Liability of the guarantor being co-extensive with the liability of the debtor

PROJECT
Submitted for partial fulfillment of B.B.A.LLB 3rd Semester

Batch: 2012-2017
SIDDHARTHA LAW COLLEGE, DEHRADUN
(Affiliated to: Uttrakhand Technical University)

Submitted to:

Submitted by:

Ms. Nidhi Sharma

Jyoti Bisht

(Contract Law-II)

B. B.A.LL.B. (3rd SEM)

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Acknowledgement
I am thankful to Ms. Nidhi Sharma for providing me the chance to work on the topic of
Liability of the guarantor being co-extensive with the liability of the debtor. The project
tested my patience at every step of the preparation but the courage provided me by the teachers
helped me to swim against the tide.
First of all I thank to ALMIGHTY GOD for giving me power to pen down the project in its
present shape. I thank the entire teaching staff especially Ms. Nidhi Sharma for sharing his
valuable knowledge with us & for providing his able guidance and support. I also thank my
parents who every time helped me out and encouraged me for carrying out the task.
I am also thankful to my sister and friends who helped me in completing my project timely by
providing their suggestions.

INDEX

NO.
1.
2.
3.
4.
5.
6.
7.

TOPICS
Introduction

Background
Liability of the guarantor being co-extensive with the liability of the debtor

Restraint of Legal Proceedings

Limitation of Time
Agreement Relating To Release or Forfeiture of Rights
The 1997 Amendment

PAGE
NO.
4
6
7
8
9
10
12

8.

Analysis

13

9.

Report of the Law

13

10.
11.
12.
13.

Agreements Prescribing Jurisdiction

Exceptions
Conclusion
Bibliography

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17
20
21

Introduction
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 innumerable contracts like
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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.
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.
As per s. 2(h) of the Indian Contract Act 1872, a contract is an agreement enforceable by law. 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.
Section 128 of the Act specifically provides that the liability of a guarantor/surety is co-extensive
with that of the principal debtor unless it is otherwise provided by the contract. The term coextensive has been defined by Pollock and Mulla1 as:
Co-extensive suretys liability is co-extensive with that of the principal debtor. A suretys
liability to pay the debt is not removed by reason of the creditors omission to sure the principal
debtor. The creditor is not bound to exhaust his remedy against the principal before suing the
surety, and a suit may be maintained against the surety though the principal has not been sued.
The guarantor of a loan is liable to pay it if the debtor fails to clear it, the Supreme Court has
ruled while maintaining that financial institutions too cannot act like property dealers in
recovering the debts.
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A bench of justices B S Chauhan and Dipak Misra also said the guarantor cannot insist that the
creditor must first exhaust all remedies against the principal debtor before recovering the debts
from the surety holders.
"There can be no dispute to the settled legal proposition that in view of the provisions of Section
128 of the Indian Contract Act, 1872, the liability of the guarantor/surety is co-extensive with
that of the debtor.
"Therefore, the creditor has a right to obtain a decree against the surety and the principal debtor.
"The surety has no right to restrain execution of the decree against him until the creditor has
exhausted his remedy against the principal debtor for the reason that it is the business of the
surety/ guarantor to see whether the principal debtor has paid or not," said Justice Chauhan,
writing the judgment for the bench.
The apex court gave the ruling on an appeal by one Ganga Kishun, who had stood as a guarantor
to a bank loan, raised by one Ganga Prasad, who had died without clearing it. Ganga Kishun had
come to the apex court against the Uttar Pradesh government's decision to recover the loan
arrears from him after the death of principal debtor Ganga Prasad.
While dismissing Ganga Kishun's appeal, the apex court, however, faulted the government's
decision to auction Ganga Kishun's entire stretch of land for Rs 25,000 to recover an arrear worth
Rs 8,500 only and not confining the auction to only 1/3rd of the land which could have fetched
the arrears.
The apex court added the financial institutions cannot be allowed to act like property dealers to
recover their loans.

Background
The (Indian) Parliament has recently caused an amendment to Section 28 of the Indian Contract
Act, 1872 (Contract Act) which hitherto struck down provisions of a contract eliminating right to
enforce after a stipulated period. The amendment brings the following exception to the statute
book:
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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. This new provision, as many would point out,
now enables a bank or financial institution to limit the time within which a guarantee must be
invoked by a beneficiary, in order for it to be honored. 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.

