India: Agreements In Restraint Of Legal Proceedings – An Overview

In March 2022, the Supreme Court, in a special leave petition rendered invalid the provisions of an insurance contract as being void under Section 28 of the Indian Contract Act. 

In the Oriental Insurance Company Limited v. Sanjesh and Anr.¹, case (“Oriental Insurance case”), it was ruled that a condition in a policy that prohibits the filing of a claim after a prescribed time limit is void for being contrary to Section 28 of the Indian Contract Act, 1872 (“Act”). 

Agreements in restraint of legal proceedings

Section 28 of the Contract Act bars agreements that impose fetters on a party from initiating legal proceedings or enforcing its rights or reduce the period within which such party may enforce its rights. This is based on the well-known legal principle that no man can exclude himself from the protection of the courts by contract. This provision follows the general common law rule recognised in English courts, which prohibits all agreements purporting to oust the jurisdiction of the courts.

The provision is practical and not pedantic in that agreements restricting enforcement of rights through arbitration is not considered a violation of this section. Also, agreements restricting parties from enforcing the contract through any other court other than the court to which exclusive jurisdiction has been conferred under the contract are considered valid.

Indian courts view restrictions on the rights of a person to obtain a legal remedy very seriously. Examples of cases where the courts have held that the contract was void for being in restraint of legal proceedings are as follows:

1. An undertaking by the landlord to a bank that he would not evict the tenant until the tenant repaid the entire bank loan was held to be void. (Rajendra Singh v. Seesh Pal Singh, 2014 SCC OnLine Utt 2644)

• Stock exchange bylaws containing restrictions on members from initiating arbitration and requiring them to initiate within a specific timeline was held to be void. (A, Chandrasekaran v. Yoha Securities Limited,2013 SCC OnLine Mad 3657).

• An agreement that the quantification of liquidated damages shall not be challenged was held to be in restraint of legal proceedings and void. (Bharat Sanchar Nigam Ltd. V. Motorola India Pvt Ltd, (2009) 2 SCC 337).

• Jurisdiction of civil courts cannot be barred by an in-house dispute resolution mechanism which is not similar to arbitration. (Dilip Kumar Kar v. Hindustan Steel Works Construction Ltd, 2015 SCC OnLine Tri 1023)

However, agreements that generally have the effect of parties foregoing the requirement of appeal prior to issuance of judgment in a matter are considered valid. 

Limitation of time for enforcing rights under a contract

An agreement which provides that a suit should be brought for breach of its terms within a time that is shorter than the period of limitation prescribed by law is void to that extent. The effect of such an agreement is to absolutely restrict parties from enforcing their rights after the expiration of the stipulated period, even though the same may be within the period of limitation. Routinely found examples of such clauses are in contracts for the purchase of shares or business transfer contracts where parties agree to restrict any indemnification claims to a period which is shorter than the usual limitation.

Similarly, clauses stipulating that rights must be enforced must be made within X number of days after the occurrence of the event are hit by Section 28. A clause which provides that parties must proceed to arbitration within X days of the dispute arising would also similarly be void. 

In contrast however, extinguishment of rights, i.e., where the contract itself comes to an end after a particular period expires, is not hit by Section 28. For example: in an insurance contract where the liability of the insurance company is restricted to 1 year from the date on which the damage occurred, this would operate to extinguish the contract with the insurance company within that period and does not, however, limit the rights of the insured to seek redressal through legal fora. The Delhi High Court has held that a clause in a contract requiring a party to refer a claim within 120 days would not offend the provisions of Section 28 of the Contract Act, since instead of curtailing the time for making the claim, it provides for forfeiture or waiver of the claim itself, if not made within 120 days.

What happened in the Oriental Insurance Case

The Permanent Lok Adalat, Muzaffarnagar vide order dated 4^th January 2020, directed the Oriental Insurance Company Limited (“Petitioner”) to pay Rs. 5,00,000/- (Rupees Five Lakhs Only) to the Respondent under the “ Mukhyamantri Kisan Exam Sarvhit Beema Yojana” (“Policy”).

Challenging the said order by way of a writ petition, the Petitioner contended that Clause 2 of the Policy stipulated that if an insurance claim was filed within one month from the expiry of the Policy, then the delay could be condoned by the Collector. Accordingly, since the Respondent's claim was filed 3 months after such expiry, the same was time barred. 

Rejecting this contention, the Hon'ble Allahabad High Court observed that because the said Clause itself allowed condonation of insurance claims filed within two months from the expiry of the Insurance Policy, the Respondent's claim “..in strict sense..” was belated by just more than a month. 

The Hon'ble High Court also referred to the case of  Gautam Yadav Vs. State of U.P. and others²wherein its division bench deemed the limitation period under the Policy as unreasonable and arbitrary; and ordered substitution of the same by a duration of three years. Noting that the insurance claim had been settled in that case despite the Hon'ble Supreme Court's  stay on the said order, the Hon'ble High Court in the present matter condoned the Respondent's delay on the basis that the Policy was a welfare policy in nature. Ultimately, in light of the same,  vide order dated 22^ndSeptember 2021, the Appellant's writ petition was dismissed.

