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Agreement in restraint of legal proceedings
Contract (201)
Karnataka State Law University
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Agreement in restraint of legal proceedings
Introduction:
A contract, in simple words, is a binding legal agreement that is enforceable in a court of law. That is, a contract is an exchange of promises for the breach of which the law will provide a remedy. The law relating to contracts is to be found in the Indian Contract Act 1872. The law of contracts differs from other branches of law in a very important respect. It does not lay down so many precise rights and duties which the law will protect and enforce; it contains rather a number of limiting principles, subject to which the parties may create rights and duties for themselves, and the law will uphold those rights and duties. Thus, we can say that the parties to a contract, in a sense make the law for themselves. So long as they do not transgress some legal prohibition, they can frame any rules they like in regard to the subject matter of their contract and the law will give effect to their contract.
The Indian Contract Act is based on the principles of English Common Law. It is a well-known rule of English law that "an agreement purporting to oust the jurisdiction of the courts is illegal and void on grounds of public policy" [Halbury's Laws of England, Vol 9, 352]. “An agreement which is not enforceable by law is said to be void” as per Section 2(g) of the Indian Contract Act, 1872. Indian Contract Act, 1872 lay down the provisions from Section 24 to Section 30 and in Section 56 relating to types of agreements which are expressly declared as void agreements :
- Agreements of which consideration and objects unlawful in part [S]
- Agreements without consideration [S]
- Agreements in restraint of marriage [S]
- Agreements in restraint of trade [S]
- Agreements in restraint of legal proceedings [S]
- Unmeaning agreements [S]
- Wagering agreements [S]
- Agreements to do impossible act [S]
We will discuss “AGREEMENTS IN RESTRAINT OF LEGAL PROCEEDINGS”.
Restraint of legal proceedings:
An agreement that restrains an individual from enjoying the fundamental right of resorting to a court of law for redress and relief is invalid. An agreement by a servant not to sue for wrongful dismissal is invalid; so is a condition restraining a transferee from enforcing his rights under the transfer in anyway. Take the case of Hyman v Hyman. In this case, a covenant in a separation deed provided that the wife would not apply to the divorce-court for maintenance and it was held that it was void as being contrary to public policy. In Nihal Chand Shastri v Dilawar Khan, it was held that a special agreement between an advocate and his client that the latter would not be sued for fees has been held void.
Any clause in an agreement providing that neither party shall have the right to enforce the agreement by legal proceedings is void. An arrangement may, however, stipulate that there is no intension to contract, or that it is only a gentleman’s agreement. In such a case, no action is possible under the agreement.
Section 28 of the Indian Contract Act renders void two kinds of agreement, namely:
- An agreement by which a party is restricted absolutely from enforcing his legal rights arising under a contract, by the usual legal proceedings in the ordinary tribunals
- An agreement which limits the time within which the contract rights may be enforced
Exceptions:
- An agreement where the parties agree that any dispute which may arise in between them shall be referred to arbitration, and that only the amount awarded in such arbitration shall be recoverable.
- An agreement where the parties agree that the disputes that have already arisen be referred to arbitration
- An agreement that allows banks and financial institutions to invent their own rules of prescription. It also allows the banks from keeping their guarantee instruments open and valid till the expiry of period of limitation under the Indian Limitation Act, 1963. Thus, legally, banks and financial institutions could include prescriptive clauses in their guarantee instruments where the rights of a party to make a claim against the bank would be extinguished at the expiry of a time period, irrespective of the fact that such extinguishment of right was before the period prescribed in the Limitation Act.
Section 28 [S] applies to agreements which wholly or partially prohibit the parties from having recourse to a court of law. The section does not render void a contract by which two or more persons agree that any dispute which may arise between them shall be referred to arbitration and that only the amount awarded in the arbitration shall be recoverable. An agreement between the parties to refer disputes to arbitration is perfectly valid.
If, for instance, a contract was to contain a stipulation that no action should be brought upon it, that stipulation would, under the first part of S, be void, because it would restrict both parties from enforcing their rights under the contract in the ordinary legal tribunals. If a contract was 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 it 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 necessarily excluded.
Thus, a contrary whereby it is provided that all disputes arising between the parties should be referred to important London brokers, and that their decision should be final, does not come within the purview of this section [Koegler v Coringa Oil Co Ltd.]. Nor does a contract whereby it is provided that all disputes arising between the parties “should be referred to the arbitration of the Bengal Chamber of Commerce, whose decision shall be accepted as final and binding on both parties to the contract”.
But, a stipulation that parties to a reference shall not object at all to the validity of the award on any ground whatsoever before any court of law does restrict a party absolutely from enforcing his rights in ordinary tribunals, and, as such, is void. The Courts have power, in spite of such a stipulation, to set aside an award on the ground of misconduct on the part of the arbitrator. A party to a submission has the right to have an award set aside on the ground of misconduct on the part of the arbitrator, and a stipulation whereby he binds himself to accept the award as final in all cases has the effect of restricting him absolutely from enforcing his right and is, therefore, void under the provisions of this section.
raised before the expiry of the specified period from the beginning of the loss or damage, such a condition even if the period specified therein was shorter than that prescribed by the statute for filing a suit for that purpose is not hit by S of the Contract Act.