Liability of the guarantor being co-extensive with the liability of the debtor
It is a well known rule of the English law that an agreement purporting to oust the jurisdiction
of the courts is illegal and void on grounds of public policy. Thus, any clause in an agreement
providing that neither party shall have the right to enforce the agreement by legal proceedings is
void. Agreements stipulating no intention to contract or a gentleman's agreement which is an
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agreement that relies upon the honor of the parties for its fulfillment, rather than being in anyway
enforceable by law is not in violation of s.28.
Section 28 of the Indian Contract Act renders void two kinds of agreement, namely:
1.

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.

2.

An agreement which limits the time within which the contract rights may be enforced.
Section 28 of the Indian Contract Act 1872 states that:
Every agreement, -

1.

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

2.

which extinguishes the right 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 that extent.
Exception 1 - 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.
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 parties 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.

Restraint of 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. 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 under this section.
It should be noted that an agreement, whereby the parties to a suit bind themselves before the
judgment is passed in the court of first instance, to abide by the decree of that court and forego
their right to appeal, is valid and binding. An important case in this regard is that of Munshi Amir
Ali v Maharani Inderjit Koer. It has also been followed by the Allahabad High Court in Anant
Das v Ashburner & Co. There are various other cases that stress this point. Some of them include
Coringa Oil Co. v Koegler, Pratap Chunder Dass v Arathoon etc. An agreement by which the
parties agreed to a procedure to be adopted in a court deciding a case on merits and consenting
that the decision will be binding on them was equivalent to providing that no right of appeal will
be exercised as seen in the case of Bashir Ahmed v Sadiq Ali. It was also held in this case that an
agreement whereby a judgment-debtor engaged himself not to appeal against him in
consideration of the judgment-creditor giving him time for the satisfaction of the judgment-debt
is not prohibited by this section. In Anant Das's case, by the agreement not to appeal, for which
the indulgence granted by the respondents was a good consideration, the appellant did not restrict
himself absolutely from enforcing a right under or in respect of any contract. He forewent his
right to question in appeal the decision which has been passed by an ordinary tribunal. Such an
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agreement is in our judgment prohibited neither by the language nor the spirit of the Contract
Act, and an appellate court is bound by the rules of justice, equity, and good conscience to give
effect to it and to refuse to allow the party bound by it to proceed with the appeal.'
It was held in Rambilas Mehto v Babu Durga Bijai Prasad Singh, it was held that a clause in an
arbitration agreement providing that the award shall be accepted by the 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.

Limitation of Time
An agreement which provides that a suit should be brought for the breach of any terms or
agreement within a time shorter than the period of limitation prescribed by law is void. The
effect of such an agreement is absolutely necessary to restrict the parties from enforcing their
rights after the expiration of the stipulated period, though it may be within the period of the
limitation. According to the Limitation Act, 1963, an action for breach of contract may be
brought within three years from the date of the breach. Hence, a rule under s.35 of the Post
Office Act limiting the liability in respect of sums specified by remittance unless a claim is
preferred within one year from the date of the posting of the article is void as beyond the powers
conferred by the section. And even if it be treated as a contract it is void under s.28 of the
Contract Act. In the same way, a clause in a policy of life insurance declaring that no suit to
recover under this policy of life insurance shall be brought after one year from the death of the
assured was held void. The same stand was taken by the judges in the case of Oriental Insurance
Co. Ltd. v Karur Vysya Bank Ltd. and also in Mahajan Silk Mills Pvt. Ltd. v MV MSC Elena.
Cases sometimes occur where parties agree to extend the period of limitation. No provision is
made the 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.23, as tending to defeat the provisions of the
Limitation Act 1908, s.3 which provides that every suit instituted after the period of limitation
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prescribed by the act shall be dismissed, although limitation has not been set up as a defense. 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 section 23, as defeating the provisions of the
Limitation Act.

