DAMODARAM aSANJIVAYYA aNATIONAL aLAW aUNIVERSITY

SABBAVARAM, aVISAKHAPATNAM, aA.P., aINDIA a

PROJECT TITLE
SECTION – 28, THE INDIAN CONTRACT ACT, 1872

SUBJECT
LAW OF CONTRACTS -1

NAME OF THE FACULTY

Ms. B. V. S. SUNEETHA

STUDENT DETAILS
NAME: K. RAHUL KANTH.
ROLL NO.: 19LLB024
SEMESTER-2

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 ACKNOWLEDGEMENT

I would sincerely like to put forward my heartfelt appreciation to our respected LAW
OF CONTRACTS-1 faculty, Ms. B.V.S. SUNEETHA, for giving me this opportunity
to take up this project regarding “SECTION-28”. I have tried to collect information
about the project in various possible ways to depict a clear picture of the given project
topic.

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 TABLE OF CONTENTS

1. SYNOPSIS 4
2. INDIAN CONTRACT ACT,1872 5
3. CONTRACT 6
4. ESSENTIALS OF A CONTRACT 6
5. SECTION 28, INDIAN CONTRACT ACT,1872 7
A. LEGISLATION 8
B. INTRODUCTON 10
C. 1997 AMENDMENT 11
D. SECTION 28 PRIOR TO AMENDMENT 13
E. UNION OF INDIA VS M/S INDUSIND BANK LTD. 15
F. SUMMARY 21
6. AGREEMENT IN RESTRAINT TO MARRIAGE (sec. 26) 22
7. AGREEMENT IN RESTRAINT TO TRADE (sec. 27) 23
8. AGREEMEMT IN RESTRAINT TO LEGAL PROCEEDDINGS 25
9. EXCEPTIONS TO SECTION 28 OF THE CONTRACT ACT, 1872 27
10. DECISIONS BY SUPREME COURT OF INDIA 29
11. CONCLUSION 32

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 SECTION 28, INDIAN CONTRACT ACT, 1872
SYNOPSIS
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.

Objective of the study:

The object of the research is to understand –
 What does section 28 emphasise about in the field of law.
 What is the jurisdiction of the courts pertaining to this legislation?

Scope of the study:

The study is limited to section 28 and its usage in the field of law keeping various
precedents in view.

Research question:

 Whether section 28 is being used as its legislators have been intended

it to be?

Research methodology:

The methodology followed in this research is doctrinal in nature.

Type of research:

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 This research is descriptive and explanatory in itself.

Significance of the study:

This study helps the reader to know about the legislation and the proper usage
of it in the administration of justice.

-----------------O----------------

THE INDIAN CONTRACT ACT, 1872:1

Enactment date: 25-04-1872.

Short title : Indian Contracts Act, 1872.

Long title : To define amend certain parts of the laws relating to

contracts.

Enforcement date: 01-09-1872.

The Indian Contract Act occupies a predominant place in the field of Commercial
Law. Without Indian Contract Act, 1872, it would have been tough to carry on trade
and commerce or any other business activity with a proper administration of justice to
ensure fair working of its machinery. It is not only the business and its subsidiary fields
which are concerned with the Contract Act, but it affects almost everyone who entered
into a contract that is in accordance with the definition and the elements of a contract
that is clearly specified in the Indian Contract Act, 1872. The objective of the Contract
Act is to ensure that the rights and obligations arising out of a contract are accepted and
that legal remedies are made available to those who are affected in their rights and
obligations pertaining to their contract. 

DIVISIONS OF INDIAN CONTRACT ACT, 1872:2

Indian Contract Act had a wide scope in its whole as it had affected not only the
business activities such as, trade and commerce but also on every individual who had
entered into a contract, that is in accordance with the contract defined in the respective

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act. The act is widely categorised into six divisions by the virtue of the legislations
imbibed in the act. Those divisions are as follows:

1. Section 1-75 - General Principles of contract.

2. Section 76-123 - Sale of Goods Act.
3. Section 124 -147 - Contracts of Indemnity and Guarantee.
4. Section 148-181 - Contracts of Bailment and Pledge.
5. Section 182-238 - Agency.
6. Section 239-266 - Partnership Act.

There are various forms of contracts such as contract of indemnity, contract of

guarantee, contract of agency etc. It is very important for a normal day-to-day trading
and regular dealing to have a valid and efficient contract and it need to be made
enforceable under the Contract act.

While summing up, the law of contracts, according to Anson, “the law of contract is
a branch of law which determine the circumstances in which a promise shall be legally
binding on the person making it”.

CONTRACT:

According to sec. 2(h) of the Indian Contract Act,1872, the term contract can be
said as – ‘An agreement which is enforceable by law is a contract’. An agreement
means – ‘a promise or a set of promises’ and a promise arises when the proposal is
accepted. Otherwise, a contract also can be said as ‘a promise that is legally binding
upon the persons those who are making that promise’. So, we can say that a contract is
an agreement between two or more parties to do or abstain from doing something.

So, if we examine the definition of contract, then we can see the two important
things for the formation of a contract. First thing is an agreement and the second thing
is enforceability of that agreement. Here, enforceability can be explained as – ‘an action
which can be made effective by the court of law’ 3. The main intent of a contract being
enforceable is to make it active or effective in the court of law.

Any undertaking between two individuals or groups of individuals results in a

contract. From morning till evening, day in and day out, we might have entered into

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innumerable contracts like purchasing vegetables from a vendor, buying a ticket to
watch a movie or getting a piece of work done. Every human relationship is built upon
a contract. Communities and nations coexist on the basis of a viable contract. Thus, we
see contract as an inherent and underlying part of every human transaction. It is a
binding agreement to get something done, sold or bought and there may be a price or a
consideration – implied or explicit.

