MANU/PH/1886/2011 and by Delhi High Court in the case reported as NHAI vs Mecon-GEA Energy Systems India Ltd, JV : MANU/DE/0791/2013 holding that the repealing of the Amendment Act does not repeal what is amended in the parent Act. Hence the 1997 amendment in Section 28 of the Act to incorporate sub section (b) thereof would be deemed to be valid.

Though the Punjab & Haryana High Court and Delhi High Court in the above cases have distinguished the judgment of the hon'ble Supreme Court in the case of HP State Forest Produce Company Ltd (supra), it will be in the fitness of things that the law in this regard is confirmed by the hon'ble Supreme Court, so that there is no ambiguity in the law barring any restriction on the period of limitation, under Section 28 of the Indian Contract Act, 1872, particularly since several courts and tribunals in India continue to follow the decision of the hon'ble Supreme Court in the case of HP State Forest Produce Company Ltd.

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