Agreement Relating To Release or Forfeiture of Rights

Before the amendment of s.28 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.28, limiting the time for enforcing the
rights was void. But a term in the contract that rights accruing there under 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.28. Clauses of this kind are usually found in policies of insurance.
In Hirabhai v Manufacturers Life Insurance, the Bombay High Court decided that a clause
providing that no suit shall be brought against the company in connection with the said later
policy than one year after the time when the cause of action accrues was held valid. The
justification for the court in this regard was that the effect of the agreement was not to limit the
time but to provide for surrender of rights if no action was brought within that time. This view
taken by the Bombay High Court was affirmed by the Supreme Court in Vulcan Insurance Co. v
Maharaj Singh, where the court observed that it has been repeatedly held that such a clause in
not hit by s.28 and is valid. In National Insurance Co. v Sujir Ganesh Nayak, the court held that
the curtailment of the period of limitation is not permissible in view of S. 28 but extinction of
the right itself unless exercised within a specified time is permissible and can be enforced. If the
policy of insurance provides that if a claim is made and rejected and no action is commenced
within the time stated in the policy, the benefits flowing from the policy shall stand extinguished
and any subsequent action would be time barred. Such a clause would fall outside the scope of S.
28 of the Contract Act.
Rights to be enforced under the contract should continue to exist even beyond the shorter period
agreed for enforcing those rights, to make such an agreement void under S.28. If, for example,
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beyond the shorter period agreed upon the rights under the contract cannot be kept alive, no
limiting of the time to enforce the rights under the contract arises and hence the agreement
putting a time limit to sue will not be hit by S.28. So, a condition in a contract that the rights
there under accruing to a party will be forfeited or released if he does not sue within a time limit
specified therein will not offend S.28. This is because, as per the contract itself, the rights
accrued to the party cease to exist by the expiry of the limited period provided for in the contract.
In such a case, in effect, there is no limiting of the time to sue. So, an agreement which provides
for a simultaneous relinquishment of rights accrued and the remedy to sue for them will not be
hit by S.28. But, at the same time, an agreement relinquishing the remedy only, by providing that
if a suit is to be filed that should be filed within a time limit-the time limit being shorter than the
period of limitation under the Limitation Act - will be hit by S.28. This is because the rights
accrued continue even beyond the time limit as the same is not extinguished. In such a case,
there is really a limiting of the time to sue prescribed by the Limitation Act. In Kerala Electrical
& Allied Engineering Co. Ltd. v Canara Bank & Others, it is clear from Clause.6 of Ext. Al
guarantee that the liability of the bank will be alive only for a period of six months after the
expiry of the period of duration of the guarantee. It is also specified in Clause.6 that the
plaintiff's rights under the guarantee will also be forfeited by the end of that six months. There is
an extinction of the right of the plaintiff under the contract and a discharge of the defendants
from liability. So, the time limit imposed in Clause.6 cannot be hit by S.28 of the Contract Act.
Clauses found in insurance policies providing that the insurer should not be liable for loss or
damage after expiration of twelve months from the happening of loss or damage unless a claim
was subject to pending action or arbitration or clauses in bills of lading excluding liability for
loss or damage unless the plaintiff brought a suit within one year from date of delivery did not
violate s.28. In short, an agreement providing for the relinquishment of rights and remedies was
valid, and an agreement for the relinquishment of remedies only fell within the mischief of s.28.

The 1997 Amendment

The amendment of s.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
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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 recognized 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.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 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.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 Spg & Wvg Co. v
Satyanarayanan Marine and Fire Insurance Co Ltd.

Analysis
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The genesis of the current amendment has its origin in almost a decade old concern from banks
about open ended guarantees and to carry such guarantee commitments for long periods as
outstanding obligations. Such concerns apparently arose following an amendment to Section 28
in 1997 which introduced the below provision:
[Every Agreement], which extinguishes the rights of any party thereto under, 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 that extent
Although the 1997 amendment was clearly concerned with enforcement of a right and not with
exercise of a right, the provision was interpreted to restrict contractual freedom of stipulating
the manner of exercise of rights under a contract and making of raising claims thereunder.
Admittedly, the 1997 amendments were inspired by the 97th.

Report of the Law

Commission of India (Indias apex legislation review panel) which not only clamped down on
contracts squeezing time periods for moving a court for their enforcement but also expressly
sought to strike down contracts which provided time bound conditions precedent for exercise of
rights. The Law Commission writing the 97th report argued that parties to a contract should not
be allowed to prescribe a method which extinguishes the rights of a party to make a claim under
the contract and while doing so, the Law Commission was conscious that their recommendation
would run contrary to the basic rule that parties to a contract should be free to decide exercise of
their substantive rights. Yet, the Law Commission found it is necessary to interfere with the
freedom of contract on the ground that unequal bargaining power of contracting parties could
bring about unfair prescription on extinction of rights.
The law makers responding to the 97th Report after a long gap of 13 years after its publication
(the 97the report was written in 1984) appeared less enthusiastic. The 1997 amendment was
brought in at a time when India had embraced globalization and while bringing in the
amendment, the lawmakers chose to leave out parts of the amendment originally suggested by
the Law Commission: Illustratively, the words in bold in the following clause suggested by the
Law Commission were not made part of the 1997 amendment:

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[Every contract] which extinguishes the right of any party thereto under or in respect of any
contract on the expiry of a specified period or on failure to make a claim or to institute a legal
proceeding within a specified period[is void to that extent]
Clearly, the law makers in 1997 did not wish to strike down contracts which provided
extinguishment of right upon failure to raise a claim in accordance with the contract. It also
sought to only regulate those contracts where the right of enforcement (or in other words, right to
move a court of law) was extinguished after a specified period a narrower position than what
the law commission sought to adopt.