 ESSENTIAL ELEMENTS OF A CONTRACT:

A. OFFER –
An "offer" is originating point in the process of making an
agreement. When one person who desires to create a legal
obligation, communicates to another his willingness to do or not to
do a thing, with a view to obtaining the consent of that other person
towards such an act or abstinence, the person is said to be making a
proposal or offer.

B. ACCEPTANCE –
An agreement emerges from the acceptance of the offer.
"Acceptance" is thus, the second stage of completing a contract. An
acceptance is the act of manifestation by the offeree of his assent to
the terms of the offer. It signifies the offeree's willingness to be
bound by the terms of the proposal communicated to him. To be
valid an acceptance must correspond exactly with the terms of the
offer, it must be unconditional and absolute and it must be
communicated to the offeror.
C. AGREEMENT –
An "agreement" is a contract if 'it is made by the free
consent of parties competent to contract, for a lawful consideration
and with a lawful object, and is not expressly declared to be void'.
The contract must be definite and its purpose should be to create a
legal relationship. The parties to a contract must have the legal
capacity to make it.
D. CONSENT –

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 Consent is very important part of the contract. The contracts
become Void if misrepresentation, mistake or anything like this the
fraud will be committed. If the general essentials ingredients of a
contract are fulfilled, a valid legal contract is formed and it becomes
affective from date it is signed.
E. CONSIDERATION –

“A valuable consideration, in the sense of the law, may

consist either in some right, interest, profit or benefit accruing to the
party, or some forbearance, detriment, loss or responsibility given,
suffered or undertaken by other”.

Summing up, for the formation of a contract, these are considered crucial

essentials that have to be followed. After the formation of a contract, the next stage is
reached, namely, the fulfilment of the object the parties had in mind. Once the object is
fulfilled the liability of either party comes to an end. Hence, the performance of the
contract is completed.

SECTION 28 OF INDIAN CONTRACT ACT, 1872:

 LEGISLATION4:

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.’

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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.

Exception 2-

‘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.

Exception 3-

‘Saving of a guarantee agreement of a bank or a financial institution.’

This section shall not render illegal a contract in writing by which any bank
or financial institution stipulate a term in a guarantee or any agreement making
a provision for guarantee for extinguishment of the rights or discharge of any
party thereto from any liability under or in respect of such guarantee or
agreement on the expiry of a specified period which is not less than one year
from the date of occurring or non-occurring of a specified event for
extinguishment or discharge of such party from the said liability.

Explanation-

(i) In Exception 3, the expression "bank" means—

(a) a "banking company" as defined in clause (c) of section 5 of

the Banking Regulation Act, 1949 (10 of 1949);

(b) "a corresponding new bank" as defined in clause (da) of

section 5 of the Banking Regulation Act, 1949 (10 of 1949);

(c) "State Bank of India" constituted under section 3 of the State

Bank of India Act, 1955 (23 of 1955);

(d) "a subsidiary bank" as defined in clause (k) of section 2 of the

State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959);

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 (e) "a Regional Rural Bank" established under section 3 of the
Regional Rural Banks Act, 1976 (21 of 1976);

(f) "a Co-operative Bank" as defined in clause (cci) of section 5

of the Banking Regulation Act, 1949 (10 of 1949);

(g) "a multi-State co-operative bank" as defined in clause (cciiia)

of section 5 of the Banking Regulation Act, 1949 (10 of 1949);
and

(ii) In Exception 3, the expression "a financial institution" means

any public financial institution within the meaning of section 4A
of the Companies Act, 1956 (1 of 1956). 

 INTRODUCTION:
As per sec. 2(h) of the Indian Contract Act 1872, a contract is an agreement
enforceable by law. Section 10 of the Indian Contract Act deals with the relation
between a contract and an agreement. As per s. 10, “All agreements are contracts if
they are made by the free consent of the parties competent to contract, for a lawful
consideration and with a lawful object, and are not hereby expressly declared to be
void.” Every contract is an agreement, but every agreement is not a contract. An
agreement becomes a contract when the following conditions are satisfied:
1. There should be some lawful consideration for it.
2. The parties must be competent to contract.
3. The consent of the parties is free.
4. Their object is lawful.
An important requirement for the formation of a valid contract is that the parties
must contract for a lawful object. An agreement the object of which is opposed to the
law of the land maybe either unlawful or simply void, depending upon the provision of
the law to which is opposed. Sections 23 of the Indian Contract Act deal with unlawful
agreements. Section 2(g) of the Indian contract deal with void agreements. As per s.
2(g), “An agreement not enforceable by law is void.” The following agreements are
declared to be void:5
1. Agreement of which consideration and objects are unlawful in part.
2. Agreements without consideration.
3. Agreements in restraint of marriage.
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 4. Agreements in restraint of trade.
5. Agreements in restraint of legal proceedings.
6. Unmeaning agreements.
7. Wagering agreements.
8. Agreements to do impossible acts.
The Contract draws distinction between an agreement which is only void and the
one in which the consideration or object is also unlawful. An illegal agreement is one
which is actually forbidden by the law; but a void agreement may not be forbidden, the
law merely say that if it made, the courts will not enforce it. Thus, every illegal
contract is also void but a void contract is not necessarily illegal.

