Agreements in Restraint of Legal Proceedings

In one line

You cannot contract away your right to go to court, and since 1997 you cannot achieve the same thing by drafting a clause that quietly extinguishes the right instead of barring the remedy.

In the words a student can write in an exam: section 28 of the Indian Contract Act 1872, as substituted in 1997, makes void every agreement (a) by which a party is restricted absolutely from enforcing his rights under a contract by the usual legal proceedings in the ordinary tribunals, or which limits the time within which he may enforce them, or (b) which extinguishes the rights of a party, or discharges a party from liability, on the expiry of a specified period so as to restrict him from enforcing his rights. There are three exceptions, all concerned with arbitration and with bank guarantees.

Why the section was amended, and why that matters

The section as originally enacted had only what is now clause (a): it struck down an agreement that absolutely restricted a party from enforcing his rights, or that limited the time for doing so.

Careful drafters found the way round. Instead of saying "you may not sue after six months", which limited the time and was void, an insurer or a bank would write "all rights under this policy shall stand extinguished unless a claim is made within six months". The clause did not bar the remedy; it destroyed the right, and a right that no longer exists cannot be enforced whatever the section says about remedies.

Section 28 was substituted by Act 1 of 1997 with effect from 8 January 1997 to close that gap, and clause (b) is what closes it. Any answer on section 28 should say that the section now has two limbs and that the second is the 1997 addition, because a textbook printed before 1997 shows only the first.

There is a second amendment that older books miss. Exception 3 was inserted by Act 4 of 2013, section 17 and the Schedule, with effect from 18 January 2013. So section 28 now carries three exceptions, not two.

The provision itself

"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."

Exception 1, saving of contract to refer to arbitration dispute that may arise. The section does 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.