Agreements Prescribing Jurisdiction

S. 28 makes void only those agreements which absolutely restrict a party to a contract from
enforcing the rights under that contract in ordinary tribunals. But this section has no application
when a party agrees not to restrict his right of enforcing his rights in the ordinary tribunals but
only agrees to a selection of one of those ordinary tribunals in which ordinarily a suit would be
tried. Parties cannot by agreement confer jurisdiction on courts to try suits not cognizable under
the ordinary law. The principle that the parties cannot by consent confer jurisdiction on a court or
deprive a court of jurisdiction has been stated to apply to cases of inherent jurisdiction of a court
over the subject matter of the suit, and the question of territorial jurisdiction as not being a
question of inherent jurisdiction. Where, thus, two courts have jurisdiction to try a case, there is
nothing contrary to law in an agreement between parties that disputes between them should be
tried at the one court rather than the other.
If such contract is clear, unambiguous and explicit and not vague, it is not hit by this section. But
an agreement however cannot confer jurisdiction on the court which has no jurisdiction at all to
entertain the suit; and if the court mentioned in the contract has no jurisdiction at all, the
jurisdiction of other courts is not barred. In Continental Drug & Co. Ltd. v Chemoids &
Industries Ltd., the contract the parties had entered into fell under the concurrent jurisdiction of
both the Bombay and Alipore courts, but a clause in the contract provided that any dispute
arising between the parties, settlement of the same legally or otherwise, will be decided in
Bombay. The court held that if there are two courts which are equally competent to try the suit,

14

an agreement between the parties that the suit should be instituted in one of those two courts
cannot be said to be an absolute restriction on the right of taking legal proceedings.' This view
has been affirmed by the Supreme Court in Hakam Singh v Gammon (India) Ltd. In this case, the
court held that it is not open to the parties by agreement to confer jurisdiction on a court which
it does not possess under the Civil Procedure Code. But where two courts or more have under the
Code of Civil Procedure jurisdiction to try a suit, an agreement between the parties that the
dispute between them shall be tried in one of such courts in not contrary to public policy. Such
an agreement does not contravene s.28 of the Contract Act.' The same view has been taken by the
courts in National Nut Company Cashew Exporter v Haridas Damodar Anandji Filhos Ltd. and
Mohammed Kasim Haji Ahamed Kunju v Sree Hanuman Industries. Hence, where the parties to
a contract specifically agree that the courts in Delhi alone shall have jurisdiction, mere statement
in the agreement is not sufficient to confer jurisdiction on Delhi courts when they lack inherent
jurisdiction. Such a clause restricting jurisdiction applies also to proceedings in courts under the
arbitration law.
Although, it is open to the parties to agree that dispute relating to their contract will be subject to
the jurisdiction of courts in a particular territory, to the exclusion of other courts, the parties who
make their choice of tribunal will be bound by it, the enforcement in India of such contracts in
not imperative where the choices restricts them to a foreign court. But an Indian citizen making a
contract while in India would not be able and cannot be permitted to avoid the applicability of
the Indian law to the contract made in India or to be performed in part or whole of India as held
in Lucca v Gorakharam. In Nirmala Balagopal v Venkatesulu Balagopal, the option was
exercised in bi-lateral agreement between parties to exclude Indian Courts. The parties lived in
Connecticut, United States of America. They are very much having jurisdiction there and it is not
as if the petitioner and the respondents are going to permanently reside in India. It was also
manifestly shown that their inclination and intention was only to reside in United States of
America. Hence, there is nothing wrong in the contract to have chosen except the Courts in
India; thereby including the Courts in United States of America. In Black Sea State Steamship
Line v Minerals and Metals Trading Corporation of India Ltd., the bill of lading provided that all
disputes would be judged in the USSR according to the Merchant Shipping Code of the USSR.
The plaintiff sued the shipping company at Madras. The claim was small, the shipping company