 1997 AMENDEMNT (97TH REPORT OF LAW COMMISSION OF INDIA):

The Law Commission in its 97th report recommended that Section 28 of the
Indian Contract Act, 1872 be amended. This suggestion was made because Section 28
as it is on the statute book now has created some sort of uncertainty about a party's
rights to enforce their rights under any agreement, which will be clarified by further
description.
The amendment of sec.28 has brought about the change that all clauses which
reduced the normal period of limitation would be void to that extent. It now prohibits
clauses which seek to extinguish the right of any party thereto, or discharge 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. The amendment
gave effect to the 97th Report of the Law Commission of India.
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 sec.28, and
had concluded that no change was necessary in the section as it stood earlier.
But later the Commission took up the matter suo-motu 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
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 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’. 6 The Commission considered that no provision like sec.28
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 Spinning & Weaving Co. v Sathyanarayanan Marine and Fire
Insurance Co Ltd.7
 AGREEMENT RESTRICTING LAW OF LIMITATION:

Prior to amendment, Section 28 says that ‘No one can contract himself
out of the statute of limitation and consequently where the result of a compromise
is that the limitation provided by law is extended it is open to the judgment-
debtor to plead that the decree-holder’s application was barred by time’. It is only
when a period of limitation is curtailed that Section 28 of the Contract Act comes
into operation. It does not apply when the term spells out an extinction of the
right of the plaintiff to sue or spells out the discharge of the defendant from all
liability in respect of the claim. A voluntary agreement to curtail the period of
limitation for filing a suit is void. A clause in a contract providing that no claim
or dispute of any sort whatever can be recognized if not made in writing within
sixty days of the due date of payment does not take away the statutory right of a
plaintiff to bring his claim within the time prescribed by law.

The clause in the agreement that the appellant would not have any right
under the bond after the expiry of six months from the date of termination of the
contract has been held not to be contrary to section 28of the Act nor it imposed

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 any restriction to file a suit within six months; [Food Corporation of India –vs-
New India Assurance Co. Ltd.,8].

 CHANGE OF PROCEDURE:
An agreement by a party that a suit may be decided in a manner different from
that prescribed by law is void and does not debar him from subsequently
claiming a trial of the suit on merits. Therefore, an agreement that a particular
suit should be decided in accordance with the result of another suit between the
parties is not valid.

 SECTION 28- PRIOR TO AMENDMENT:

A major change to the named section 28 by the Indian Contract

(Amendment) Act,1996, by the virtue of 97th report of Law Commission of
India,1984, which gave the amended law be enforceable with effect from 08-01-
1997 is the inclusion of sub-section (b).9

Original section 28of the Indian Contract Act before the commencement of
the amendment is as follows-

“Every agreement, by which any party thereto 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 the
extent”.

The Limitation Act, 1963, prescribes a time limit of 30 years for all suits to
be instituted by the government. Prior to the amendment to section 28of the Indian
Contract Act, 1872, by the Banking Laws (Amendment) Act, 2013, the banks were
apprehensive that in view of this limitation period, a stipulation in the contract for
discharge of liability was void under section 28.

This was so because in the case of Union of India v Bhagwati Cottons Ltd,
Bombay High Court struck down extinguishment clauses as invalid in view of a
1997 amendment to section 28. Even after a division bench of Bombay High Court
overruled this decision in IndusInd Bank v Union of India, the banks insisted on

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 return of the original bank guarantee or a no-claim notice before they released the
margin money.

Prior to 1997, section 28 stipulated that every agreement by which any

party was restricted absolutely from enforcing its rights under or in respect of any
contract by the usual legal proceedings in the ordinary tribunals, or which limited
the time within which it may thus enforce its rights, was void to that extent. Under
the 1997 amendment, section 28(b) provided for agreements which extinguish the
rights of any party, or discharge any party 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 its rights.10

This amendment was discussed and it was held in Union of India v

Bhagwati Cottons Ltd that a provision made in the bank guarantees, to the extent
that the rights of the party would stand forfeited and the defendant would stand
discharged unless a demand or claim under the bank guarantees was made in
writing within the specified time, was hit by 1997 amendment.

This position was overruled in IndusInd Bank v Union of India and also

in Explore Computers Pvt Ltd v CALS Limited and Anr11, in which it was held that
the restrictive clause in the bank guarantees whereby the beneficiary was required
to enforce its claim within a stipulated period after expiry of bank guarantee
violated section 28, but a clause in an agreement which provides for the forfeiture
or waiver of the right itself if no action is commenced within the period stipulated
by the agreement would not violate section 28.

To resolve the conflicting judgements, the 2013 amendment added

exception 3 to section 28, which provides legitimacy to a term in a guarantee for
extinguishment of the rights or discharge from any liability on the expiry of a
specified period which is not less than one year from the date of occurring or non-
occurring of a specified event.

In light of the above, a clause in a bank guarantee may provide for

discharge of the bank’s liability in the event that - (i) no claim is made within the
claim period and (ii) if a claim is made during the validity of the guarantee, not less

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 than one year is provided for enforcement of the guarantee from a specified event,
after which the bank shall be discharged of it liabilities.

Union of India & Anr vs M/S IndusInd Bank Ltd & Anr. 12 13

FACTS:

o The present appeals by the Union of India raise an interesting question as to the
applicability of the 1997 Amendment to section 28 of the Contract Act, 1872. The
facts of the three appeals are similar inasmuch as they concern four exporters who
belong to what is known as the GPB Group of Companies.
o By a Memorandum dated 6.11.1995, issued by the Textile Commissioner under the
Imports and Exports (Control) Act, 1947, terms and conditions for export of raw
cotton and cotton waste for September, 1995 - August, 1996 were laid down. The
shipment was permitted only against an irrevocable letter of credit. The exporters
were required to furnish a bank guarantee in the prescribed form at the rate of 10%
of the contract price. The bank guarantee was required to be kept valid up to 6
months with a provision for claims for an additional three months, after the last
date of shipment. The allocation of quota was on the basis of the highest unit value
realization.
o The Textile Commissioner invited applications vide Press Note and Memorandum,
both dated 9.1.1996, for export of 10,000 bales of extra-long staple cotton. It was
mentioned in the Press Note and the Memorandum that the shipment period will be
180 days from the date of registration of quota or up to 31.8.1996, whichever is
earlier.
o Pursuant to this Press Note and Memorandum, four sale contracts were executed
between M/s Indocomex Fibres Pvt. Ltd., Singapore and the four exporters, all in
January, 1996. On 31.1.1996, the four exporters made an application together with
a bank guarantee of even date. In February, the exporters were permitted to export
the total quantity of 9175 bales vide an Allocation-cum-Registration Certificate
dated 6.2.1996 within a validity period of shipment up to 31.7.1996. It may be
mentioned in passing that this date was extended as many as three times, the third
extension being notified as up to 28.2.1997.

