Agreement in Restraint of Legal Proceedings under Section 28 of the Indian Contract Act, 1872: Absolute Restrictions, Limitation and Extinguishment Clauses, the 1997 Amendment, and the Arbitration and Bank Guarantee Exceptions

Section 28 protects access to the courts. It voids agreements that absolutely restrict a party from enforcing his rights by the usual legal proceedings, and agreements that shorten the time within which he may do so. For most of its life the section was easily evaded, because drafters learned to frame a clause so as to extinguish the right rather than to limit the time for suit, and the courts held that the section struck only at the remedy. That distinction was thin to the point of being unreal, and Parliament removed it by the Indian Contract (Amendment) Act, 1996. The pre-amendment authorities are therefore still frequently cited and must be read with care, because several of them no longer state the law.

1. The Provision as It Now Stands

2. Clause (a): Absolute Restriction and Limitation of Time

2.1 The restriction must be absolute

The word absolutely does a great deal of work. A clause that removes the right to go to court altogether is void; a clause that channels the dispute to one of several available forums is not. The distinction was settled in Hakam Singh v. Gammon (India) Ltd., (1971) 1 SCC 286, in which the Supreme Court upheld a clause providing that disputes should be subject to the jurisdiction of the courts at Bombay, holding that where two or more courts have jurisdiction under the Code of Civil Procedure, 1908, an agreement to litigate in one of them is not contrary to public policy and does not contravene Section 28.

• A clause selecting one of several competent courts is valid, and is commonly described as an exclusive jurisdiction clause.
• A clause conferring jurisdiction on a court that has none is ineffective, since jurisdiction cannot be created by consent.
• A clause requiring a party to obtain the other's consent before suing, or making the other party's decision final on the existence of liability, restricts absolutely and is void.
• A clause referring disputes to a domestic tribunal that is not a court and whose decision is final, other than an arbitral tribunal within the Exceptions, is void.

2.2 Limitation of time

The second half of clause (a) voids a clause that limits the time within which a party may enforce his rights. The periods of limitation are fixed by the Limitation Act, 1963 as a matter of public policy, and parties cannot contract for a shorter one. A clause requiring notice of a claim to be given within a stated period stands differently, because it regulates the manner of making a claim rather than the time for suing, though a notice period so short as to be illusory may be struck down.

3. The Pre-Amendment Position and Why It Changed

Before 1997 the section contained only what is now clause (a). The courts drew a distinction between a clause that curtailed the period of limitation, which was void, and one that extinguished the right itself on the expiry of a stipulated period, which was not, on the reasoning that the section struck at the remedy and not at the right.

What Section 28 strikes down, what it leaves standing, and why dates matter

4. Clause (b): Extinguishment of Rights

Clause (b) closes the gap. It voids any agreement that extinguishes the rights of a party, or discharges a party from liability, on the expiry of a specified period, so as to restrict any party from enforcing his rights. The closing words matter: the clause is aimed at provisions whose effect is to prevent enforcement, and it does not disturb a term that genuinely defines the duration of the contractual obligation itself, such as a policy that covers losses occurring within a stated period.

5. The Exceptions

5.1 Arbitration

Exceptions 1 and 2 save arbitration agreements, whether they relate to future disputes or to a question that has already arisen. The rationale is that arbitration does not deny a remedy; it substitutes one tribunal for another, and the award is enforceable through the courts. The field is now governed by the Arbitration and Conciliation Act, 1996, which supplies the requirements of a valid arbitration agreement in Section 7, the reference of parties to arbitration in Section 8, the appointment of arbitrators in Section 11, and the limited grounds for setting aside an award in Section 34.

5.2 Bank and financial institution guarantees

Exception 3 was inserted by the Banking Laws (Amendment) Act, 2012 with effect from January 2013. It permits a bank or financial institution to stipulate, in a written guarantee, a term extinguishing rights or discharging liability on the expiry of a specified period, provided that period is not less than one year from the date of the occurring or non-occurring of the specified event. The reason is commercial: a guarantor bank needs to close its books and release the margin it holds, and an indefinite exposure would make guarantees more expensive for everyone. The one-year floor is the protection given to the beneficiary.

6. What Section 28 Does Not Reach

1. The general law of limitation. The section voids agreements, not statutes, and the Limitation Act, 1963 continues to apply of its own force.
2. A clause providing that a contract shall remain in force only for a stated period, which defines the obligation rather than restricting enforcement of a right that has accrued.
3. A clause making a certificate or a decision of a named person final on a matter of fact, such as measurement or quality, provided it does not oust the court's jurisdiction on the existence of liability.
4. Agreements not to sue on a matter outside contract, since the section speaks of rights under or in respect of any contract.
5. A waiver of a right after it has accrued, which is a release rather than a restriction on enforcement.

7. The Position Stated Shortly

1. Section 28 voids agreements restricting a party absolutely from enforcing his contractual rights in the ordinary tribunals, and agreements limiting the time for doing so.
2. Hakam Singh: a clause selecting one of several competent courts is valid; a clause conferring jurisdiction on a court that has none is ineffective.
3. Before 1997 the courts distinguished clauses curtailing limitation, which were void, from clauses extinguishing the right, which were not.
4. Food Corporation of India: a requirement to make a claim within six months was a valid condition precedent under the unamended section.
5. Sujir Ganesh Nayak: a clause extinguishing liability twelve months after the loss was valid under the unamended section.
6. The Indian Contract (Amendment) Act, 1996 inserted clause (b) and voided extinguishment clauses, following the 97th Report of the Law Commission.
7. The amendment is not retrospective, so the earlier decisions still govern contracts made before it and are misplaced for later ones.
8. Exceptions 1 and 2 save arbitration agreements, and the field is governed by the Arbitration and Conciliation Act, 1996.
9. Exception 3, inserted in 2012, saves an extinguishment term in a bank or financial institution guarantee where the period is not less than one year.

8. Related Topics and Provisions