15

had its agents at Madras, and there was no difficulty in collecting facts and applying the law
there. While holding that the courts in Madras had jurisdiction, the court observed that in case of
foreign jurisdiction clause, the question is not so much of freedom of contracts, and the parties
are bound by their choice as of expediency in the light of what may be called the rule of
convenience and the ends of justice in the particular circumstances of the case.' It is open to the
Court to consider the balance of convenience, the interest of justice and the circumstances when
it decides the question of jurisdiction of the court in the light of the clause in the agreement
between the parties choosing one of the several courts or forums which were available to them.
Indeed such a consideration is essential in the interest of international trade and commerce for
the better relation between the countries and the people of the world.
The choice regarding the jurisdiction of courts should be clearly unambiguous and explicit. The
party invoking the clause must strictly prove that the restriction applies to the proceedings under
consideration. It is also necessary that important terms of this nature must be specifically brought
to the notice of the parties whose rights are sought to be curtailed. The law requires that before
making a person bound by any such clause in the agreement as to exclusive jurisdiction, it must
be proved that the same was brought to the knowledge of the consignor in such a way that it
should seem to be the result of a mutual assent. Where the original contracting party has been
adequately informed, it will be a question of fact in each case whether the parties subsequently
acquiring his rights will also be bound by the notified terms.
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.

Exceptions

16

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., 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.
In order to conform to this exception, the jurisdiction of the courts must be excluded in all
respects except in the matter which is the result of the arbitrator's award. This section does not
forbid action for damages for breach of such agreement to refer to arbitration. In Union
Construction Co. Pvt. Ltd. v Chief Engineer, Eastern Command, the court held that a lawful
agreement to refer a matter to arbitration can be made a condition precedent before going to the
courts, and it does not violate s.28. All such cases have to be decided according to the Arbitration
and Conciliation Act 1996. In Rajasthan Housing Board v Engineering Projects (India) Ltd., the
court held that a clause providing for arbitration and declaring that the Arbitration Act would not
apply was held to be void. The arbitration clause was held to be valid. The part which excluded
the application of the Arbitration Act being severable from the rest of the agreement was alone
struck down. A clause in an agreement that except where otherwise provided in contract the
decision of the superintending engineer shall be final, conclusive binding and upon certain
matters therein mentioned does not constitute him an arbitrator and the clause is not contrary to
s.28 of the Contract Act and is not hit by s.21 of the Specific Relief Act as held in State of Bihar
17

v Rama Bhushan Basu. It is also possible to contemplate an agreement appointing one of the
contracting parties as an arbitrator for matters arising out of a contract. The decision given by
such a person is binding on the party and no party can be heard to say that such decision is not
binding being a decision by a person in his own cause, unless it can be shown to be arbitrary or
otherwise unjust. The parties can also question the finality of such a decision despite any
agreement.
The Law Commission of India, in its 13th Report, recommended amendment to the exception of
substitute the words the parties will be bound by 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.'
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
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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.

Conclusion
Agreements restraining legal proceedings are against public policy as it acts as a hindrance to the
dispensation of justice. It places one of the parties to a contract in a more advantageous position
than the other. Section 28 of the Indian Contract Act 1872 has corrected this imbalance and has
been successful in ensuring that justice is served in the society. In a way, this move to provide
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additional comfort for banks could be problematic from other perspectives. For starters, the
exception does not only apply to a guarantee but applies to any contract of a bank making a
provision for guarantee. Perhaps unintended but a consequence of the new amendment is that a
bank may now be able to disclaim liability with respect to an entire agreement so long as such an
agreement envisage a guarantee (regardless of the guarantor). Apart from obvious constitutional
concerns arising with such an approach, the amendment raises doubts about enforceability of
limitation provisions found in other contracts. Illustratively, limitation of warranty claims is an
important feature of a share purchase contract. Similarly, in many construction contracts,
limitation clauses are built requiring the owner of a project to bring a claim within stipulated
time. The move to amend Section 28 would indicate that so far as the law makers are concerned,
such limitation provisions are to fall because they do not enjoy protection of the recent
amendment.

Bibliography
Websites:
http://www.moneycontrol.com/news_html_files/news_attachment/2013/VERUS
%20Update%20(23%20April%202013).pdf
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http://www.lawteacher.net/contract-law/essays/section-28-of-the-indian-contract.php
http://www.indianexpress.com/news/guarantors-to-pay-on-debtors-defaultsc/955300/
http://legalapproach.net/legal.php?nid=290
http://lawcommissionofindia.nic.in/51-100/Report97.pdf
http://thefirm.moneycontrol.com/story_page.php?autono=859093
http://www.indiankanoon.org/doc/1224074/
http://www.vakilno1.com/bareacts/indiancontractact/indiancontractact.html

Books:
Dr. R.K.Bangia, Law of Contract - II
P.C.Tulian, Business Law (2nd Edition)

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