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o As the four exporters failed and neglected to furnish supporting documents
regarding export of goods allocated to them within the stipulated period, the
Textile Commissioner, by a letter dated 3.1.1997, called upon the exporters to
submit the necessary documents within 15 days from the date of issue of this letter
but not later than 20.1.1997, failing which the bank guarantees would be enforced.
As the exporters failed and neglected to furnish these documents, the Textile
Commissioner, vide letters dated 15.5.1997, invoked the bank guarantees. Vide
letters of even date, the Respondent Bank refused to pay under the said guarantees,
stating that the same could be invoked only within the extended period of three
months i.e. up to 30.4.1997, and not later. By a letter dated 27/28.8.1997, the
Textile Commissioner informed the Respondent Bank that in light of the
amendment to section 28 of the Indian Contract Act, which came into force on
8.1.1997, the Bank was not absolved of its obligation to make payment under the
bank guarantee. To this, the Bank vide letter dated 19.9.1997, reiterated its earlier
stand and stated that it was not liable to make payment under the bank guarantee
after 30.4.1997. It may be mentioned in passing that two of the aforesaid group
companies, namely GPB Fibres Ltd. and M/s Bhagwati Cotton Ltd. were
amalgamated on 12.9.1997.
o On 23.7.1998, the Textile Commissioner called upon both the exporters and the
Respondent Bank to pay the sums covered by the bank guarantee. As this letter
evoked no response, three summary suits - being 2959/1999, 2963/1999 and
2996/1999 - were filed on 8.4.1999 by the Union of India and the Textile
Commissioner against the exporters and the Bank in the High Court of Bombay.
By order dated 4.12.2001, as amended on 22.1.2002, unconditional leave to defend
the suits was granted to the Bank, and conditional leave to so defend the suits to
the exporters upon depositing the amount of Rs.3,82,59,450/- in the Court within
12 weeks from the date of the said order. On 20.1.2003/27.2.2003, the Division
Bench dismissed the appeal filed by the Union of India on the ground that it was
not maintainable under Clause 15 of the Letters Patent of the High Court. On
14.8.2003, an SLP filed by the Union of India met with the same fate.
o All four exporters remained ex parte, as a result of which the suits came to be
decreed ex parte against the said exporters on 29.11.2004.

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 o On contest with the Bank, a learned Single Judge of the Bombay High Court on
22.2.2008, was of the view that as the bank guarantees in question were in force on
8.1.1997, when the amendment to section 28 of the Contract Act took place, the
amended section 28 would apply to the facts of these cases. This being the case,
the clause in the bank guarantees extinguishing rights and discharging the liability
of the Bank if a claim were not to be made within three months of the date of
expiry of the bank guarantee, was held to be void. Consequently, it was held that
the invocation of the aforesaid bank guarantees, being without the aforesaid time
constraint, was valid, and the said suits were, therefore, decreed in favour of the
Union of India and against the bank.
o In an appeal against this judgment, by the impugned judgment dated 20.4.2011, a
Division Bench of the Bombay High Court, while holding that the amended section
28 would apply to the facts of these cases, came to the opposite conclusion by
following certain judgments of this Court, and therefore, reversed the learned
Single Judge, holding that since the bank guarantees were not invoked within the
time prescribed, the suits would have to be dismissed. The Union of India has filed
the present appeals before us.
o Shri A.K. Panda, appearing on behalf of the Union of India, has stated that the
Single Judge was correct in applying section 28(b) as amended in 1997, and that
the condition contained in the bank guarantee which restricted the period within
which it could be invoked is, therefore, void. To buttress his submission, he
cited, R.Rajagopalreddy vs. Padmini Chandrashekharan14. According to learned
counsel, the Division Bench, having reiterated that the amended section
28(b) would apply, was not correct in its conclusion that such clause in the bank
guarantees would not be void. According to learned counsel, the Supreme Court
judgments relied upon were all pre-amendment, and could not therefore be relied
upon to arrive at the opposite result from the learned Single Judge.
o On the other hand, Dr. A.M. Singhvi, learned senior advocate, and Shri Krishnan
Venugopal learned senior advocate, contended that both the Single Judge and the
Division Bench were not correct in applying the amendment to section 28.
o According to both the learned counsel, the bank guarantees themselves being dated
31.1.1996, would not be affected by an amendment made one year later i.e. on

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 8.1.1997. The relevant date and the relevant law applicable would be as on
31.1.1996, which would be the unamended section 28. This being the case,
according to them, a catena of judgments has held that if a clause in a contract does
not restrict the limitation period within which one can approach a Court, then it is
perfectly valid and not hit by section 28 (unamended). For this purpose, they cited
several judgments before us.
o An alternative plea was also raised by them that, on the assumption that the
amended section 28 would apply, even then, regard being had to the limited object
sought to be achieved by the amendment, which followed a Law Commission
Report, it would be clear that even on application of section 28(b), the aforesaid
clause in the bank guarantees would not be hit. In particular, they argued that the
revised section 28 suggested by the Law Commission was not in fact enacted
verbatim in section 28(b), and that the crucial words “or on failure to make a
claim” are missing in the amended section 28. They also referred to a subsequent
amendment of section 28 in 2012, specifically dealing with bank guarantees, in the
course of their arguments.

ARGUMENTS:

a. By Union of India -
i. A single judge was correct in applying section 28(b) as amended in
1997, and that the condition contained in the bank guarantee which
restricted the period within which it could be invoked is, therefore,
void.
ii. To buttress his submission, he cited R.Rajagopalareddy vs. Padmini
Chandrashekharan15. The Division Bench, having reiterated that the
amended section 28(b) would be applied, was not correct in its
conclusion that such clause in the bank guarantees would not be void.
iii. The Supreme Court judgements relied upon were all pre-amendment,
and could not therefore be relied upon tro arrive at the opposite result
from the learned Single Judge.
b. By the IndusInd Bank -
i. It was contended that both the Single Judge and the Division Bench
were not correct in applying the amendment to section 28.

