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Report No. 176

2.34.1 Atlantic Clause:

Explanation to be introduced under sec. 43(3) in view of the provisions of sec. 28 of the Contract Act 1872, as amended by Contract (Amendment) Act, 1996 making "time barring clauses" void.

A "time barring" clause is a familiar clause in several arbitration agreements. We shall give an example of such a clause - it says that a party must take some steps (such as issuing a notice for arbitration) to commence arbitration proceedings within a period of time fixed by the agreement failing which the claim itself would get barred or get extinguished.

Such a clause was upheld in Atlantic Shipping Case, 1922(2) AC 250 and by our Supreme Court in Vulcan Insurance Co. Ltd. Vs. Maharaj Singh AIR 1976 SC 287. The Supreme Court upheld such a clause on the basis of sec. 28 of the Contract Act, 1872 as it stood then. As long as such a clause was valid, the legislature tried to relieve against hardship.

The English legislature in sec. 27 of the English Act, 1950 and sec. 12 of the recent English Act, 1996 and sec. 37(3) of the Indian 1940 Act and in sec. 43(3) of the 1996 Act, felt that such a premature extinguishment of the claim itself might cause hardship and should therefore be relieved against in cases of hardship by extending the period for filing actions in the court. To relieve hardship, the 1996 Act made a provision for extension of period of limitation by the Court as follows:

Sec. 43(3) reads as follows:

"Where an arbitration agreement to submit future disputes to arbitration provides that any claim to which the agreement applies shall be barred unless some step to commence arbitral proceedings is taken within a time fixed by the agreement, and a dispute arises to which the agreement applies, the Court, if it is of opinion that in the circumstances of the case undue hardship would otherwise be caused, and notwithstanding that the time so fixed has expired, may on such terms, if any, as the justice of the case may require, extend the time for such period as it thinks proper."

2.34.2 We shall refer to the subsequent development w.e.f. 8.1.99 pursuant to the 91st Report of the Law Commission, sec. 28 of the Contract Act, 1872 has been amended. The amendment to sec. 28 of the Contract Act, 1872 was made by the Contract (Amendment) Act, 1996, and came into force on 8.1.97, and a new sec. 28 was substituted. The statement of objects and reasons of the Amendment Bill reads as follows:

"The Law Commission of India has recommended in its 97th Report that Section 28 of the Indian Contract Act, may be amended so that the anomalous situation created by the existing Section may be rectified: It has been held by the Courts that the said Section 28 shall invalidate only a clause in any agreement which restricts any party thereto from enforcing his rights absolutely or which limits the time within which he may enforce his rights.

The Courts, have, however, held that this Section shall not come into operation when the contractual term spells out an extinction of the right of a party to sue or spells out the discharge of a party from all liability in respect of the claim. What is thus hit by Section 28 is an agreement relinquishing the remedy only, i.e. where the time-limit specified by Law.

A distinction is assumed to exist between remedy and right and this distinction is the basis of the present position under which a clause barring a remedy is void, but a clause extinguishing the right is valid. This approach may be sound in theory but in practice it caused serious hardship and might even be abused. It is felt that Section 28 of the Indian Contract Act of 1872 should amended as it harms the interest of the consumer dealing with big Corporations and causes serious hardship to those who are economically disadvantaged. The Bill seeks to achieve the above objects."

Under clause (b) of the new sec. 28, it was declared that a clause in a contract which provides for an extinguishment of a right will also be void. The new sec. 28 reads as follows:

"Sec. 28: Agreement in restraint of legal proceedings void, 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 enforce his rights, or

(b) Which extinguishes 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, is void to that extent."

(The Explanations to the new sec. 28 however permit arbitration of future as well as present disputes and are not relevant in the present contract.)

In view of the new sec. 28(b) of the Contract Act, if there is a provision in an arbitration clause which requires a party to take some steps to commence arbitral proceedings within a time fixed in the arbitration agreement, failing which the claim gets barred, such a clause will be void. (See p.112 of the Commentary on the 1996 Act by Justice S.K. Chawla and p.113 of the commentary by Justice V.A. Mohta, that such "time- bar clauses" have become void after the new sec 28 of the Contract Act was introduced w.e.f. 8.1.97.) Consequently, if such a clause is void, then the question of seeking extension of time on the ground of hardship is no longer necessary.

Thus, the provision in sec. 43(3) that a party can seek extension of time from a court of law to relieve hardship becomes redundant w.e.f. 8.1.97. The Commission, while reviewing the position in the year 2001, if it does not take note of this change in the law in sec. 28 and if it allows sec. 43(3) to remain without amendments, it may lead to some doubts and given an impression that sec. 43(3) still survives even after the amended sec. 28 of the Contract Act, i..e. after 8.1.97.

2.34.3 It has therefore been decided to clarify the position by adding the following proviso below in sec. 43(3):

"Provided that after the commencement of Indian Contract (Amendment) Act 1996, any provision in the arbitration agreement which provides that any such claim shall be barred unless some step to commence arbitration proceedings is taken within a time fixed by the agreement, shall be void:

Provided further that the provisions of this sub-section shall be deemed to have no effect from the date of such commencement".

The Arbitration and Conciliation (Amendment) Bill, 2001 Back

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