When the matter came to be heard by the Hon'ble Supreme Court, the bench comprising Mr. Hemant Gupta and Mr. V. Ramasubramanian JJ., restricted the scope of their decision to Section 28 of the Act. The sole argument raised by the company was that the claim was time barred. However, the Court held that the condition of lodging a claim within a period of one month, extendable by another month, was contrary to Section 28 of the Act and thus void. Therefore, upholding the Allahabad High Court's order, the special leave petition was dismissed.

Position of Law- Before and After the 1997 Amendment

It is pertinent to understand what the position of law was with regard to Section 28 prior to 1997, how it was applied and interpreted, and how the same has changed post the amendment. This is owing to the peculiarity of the provision and its interpretation.

Before the 1997 Amendment

Prior to the amendment of Section 28 in 1997, the part of the provision relevant for this discussion read 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.”

The Supreme Court has on several occasions applied and interpreted the erstwhile provision, inter alia, in the cases of  National Insurance Co. Ltd. v. Sujir Ganesh Nayak & Co. and Anr.³,  Food Corporation of India v. New India Assurance Co. Ltd and Ors⁴ and Vulcan Insurance Co. Ltd. v. Maharaj Singh and Anr.⁵.  On the basis of the judgments in the aforementioned cases, one could surmise the following to be the effect of the erstwhile Section 28: – 

1. The parties to an agreement were prohibited from inserting their own periods of limitation in place of the period laid down by the law of limitation;

1. However, the parties to an agreement were permitted to insert their own periods of prescription, i.e., they were free to assert that if a party does not make a claim within a specified period, then the rights accruing under the contract shall be extinguished or that a party shall be discharged from all liability under the contract.⁶

The  1997 Amendment was exigent, welcoming, and brought in much needed additions to Section 28. The said amendment divided the section into two sub-sections (a) and (b). The erstwhile provision was part of clause (a) with the additionthat even agreements which limit the time within which rights may be enforced  will be barred. Clause (b) further prohibited agreements which extinguished the rights of any party or discharged any party from liability on the expiry of a specified period so as to restrict enforcement of rights.

The history of the amendment is peculiar and has been set out by the Supreme Court. The amendment seeks to set aside the distinction made in case law between agreements which limit the time within which remedies can be sought and agreements in which the right itself ceases to exist in limiting the time. It seeks to bring about a substantive change in the law by stating that even if an agreement extinguishes the rights or discharges the liability of a party or restricts such Party from enforcing rights on the expiry of such period, such agreement shall be void.

Effect of Oriental Insurance Company Limited

With respect to the case of Oriental Insurance Company Limited (supra) and insurance policies in particular, the decision of the Supreme Court will have opposing effects on the claimants on one hand and the insurance companies on the other. As can be seen from the order, the Court has not dealt with the matter in detail. It has merely mentioned that since the clause of the policy would be hit by Section 28, the same would be void. For the claimants, it means that they can file their claims/file a suit as per the general law of limitation as opposed to any clause in the policy limiting the period. However, insurance companies will look at this as a setback as this order could be used against them in the future, in respect of policies entered into after the 1997 amendment. They will also be prevented from extinguishing the rights prior to the period of limitation. Is it then safe to assume that insurance policies will be governed solely by the Limitation Act, 1963? 

In Sum

The erstwhile legal position assumed a distinction between ‘right' and ‘remedy' whereby a clause barring a remedy was void but a clause extinguishing the rights was held to be valid. In practice, this was violative of economic justice and harmed the interests of consumers.⁷ Inter alia, this led to the introduction of the 1997 amendment which put the debate to rest. 25 years later, it appears that the order in the case of Oriental Insurance Company Limited (supra) is tipping the scales in favour of policy claimants but whether this same principle will be extended to private contracts between parties is to be seen. 

Footnotes

1 The Oriental Insurance Company Limited v Sanjesh and Anr., SLP(C) 3978 of 2022, decided on 11.03.2022.

2 Gautam Yadav vs. State of U.P. and others, 2020(11) ADJ 321.

3 National Insurance Co. Ltd. v. Sujir Ganesh Nayak & Co. and Anr.,  (1997) 4 SCC 366.

4 Food Corporation of India v. New India Assurance Co. Ltd and Ors,  (1994) 3 SCC 324.

5 The Vulcan Insurance Co. Ltd. v. Maharaj Singh and Anr.,  (1976) 1 SCC 943. 

6 Law Commission of India Ninety-Seventh Report, Section 28 Indian Contract Act 1871, Prescriptive Clauses in Contracts, [March, 1984], available at https://lawcommissionofindia.nic.in/51-100/Report97.pdf last accessed on 29^th March 2022. 

7 Law Commission of India Ninety-Seventh Report (supra).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.