15
[1995] 2 SCC 630
18 | P a g e
 ii. The bank guarantees themselves being dated 31-01-1996, would not be
affected by an amendment made a year later i.e., 08-01-1997. The
relevant law applicable would be ads on 31-01-1996., which would be
the unamended section 28. This being the case, according to them, a
catena of judgements held that if a clause in a contract does not restrict
the limitation period within which one can approach a court, then it is a
perfectly valid and not hit by section 28.
iii. An alternative plea was also raised by them that, on the assumption
that the amended section 28 would apply, even then, regard being had
to the limited object sought to be achieved by the amendment, it would
be clear that even on application of section 28(b), the aforesaid clause
in the bank guarantees would not be hit.
iv. In particular, it was argued that the revised section 28 suggested by the
Law Commission was not in fact enacted verbatim in section 28(b),
and that the crucial words “or on failure to make a claim” are missing
in the amended section 28. They also referred to a subsequent
amendment of section 28 in 2012, specially dealing with bank
guarantees, in the course of their agreements.

ISSUES INVOLVED IN THE CASE:16

1. Whether in the present case, section 28 applies in its original form or

whether it applies after amendment in 1997.
2. Whether section 28 is retrospective or perspective.
3. Whether section 28 purports either to be clarificatory or declaratory.

OBSERVATIONS MADE BY THE HONOURABLE COURT:

The Division Bench of the Bombay High Court held that since the bank guarantee
was not invoked within the time prescribed the suits would have to be dismissed.  The
Supreme Court agreed with this view.

The Supreme Court whilst dealing with this issue mainly examined the question as
to whether the amendments brought about to Section 28 in the year 1997 would apply
retrospectively or not.

16
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19 | P a g e
 The amendments to Section 28 brought about a substantive change in the law that
even where an agreement extinguishes the rights or discharges the liability of any party
to an agreement, so as to restrict such party from enforcing his rights on the expiry of a
specified period, such agreement would become void to that extent.

The Supreme Court held that the amendments made in the year 1997 were not
declaratory but were substantive changes to the law and therefore applied only
prospectively and not retrospectively.

However, in passing, the Supreme Court made an observation with regard to the
amendments brought about to Section 28 of the Act with effect from 18.01.2013.

The amendment to Section 28 was by insertion of Exception 3 which permitted banks

and financial institutions to limit the period to make a claim up to one year by
incorporation of an appropriate clause in the contract.

The effect of this Exception is to limit the period provided under the Limitation Act
from three years to one year in the case of banks and financial institutions which issue a
guarantee.

The Supreme Court then states that such stipulations would pass muster after 2013 if
the specified period is not less than one year from the date of occurring of a specified
event for extinguishment or discharge of a party from liability.  This statement adds
further to the confusion.

Stipulations in the IndusInd case was for extending the period to make a claim

before the Bank and not a claim before a court of law. This statement has resulted in a
scenario where Banks have now taken a view that the judgment requires banks to
provide for a claim period of one year instead of the period of three months which was
provided for in the IndusInd Bank case.

The only issue which is relevant from the point of view of Section 28 is the period of
limitation to pursue a claim in Court.  The normal period of limitation under the
Limitation Act, 1963 is three years.  The limitation to make a claim in Court can be
limited to a period of one year by including a clause in the guarantee.  The time period
during which a claim can be made by invoking the bank guarantee is simply a matter of
contract and is not governed by any law including Section 28 of the Contract Act.

JUDGEMENT:

20 | P a g e
 The supreme Court opined, considering the IndusInd Bank’s first argument, that it
is not necessary to go into the finer details of the second argument and as to whether the
aforesaid clauses in the bank guarantee would be hit by section 28(b) after the 1997
amendment. It may only be noticed, in passing, that parliament has to a large extent
redressed any grievance that may arise qua bank guarantees in particular, by adding an
exception (iii) by an amendment made to section 28 in 2012 with effect from 18-01-
2013. Since the court is not directly concerned with this amendment, suffice it to say
that stipulations like the present would pass muster after 2013 if the specified period of
a specified event for extinguishment or discharge if a party from liability. The appeals
are, therefore, dismissed with no order as to costs.

SUMMING UP:

a. Section 28 of the Contract Act renders void any clause in a contract which may
restrict absolutely the right of any party to enforce his rights under or in respect of a
contract by the usual legal proceedings or which limits the time to enforce his rights;

b. Section 28 also renders void any clause in a contract which extinguishes the right of
any part or discharges any party from liability upon expiry of any specified period.

c. Section 28 does not in any way affect the right of a party to prescribe a time period
within which a claim should be made before it and to not be liable if a claim is not
made within that time limit. To take an example, a warranty clause in a contract of
sale of goods may have certain time limits during which the right to make a claim
arises.  If a claim is not made within that time, the right to make a claim for breach of
warranty is lost.  If a claim is made and not honoured, then the party is entitled to a
period of three years to sue for enforcement of the right.  If this is impermissible, then
all warranties provided for goods would be extended for a period as prescribed in the
Limitation Act, 1963. 

d. Exception III to Section 28 only acts as an exception and therefore cannot be read
over and beyond the scope of Section 28 itself. The right to make a claim before an
ordinary tribunal can be limited by virtue of the Exception.  The discharge of the right
also occurs after the period of one year if so provided.  This is, of course, subject to
the overarching requirement that the claim under the guarantee has been made within
the time specified in the guarantee or the right to make the claim has arisen during the
period of the guarantee.