Cases sometimes occur where parties agree to extend the period of limitation. No provision is made this section, for agreements extending period of limitation for enforcing rights under it. There is hardly any doubt that an agreement which provides for a longer period of limitation than the law allows does not lie within the scope of this section. There is no restriction imposed upon the right to sue. On the contrary, it seeks to keep the right to sue subsisting even after the period of limitation. It would, however be void under S, as tending to defeat the provisions of the Limitation Act 1908, S, which provides that every suit instituted after the period of limitation prescribed by the act shall be dismissed, although limitation has not been set up as a defence. In Gobardhan v Dau Dayal, a Full bench of the Allahabad High Court has held that contracts extending the period of limitation are void under S, as defeating the provisions of the Limitation Act.
Effect of amendment
The amendment this section in 1997 gave effect to the 97th Report of the Law Commission of India. This amendment states that if any clause in an agreement not only bars a remedy but also extinguishes the right, it will be void to that extent. Thus, the artificial distinction between a clause cutting short the period of limitation and a clause providing for extinction of rights after a specified period has been eliminated. It, thus makes a substantial change in contract law.
Tracing back to the history of the amendment, it is interesting that the Law Commission of India, in its 13th Report, had deliberated upon this section and had observed that such clauses hinged not on the interpretation of the section, but on the construction of the contract, and that ‘the principle itself is well recognised that an agreement providing for the relinquishment of rights and remedies is valid but an agreement for relinquishment of remedies only falls within the mischief of s , and had ′ concluded that no change was necessary in the section as it stood earlier.
But later the Commission took up the matter s uo moto and submitted its 97th Report in 1984. The proposal to disallow prescriptive clauses which extinguished rights or provided for forfeiture of rights or discharge of liability on failure of to sue within a certain time rested on the basis of economic justice, avoidance of hardship to consumers and certainty and symmetry of law. The Commission pointed out that by giving a clause in an agreement that shape and character of a provision extinguishing the right and not merely affecting the remedy, a party standing in a superior bargaining position can achieve something which could not have been achieved by merely barring the remedy. The amendment was also justified on the ground that it was necessary to make the law simpler. The Commission found the existing provision illogical, based on ‘a distinction too subtle.’ The Commission considered that no provision like S existed in the English law. However, clauses now prohibited by the amendment are not void under the English law.
The clauses hit by the amendment have been held to have a purpose, especially in contracts of insurance. They ensure that the claims under the policy are made early, investigated promptly, thereby avoiding the likelihood of loss of important evidence. If claims were not made early, the insurers might be unable to meet a fraudulent claim as seen in Baroda Spg & Wvg Co. v Satyanarayanan Marine and Fire Insurance Co Ltd.
Since the date of the amendments coming into force, any condition of the contract, in which a stipulation is made that, the right to the claim would be barred if the claim was not raised before the expiry of the specified period from the incurring of the loss or damage would be void.
Amendment of S not retrospective
In a contract of insurance, the policy provides that the claim under the insurance has to be made within the period stipulated therein. Otherwise, the benefits flowing from the policy would stand extinguished. The period specified less than the period of limitation provided in the Limitation Act for a suit under the contract. But such extension of right is impermissible under the amended S of the Contract Act. But considering the fact that the amendment was prospective in nature and the contract was entered prior to the amendment, the condition in the policy was held to be valid in the light of the provisions of S prior to its amendment in 1997 as happened in Oriental Insurance Co. Ltd v. Karur Vysya Bank Ltd.
Agreement relating to release or forfeiture of rights
Before the amendment of S of the Contract Act in 1997, agreements reducing the period of limitation were distinguished from those which did not limit the time within which a party might enforce his rights, but which provided for a release or forfeiture of rights if no suit was brought within the period stipulated in the agreement. Under S, limiting the time for enforcing the rights was void. But a term in the contract that rights accruing thereunder to party would be forfeited or released, if the party did not sue within such short a time as given in the contract, would not fall within S. Clauses of this kind are usually found in policies of insurance.
Absolute Restriction
If the limitation is not absolute, this section will not come into play. Where one of two competent jurisdictions is excluded by agreement, that does not affect the absolute removal of jurisdiction and a clause does not infringe S. An illustration of partial restriction is the decision of the Calcutta High Court in Continental Drug & Co Ltd v. Chemoids & Industries Ltd. The contract in question fell under the concurrent jurisdiction of both the Bombay and Alipore Courts, but the contract provided that “any dispute arising between the parties, settlement of the same legally or otherwise, will be decided in Bombay”. It was observed that the agreement to jurisdiction of Bombay was not an absolute restriction.
Generally, three jurisdictions are available: the place of the making of a contract, that of its performance and the defendant’s place of business or residence. If, out of these three jurisdictions, at least one is left open, competent under the Civil Procedure Code, it will not offend S, provided that the jurisdiction which is left open is a convenient one, i., available at a reasonable expense and not inaccessible. A clause of exclusive jurisdiction must be brought to the notice of the parties whose rights are sought to be curtailed. The burden of proof of mutual assent would weigh down the case. An ouster clause in a contract can oust the territorial jurisdiction only of a civil court but not that of a High Court.
A contract between the parties with regard to the exclusion of jurisdiction of a court is not binding on a third party, unless the attention of such third party is specifically drawn to such a clause in the contract and he is made aware of the implications. Thus, where the suit was filed in the court at Hyderabad by the insurance company for recovery of damages for short delivery of goods which were delivered at Hyderabad, it was held that in absence of any evidence that the insurance company who was a third party was made aware of the implications of the lorry receipt and since no part of cause of action had arisen in Calcutta, it was not open to say that the suit could be filed only in the court in Calcutta as stipulated in the lorry receipt.
Agreement in restraint of legal proceedings
Course: Contract (201)
University: Karnataka State Law University
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