The Appellant and Respondents had entered into a contract to construct a Boy’s
Hostel in the Chanakya National Law University. As the construction work got
completed, the Respondents paid whatever amount was due by way of full and final
settlement. However, the Petitioner Company demanded Rs 63,18,345.49 for the
cost incurred in carriage of materials
vide letter dated 12.10.2011. Registrar of
the Respondent- Chanakya National Law University informed the Petitioner-company
that a representation was referred to the consultant M/s Gherzi Eastern Ltd.
The consultation company had opined that the additional claim for
carriage was not admissible, unless or otherwise, specially mentioned in the
Bill of Quantity (BOQ) of civil work. The same was informed to the Petitioner
vide letter dated 09.08.2012 and had further stated that the Respondents would
no longer entertain any more correspondence in the above regard. Petitioner had
demanded interest on the amount of security deposit vide letter dated
03.03.2012, to which the respondent stated that the same was absolutely
illusionary and without any substance.
Finally, the Petitioner vide letter dated
07.05.2013 had requested the Respondents for the appointment of an Arbitrator as
it was mentioned in the terms of the contract. However, the Respondent replied
vide letter dated 18.05.2013 that clause-25 of the contract states that there is
a 45 days’ time limit for appointment of an Arbitrator in respect of any claim
from the date of intimation of final bill ready for payment.
further stated that the right to appoint an Arbitrator under clause-25 of the
Contract was extinguished because the final payment was made on 07.01.2012 and
there was no demand for appointment of an Arbitrator within 45 days thereafter
and hence the claim of the Petitioner shall be deemed to have been waived and
absolutely barred and the Respondents would be treated to have been discharged
of all the liabilities as per the terms mentioned in the agreement. In view of
such matter where the Respondents had failed to respond positively, the
Petitioner had filed an application in the Patna High Court claiming appointment
of an Arbitrator.
Main Issue Raised:
Whether the time limit of 45 days for the appointment of arbitrator as mentioned
in Clause-25 of the Contract renders the clause void according to the provisions
of section 28 of the Indian Contract Act.
Section 28 of Indian contract Act, 1872
Agreements in restraint of legal proceedings, void: 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; or
- 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.]
Saving of contract to refer to arbitration dispute that may
arise. —This section shall 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.
.:Saving of contract to refer questions that have already
arisen. —Nor shall this section render illegal any contract in writing, by which
two or more persons agree to refer to arbitration any question between them
which has already arisen or affect any provision of any law in force for the
time being as to references to arbitration.
Before I begin with the analysis of the case, it will be appropriate to quote a
paragraph from Clause-25 of the Contract, which reads as follows:
It is also a term of this contract that if the contractor does not make any
demand for appointment of arbitrator in respect of any claims in writing as
aforesaid within 45 days of receiving the intimation from the Employer or his
authorized representative that the final bill is ready for payment, the claim of
the contractor shall be deemed to have been waived and absolutely barred and the
Employer shall be discharged and released of all liabilities under the contract
in respect of these claims.
Section 28 of the Indian Contract Act, 1872 states that agreements in restraint
of legal proceedings is void. Further it clearly mentions that every
agreement, which extinguishes the rights of any party or discharges any party
from any liability under the contract on the expiry of a specified period so as
to restrict any party from enforcing his rights, is to be rendered void to that
To quote the words of CJ Garth, in the case of Koegler v Coringa Oil Co
,This section applies to agreements which wholly or partially prohibit
the parties from having a recourse to a court of law. If, for instance, a
contract were to contain a stipulation that no action should be brought upon it,
that stipulation would be void, because it would restrict both parties from
enforcing their rights under the contract in the ordinary legal tribunals.
The petitioner-Company claimed that prior to amendment of Section 28 of the
Contract Act, the clause in agreement stipulating extinguishment of remedy had
been held by the Hon'ble Supreme Court to be void as it operated against the
provisions of Section 28 of the Contract Act, which provides that any agreement,
restricting absolutely from enforcing his right under or in respect of any
contract by usual legal proceeding in the ordinary Tribunal or reducing the
period of limitation other than the limitation provided under the statute to
that extent is void, but there is no bar prohibiting the parties to enter into
an agreement relating to extinguishment of the right if it is claimed within
period mentioned in the agreement. The extinguishment of remedy is one thing and
extinguishment of right is another thing.
Taking the example of Hirabhai Narotamdas v Manufacturers Life Insurance Co
counsel for the Petitioner stated the decision of Bombay High Court which held
that a clause in a policy of life insurance declaring that no suit to recover
under the policy of life insurance shall be brought after one year from death of
the assured was held void.
The counsel for the Respondents gave the example of the famous case of National
Insurance Co Ltd v Sujir Ganesh Nayak & Co
. The clause in question
In no case whatsoever shall the company be liable for any loss or damage after
the expiration of 12 months from the happening of loss or damage unless the
claim is the subject of pending action or arbitration.
The claimant notified
the insurer regarding the strike which caused the loss but did not commence
proceedings within the stipulated time. The court observed that such a clause is
not hit by section 28 and is very much valid.
A blatant violation of the section 28 of Indian Contracts Act, 1872 was observed
in the given facts and hence the Court rightly ruled in favour of the
petitioner-company. It is true that a party cannot enforce another party to
maintain a time limit in order to seek a legal remedy purely on the basis that
Insurance Companies do so. It would, otherwise, lead to the infringement of
one’s rights to seek legal remedy being a party to a contract.
After listening to both the sides, the Patna High Court held that if parties in
a contract are bound by a time limit to exercise their legal rights, then such
an agreement is void. The Court held that since Clause-25 of the Contract
between the parties was blatantly violating section 28 of Indian Contract Act in
bright daylight, the same cannot be invoked to the prejudice of the
petitioner-company. The Court further said that the issue of payment of interest
on security deposits and payment of transportation of materials remains fit for
an Arbitrator to decide and hence decided the favour against the Respondents.
- SSC Online:
- LexisNexis Advanced:
- Avtar Singh, Contract and Specific Relief, Twelfth Edition
Award Winning Article Is Written By: Mr.Ashish Dash - 1st year law student at Institute of law, Nirma University, Ahmedabad
Authentication No: AP2204130fk8Hl-25-0421