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AGREEMENTS IN RESTRAINT TO MARRIAGE (sec – 26)

According to section 26 of the Indian Contract Act, all agreements in restraint of

marriage except that of a minor are void. Romans were the first ones to delegitimize
agreements that were in restraint of marriage. The basis of making agreements in restraint
of marriage void is that marriage is a sacrament and nothing should interfere in the
institution of marriage, not even contracts. The idea behind this provision is to not snatch
away the personal right of every individual to marry someone of their own choice. It is
important to note here that according to the section, agreements in restraint of marriage of
a minor are not  void.

Cases

In Shravan Kumar vs. Nirmala17, the petitioner filed a suit in the Allahabad High
Court asking the court for an injunction on the defendant’s marriage to the other person.
The plaintiff contended that the defendant had promised to marry him, and therefore her
marriage with the other person should be injuncted against Pankaj Mithal, J. cited Section
26 of the Indian Contract Act, 1872 while pronouncing his judgment, whereby he
dismissed the petition.

AGREEMENTS IN RESTRAINT TO TRADE (sec – 27)

Agreement in restraint of trade is void under Section 27 of the Act. That is, any
agreement that debars one person from starting or continuing his trade or profession, in
return for some consideration is void. Therefore, any agreement stopping a person from
trading in the manner he likes or wherever he likes, on an agreement with other party, in
which the other party benefits from him stopping his trade or profession, will be called an
agreement in restraint of trade. Apart from two exceptions, which we will discuss below,
all agreements in restraint of trade are void. The two exceptions lie in Sale of Goodwill
and Partnership Act.

In Common Law, a ‘test of reliability’ is followed. An agreement in restraint of

trade is valid, if:18

There is a valid interest that the party imposing the restraint is trying to protect.

1. The restraint is no more than that which is necessary to protect this interest.
17
CRIMINAL APPEAL No. - 848 of 2014
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22 | P a g e
 2. Restraint is not contrary to public interest.

Cases

o Madhub Chunder v. Rajcoomar19

In this case, the parties were businessmen in Calcutta. The defendant,

Rajcoomar suffered loss due to the plaintiff’s competition and entered into an
agreement with the plaintiff that if he closed his business there, he would pay him
all the advances he had made to his workmen. When the defendant failed to pay,
the plaintiff filed a suit to recover the amount but failed to do so because it was an
agreement in restraint of trade, therefore not enforceable in a court of law.

o Superintendence Co. of India Pvt. Ltd. v. Krishan Murgai20

In this case, the Supreme Court came to the conclusion that Section 27
expressly declares all agreements (apart from one exception) to be void and the
section cannot be attributed two meanings. The test of reasonability as applicable
in England cannot be applied in India.

Exceptions

Section 27 of The Indian Contract Act, 1872, has two (2) exceptions when dealing
with the agreements in restraint to trade. They are, namely-

1. Sale of goodwill.
2. Partnership Act,1932.
1) Sale of goodwill:

Goodwill is an intangible asset of a firm, that is, it exists, yet it is not

material or physical. It essentially means the reputation or status of the firm in
society. Goodwill has its origin in brand value, employee morale, reputation,
customer advantage etc. It is an important asset because a customer is expected to
engage with the same favourable firm, that he was engaged with earlier, because of
its name and reputation. This why Goodwill of a firm holds a value.

Conditions that make restraint of trade valid

There are certain conditions that make a restraint on trade during a sale
of goodwill valid, these are:
19
[1874] 14 Beng. L.R. 76
20
1980 AIR 1717
23 | P a g e
 a. The seller can be restrained only from carrying out a
similar business.
b. The restraint can be applied only to certain local limits.
c. The limits/restraint should appear to be reasonable.

Case

Chandra v. Parsullah21

Here, the plaintiff was the owner of a fleet of buses that used to ply
between Pune and Mahabaleshwar. The defendant also had a similar business
in the same area. To avoid competition, the plaintiff bought the defendant’s
business along with the goodwill, and by contract made him agree not to open a
similar business in the area for 3 years. The defendant did not comply and
started his business. It was held by the court that the agreement was valid, as it
fell within the exception to section 27.

2) Partnership Act, 193222

The Act lays down three exceptions. These are:
i. An agreement with a partner of the firm to not carry out his own
business so long as he/she is a partner in the said firm will be
valid under Section 11 (2) of the Partnership Act.
ii. An agreement between partners to not engage in a similar
business as that of the said firm within specified territorial and
time limits (period of restraint). (Section 36 (2))
iii. In anticipation of dissolving the firm, the partners may come to
an agreement in restraint of carrying out a similar business
within specified territorial and time limits so long as this
restraint is reasonable.

AGREEMENTS IN RESTRAINT TO LEGAL PROCEEDINGS

Any agreement between the two parties that debars either or both of them from
going to a court of law in case of non-compliance of the contract, is a void agreement.
Section 28 of the Indian Contract Act says that any agreement that restricts an aggrieved

21
(1922) 24 BOMLR 602
22
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24 | P a g e
party from enforcing his rights to approach a relevant court or tribunal in case of a breach
of contract, or limits the time within which he may do so, is a void agreement. It further
says, any agreement that extinguishes the rights of any party or discharges either of the
parties from liability is a void agreement.

In simple terms, all agreements are void, if:

1. They render it invalid, by agreement, for a party to approach a relevant court or

tribunal if the party’s rights have been violated.

2. Limit the time within which the aggrieved party can approach such a court or
tribunal.

3. Make a party immune from liability by agreement.

In the case named, Food Corporation of India vs. New India Insurance Co. Ltd.,
the Supreme Court held that the terms of an agreement should not be so construed as to
bar the other party from seeking the remedy of the suit.

RESTRAINT TO LEGAL PROCEEDINGS

An agreement having for its object the restrain of an individual from enjoying the
fundamental right of resorting to a court of law for redress and relief is invalid. Section 28
applies to agreements that wholly or partially restrain this right of the parties. A contract
having a clause that no action should be brought up on it is void since it restricts both
parties from enforcing their rights under the contract in a court of law. 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 23. 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 24, 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 under this section.

