Agreement in Restraint of Legal Proceeding

Introduction:

An agreement made to restrict a person’s right to legal proceedings or limit the time for filing a suit is void. But the section that declares these types of agreements has an exception that allows restricting the jurisdiction to one court and enforcement of any legal proceeding in a court of law if parties are agreed to refer to arbitration

Definition:

According to section 28 of the Indian Contract Act, defines an agreement in restraint of legal proceedings. Restriction may be of two types one is the restriction on a party from enforcing a right of legal proceeding and another is a restriction on a time limit to enforce the legal proceeding.

Types of restraint in a legal proceeding:

  • An agreement restraining a right of a party absolutely from enforcing the legal proceeding is void. However, parties made a contract in which they partially restrict the right of legal proceedings that is enforceable.

In United India Ins. Co. Ltd. v. Associated Transport Co. Ltd. the court held that a note containing the words ‘subject to Bombay jurisdiction only’ is only by one party not by the meeting of minds and it is not enough to oust the jurisdiction of all the other courts. Hence, the contract is not enforceable.

In Dilip Kumar Ray v. Tata Finance Ltd., the parties made a contract for the sale of Tata Estate Car. They agreed that all the disputes should resolve at the Bombay court. The court recognized that only the Bombay court has jurisdiction to entertain their issue.

  • The agreement made with the time limit to enforce a legal proceeding is a void agreement.

In National Ins. Co. Ltd. v. S.G. Nayak & Co. an agreement that clearly seeks to shorten the limitation period and specifies a shorter term than that required by law has been declared to be invalid as violating section 28 of the contract act. However, if a contract contains a clause that allows for the termination or waiver of the right itself, the contract will be void.

 In Baroda Spinning and Weaving Co. Ltd. v. Satyanarayen Marine & Fire Ins. Co. Ltd. a clause in a fire insurance policy stated that all benefits under the policy would be lost if a claim was made, or rejected, and no action or suit was brought within three months of the rejection. The policy’s agreement was determined to be valid and binding.

Exceptions:

There are two exceptions to this section:

  • Any agreement between two or more people that any dispute that might arise between them about any subject or class of subjects would be arbitrated and that only the amount awarded in such arbitration shall be recoverable in respect of the dispute so addressed is not illegal under this section.
  • Any written agreement between two or more parties to arbitrate a dispute that has already arisen is not prohibited by this section, nor does it alter any provision of any law currently in effect regarding references to arbitration.

Conclusion:

Section 28 of the Indian Contract Act declares the agreement void if an agreement restricts the right of a party to enforce a legal proceeding. However, the agreement in which the parties are agreed with mutual understanding to refer to an arbitrator in any dispute or want to limit the jurisdiction to approach the court to only one court of law.

References:

Books:

Indian Contract Act, 1872

Law of Contract Part I by R.K.Bangia; Edition 2006

Law of Contract and Specific Relief by Avtar Singh; Ninth Edition

Cases:

United India Ins. Co. Ltd. v. Associated Transport Co. Ltd. AIR 1988 Ker. 36

Dilip Kumar Ray v. Tata Finance Ltd. AIR 2002 Orissa 29

National Ins. Co. Ltd. v. S.G. Nayak & Co. AIR 1997 SC 2049

Baroda Spinning and Weaving Co. Ltd. v. Satyanarayen Marine & Fire Ins. Co. Ltd. ILR 1914 38 Bom. 344

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