It was held in Rambilas Mehto v Babu Durga Bijai Prasad Singh 25, it was held that
a clause in an arbitration agreement providing that the award shall be accepted by the
23
Avtar Singh, Contract & Specific Relief Act (12th edition).
24
AIR 1933 All 417
25
AIR 1965 Pat 239
25 | P a g e
parties and any objection thereto shall be null and void and shall not be put forth in any
court of law was held to be void as imposing a restriction on the right of the party affected
to institute legal proceedings.

EXCEPTIONS TO SECTION 28: 26

Forbearance by a creditor from suing a debtor or a promise to forbear absolutely or

for a time is not unlawful. So, a compromise of doubtful rights is outside the scope of
Section 28 though the parties thereby agree that they abandon their rights under the
original contract which necessarily includes a right to resort to a Civil Court in regard to
the contract.

1. Exception 1: Reference of Future Disputes to Arbitration

This exception applies to contracts where the parties have agreed that no
action shall be brought until some question of amount has been decided by the
arbitrators. Thus, in Scott v Avery and Atlantic Shipping and Trading Co. v Louis
Dreyfus & Co.,27 clauses are saved by this exception. The former refers to term in
the contract which provides that, in the event of a dispute arising, it shall be
referred to arbitrators whose award shall be a condition precedent to any right of
action in respect of the matters agreed to be referred is valid. It is a clause which
requires as a condition precedent of the accrual of any cause of action that the
arbitrator shall have made in an award. The latter clause is the one which provides
that no claim shall arise, unless it is put forward in writing and an arbitrator
appointed within a limited period. If a contract were 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 its first branch, 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 the courts, but the latter branch of the
stipulation would be void because by that the jurisdiction of the courts would be
naturally excluded.
The Law Commission of India, in its 13th Report, recommended
amendment to the exception of substitute the words ‘the parties will be bound by

26
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27
[1921] 2 AC 250
26 | P a g e
the award’ for the words ‘only the amount awarded in such arbitration shall be
recoverable.’ This clause was repealed by the Specific Relief Act 1877. Section 21
of that Act, now s.14 (2) of the Specific Relief Act provides that:
‘Save as provided by the Arbitration Act 1940, no contract to refer present
or future differences to arbitration shall be specifically enforced; but if any person
who had made such a contract other than an arbitration agreement to which the
provisions of the said Act apply and has refused to perform it sues in respect of my
subject which he has contracted to refer, the existence of such contract shall bar the
suit.’
2. Exception 2: Reference of Existing Question to Arbitration
The exception saves any contract in writing by which two or more persons
agree to refer for arbitration any question between them which has already arisen,
though such a contract would now also be dealt with by the law relating to
arbitration.
Resolution of disputes is governed by Arbitration and Conciliation Act
1996 under which parties may by means of an agreement in writing to refer to
arbitration disputes which have arisen between them in a contract. Where the
parties agreed to refer their disputes to arbitration, they were held to be bound to
do so. Certain excuse will not be enough to nullify the arbitration when the parties
had accepted the agreement with full conscience. If a suit is filed in the same
subject matter as the arbitration agreement, the party desirous of reference to
arbitration may apply to the court seeking reference, which the party must do
before submission of the first statement of substance or dispute in the court. If the
suit is in the same matter as the arbitration agreement, the court shall refer the
parties to arbitration. The Arbitration and Conciliation Act 1996 allows discretion
to the court in referring the matter. Section 77 of that act provides that the parties
shall not initiate, during the conciliation proceedings any arbitral or judicial
proceedings in respect of a dispute that is the subject matter of the conciliation
proceedings except where such proceedings are necessary to preserve his rights.
3. Exception 3: Limit the Time Within Which A Guarantee Must Be Invoked
by A Beneficiary
In order for it to be honoured, given that time limitation clauses are not
unique to bank guarantees; this new exception raises a concern as to the
enforceability of limitation provisions found in other contracts. The beneficiary of
27 | P a g e
 the guarantee shall invoke the bank guarantee on or before the expiry date of the
guarantee. The bank is discharged from its liability if no claim is received by it on
or before validity period mentioned in the guarantee. When an original guarantee
issued by the bank, not returned to the bank for cancellation after the expiry of
guarantee, the procedure for cancellation of expired guarantee adopted by the
banks is that a registered notice is sent to the beneficiary of the guarantee to return
the original guarantee immediately.28 If no reply is received or original guarantee is
not surrendered for cancellation, the guarantee can be cancelled by the bank after
waiting for a reasonable time.
An unavoidable duty either as affirmed bank ensures or irreversible letter of
acknowledge can't be meddled for since visit court mediation would not be with
regards to the specific reason and protest of bank ensures because of a paranoid
fear of endangering what frames the simple premise of business exchanges. When
in doubt particularly on account of unlimited or supreme bank ensures, the banks
must respect their duties according to the terms of the agreement, regardless of any
debate between the client and the save money as for the essential contract. The
Courts are in this manner hesitant to give an order anticipating instalment or
meddling with the risk of the bank to pay the sum due on the certification.
The Courts have separated out two special cases to the general control of non-
impedance by the Courts, in particular:
i. fraud and
ii. the subsequent of unrecoverable
unfairness or mischief.

DECISIONS BY SUPREME COURT OF INDIA29

 Agreement
I. After six months of expire period of contract appellant could not claim to
fidelity insurance guarantee which neither against contrary of Section 28 nor
against public policy under Section 23 - insurance company has no liability after
expiry date of termination of contract - notice sent by appellant for mere
demand after expiry cannot be enforceable - Apex Court found that non filling
of suits within six months not mean that suit barred by limitation - law of

28
www.bankersadda.com
29
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 limitation allows person to recover amount up to three years - agreement time
for recovery cannot be circumscribed against provisions of Act of 1963 -
appeals allowed. [The Food Corporation of India –vs- The New India Assurance
Co. Ltd. and others30]
II. Merely because Arbitrators were situated in foreign country cannot by itself be
enough to nullify arbitration agreement when parties willingly entered into
agreement. [M/s. Atlas Export Industries –vs- M/s. Kotak & Company31]

 Civil
Suit for declaration that appellant-plaintiff entitled to payment of
compensation for loss of insured vehicle. Suit dismissed on ground that suit for mere
declaration without consequential relief for payment of compensation for loss of
vehicle not maintainable. Question of granting amendment to include prayer for
consequential relief. Granting of amendment of plaint seeking to introduce
alternative relief of mandatory injunction for payment of specific amount bad in law.
Alternative relief was available to appellant to be asked for when he had filed suit for
declaration but he failed to do so. He cannot be permitted to amend plaint after suit
was barred by limitation during pendency of proceeding in Appellate Court. [Muni
Lal vs . The Oriental Fire & General Insurance Company Ltd. and another32]

 Commercial
Preamble of Carriers Act, 1865 indicates that Act was passed with view to
limit liability of carriers and to declare liability of carriers. Any contract or bargain
which seeks to defeat liability of carriers as enacted by law defeat provisions of Act.
Section 23 provides that consideration or object of agreement lawful unless
provision was of such nature that if permitted would defeat provisions of any law.
Parties had not by express contract limited their liability as contemplated under
Section 6. Condition in question of way bill designed to avoid liability contemplated
under Section 10 of Act of 1865. Held, condition void. [M. G. Brothers Lorry
Service vs. Prasad Textiles33]

30
AIR 1994 SC 1889
31
MANU/SC/0538/1999
32
AIR 1996 SC 642
33
AIR 1984 SC 15
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 Consumer
Repudiation clause in the policy that claims shall be deemed to have been
abandoned and not recoverable if filed after 3 months of repudiation. National
Consumer Disputes Redressal Commission rejected the matter on basis of earlier
view that such clause was void. Final decision about repudiation conveyed on
28.7.1994. Till then appellant promising that repudiation of claim was being
considered afresh. Complaint made on 6.8.1994 within three months. Order of
National Commission needs no interference. Not necessary to go into question of
Section 28 of Contract Act. Period of limitation for filing complaint against
repudiation of claim is to be reckoned from the date when final decision about
repudiation is conveyed. Appeal dismissed. [Oriental Insurance Co. Ltd. vs Prem
Printing Press34]
 Liability
Preamble of Act of 1865 indicates that Act was passed with view to limit
liability of carriers and to declare liability of carriers. Any contract or bargain which
seeks to defeat liability of carriers as enacted by law defeat provisions of Act.
Section 23 provides that consideration or object of agreement lawful unless
provision was of such nature that if permitted would defeat provisions of any law.
Parties had not by express contract limited their liability as contemplated under
Section 6. Condition in question of way bill designed to avoid liability contemplated
under Section 10 of Act of 1865, held, condition void. [M. G. Brothers Lorry Service
vs Prasad Textiles35]
 Transfer of case
Transfer of Arbitration application from Gujarat to Calcutta High Court.
Parties knowingly and voluntarily agreed that contract would be subject to Kolkata
jurisdiction and even if Courts in Gujarat also had jurisdiction to entertain any action
arising out of agreement. It has to be held that agreement to have disputes decided in
Kolkata by Arbitrator therein was valid. And respondent company had wrongly
chosen to file its application under Section 9 of Arbitration and Conciliation Act
before Bhavnagar Court (Gujarat) in violation of such agreement. Application
allowed. Arbitration application pending in Bhavnagar Court (Gujarat). Transferred

34
MANU/SC/0095/2009
35
(1983) 3 SCC 61
30 | P a g e
 to Calcutta High Court. [Balaji Coke Industry Pvt. Ltd. vs Maa Bhagwati Coke (Guj)
Pvt. Ltd36]

CONCLUSION

Some agreements are unenforceable in a court of law because they are against
public policy and interest. Such agreements are not illegal, they can still be made, but they
are not enforceable in a court of law. That is, in case any of the party in the agreement fails
to perform his duties in such an agreement, the aggrieved party cannot take the matter to a
relevant court or tribunal to have his rights enforced. Agreements in restraint of trade,
marriage, and legal proceedings are examples of such agreements.
Section 28 was amended by section 2 of the Amendment Act 10 of 1997 which
came into force with effect from 8-1-1997. The amended Section 28 prohibits clauses in
agreements which seek to extinguish the rights of any party to the contract or discharge
any party from any liability under the contract of the expiry of period specified in the
contract with a view to restrict any party from enforcing his rights. The condition in an
insurance policy that the claim must be made within a period of 12 months has been held
to be valid because this decision was given on the basis of un-amended Section 28 and this
position was changed after the 1997 amendment which is prospective in nature. Presently,
Section 28 allows parties to an agreement to substitute their own period of limitation in
place of the period laid down in the general law of limitation. But they are free to provide
that if a party does not sue within a specified period, within the rights accruing under the
contract, it shall be forfeited or extinguished or that party shall be discharged from all
liability under the contract. This distinction is very fine and a number of litigating
contracting parties have found it difficult in practice to ascertain this very fine difference
between what is meant by extinguishing (quenching) of a right and what is meant by
extinction (disappearance) of a remedy. This anomaly is sought to be cleared by virtue of
Section 28 of The Indian Contract Act, 1872.

36
2009 (9) SCC 403
31 | P a g e
REFERENCES:

a) Contract and Specific Relief Act (12th edition), by Avtar Singh.

b) www.indiacode.nic.in.
c) docs.manupatra.in/newsline/articles
d) www.legalservicesindia.com/articles
e) www.sagepub.com/sage_journals
f) www.lawcommissionofindia.nic.in/report_97.pdf.
g) www.lexisadvance.com
h) www.taxmann.com/journals

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