This blog is inscribed by Raghavendra Singh.
Legal Proceedings, be easily understood by ‘Arbitration’. Arbitration can simply be defined as a form of dispute settlement, where different parties can basically avoid resolving their disputes in the public litigation. Arbitration is used mainly in solving disputes which arise out of commercial matters.
The method of arbitration is usually more efficient than going to court to resolve the dispute because it avoids courtroom procedures and is less technical and even the process itself is much faster. However, there were several disadvantages or downsides of the arbitration method as well, such as the decisions by arbitration method cannot be appealed in court unless either of the parties can prove that the arbitrator was unfair or biased while making a decision and as a result has violated public policy. Also, it is very important to not confuse arbitration with mediation.
The basic difference between these two is that in arbitration the arbitrator is obliged to determine the dispute by reference to certain and specific rules and regulations, whereas in mediation the primary task of the mediator is to seek compromise. This makes arbitration much more informal and flexible, as it allows the parties to discuss the remedies on their own terms. Now the question arises here is that
What should an arbitration clause contain?
Arbitration usually contain statements, such as-
“The parties to this specific contract hereby agree to resolve any legal dispute through methods of arbitration rather than civil lawsuits”.
The clause may be customized or modified exactly to how both the parties need it to be. Such clauses should be very specific and should also contain information such as:
- When the clause will be executed, and when it will terminate.
- Can the clause be modified in the future
- The consequences of violating the clause
Further, if an arbitration clause is violated, one of the parties can seek to file a lawsuit, even when they agreed to settle disputes through arbitration. In conclusion, the parties can forfeit their right to file a lawsuit with an “arbitration clause”.
Section 28 of The Indian Contract Act(1872)
It states that:
“Every agreement, –
1. by which any party thereto is restricted from enforcing their rights in respect of any contract, by the usual legal proceedings in the ordinary tribunals, or which limits the time period within which he may enforce his rights or,
2. which extinguishes the right of any party thereto, or even discharges any party thereto from any liability, in respect to any contract on the expiry of a specified time period so to restrict any party from enforcing their rights, is void to that extent.”
It essentiallyprovides two kinds of void agreement, namely:
1. Any agreement by which a party is restricted from enforcing his legal rights which arise under a contract by the usual legal proceedings in any of the ordinary tribunals.
2. Any agreement which limits the time in which the contract rights can or may be enforced.
Rules of Restraint of Legal Proceedings
1. Restriction of Right:
· Absolute restriction:
On any party from enforcing his rights in the restraint of any contract by usual legal proceedings is void. However, in some cases partial restriction like subject to diligent restriction etc., is valid
· Limiting time period:
Agreements curtailing or extending the period of limitation described by law subjected to defeat the provisions of law are void.
· Discharge of liability:
Agreements to discharge any party thereto from liability to any contract on the expiry of a specified time period so to restrict any party from enforcing their rights is completely void.
Agreement for arbitration is valid however an agreement purporting to the jurisdiction of the court is contrary to public policy. An agreement between two or more parties to refer to arbitration any dispute which may have arisen or may arise between them is valid and agreement restricting anyone from taking legal recourse at a court of law is void.
Interfering in the court of justice, in the same manner you cannot restraint any legal proceedings and you can’t stop the legal proceedings from happening. If there is a case running in the court, you cannot stop that case and you cannot enter a contract which stop that case, or which provide hurdles and provide impediments to running of that case. However, you can enter an arbitration contract as they are “out of court settlement done by arbitrator” and the court will support for sure and such agreements are valid.
When we look closely, in India, as also in England, agreements which pervert the course of justice are declared void, because their object is legal. And neither the law favor’s an agreement, whose primary objective is basically to change the jurisdiction of a court of law nor it permits an agreement. The object between the parties to invest in a court which has no jurisdiction, with the authority to try the disputes arising out of a contract. The parties by an agreement limit the jurisdiction to one court only, then such agreements shall not be declared as void.
In simple terms, we can say that all agreements are void if,
1. They render it as Invalid, for a party to approach a court or tribunal if the person’s right has been violated.
2. Liability by Agreement must be avoided to/by the party.
3. Time limitation is must in which the party can approach such a tribunal or court.
Furthermore, each and every agreement, by which for any party or individual there to is restricted absolutely from enforcing his rights under any contract, by the usual legal proceedings in the Tribunals, or even which limits the total time within which the person may legally enforce his rights is void to that extent (Sec 28).
Such agreements qualify restrictions of broadly two types:
First is, agreements completely or even partially restricting the enforcing of the rights in a Court of Law, e.g.: where a contract contains a stipulation that no action shall be brought upon it, when an agreement which extends the total time of limitation for enforcing the rights.
Which though not covered by this section, will nevertheless be void under section 23 of the Act as intending to defeat the provisions of the Limitations Act, 1963. But like any other section there are some exceptional cases in this section also.
The second, talks about how agreements limiting the time allowed by the law of limitation. Also, we see that in both the cases, agreement would be void as an agreement in “restraint of legal proceedings”.
(1) This specific section shall not render illegal a contract by which 2 or more individuals agree that if a dispute may arise between them, in respect of any subject or even class of subjects shall be referred to/for arbitration, also that only the amount awarded in such arbitration is permissible to be recoverable in respect of the dispute so referred.
(2) It states, how it shall not render any illegal contract in writing by which two or more individuals agree to refer to arbitration, by question between them which had already arisen.
(3) An agreement will be valid if it restricts the right of either party to sue in a particular Court or refer the dispute to arbitration. However, in some exceptional cases as in Hakam Singh v. Gammon (India)[i] it was noted by the Hon’ble Supreme Court that- exception 1 and 2 of Section 28 are not open to the parties by agreement in order to confer jurisdiction on a Court which it does not possess under the Civil Procedure Code.
M/s. Chander Kant & Co. vs. The Vice Chairman, DDA & Ors[ii]
In this particular case the petitioner entered into a contract with the respondents/DDA for construction of 256 numbers L.I.G. Houses in Delhi as per letter dated 10.9.1985 under an agreement. Although the contract was to be completed within twelve months, the work was completed on 11.10.1990. The final bill was released on 7th November 2002, after withholding several amounts. The petitioner also raised several claims and disputes with the respondent (DDA).
The agreement contained an arbitration clause. Also, the petitioner invoked the arbitration clause which the notice dated 17th June 2004. Further the respondent party failed to respond to the notice of the petitioner and, hence the petitioner approached this Court.
So, the question arises, whether there can be such limitation of a period of 90 days in view of the amended provisions of Section 28 (b) of the Indian contract act?
In the decision of the court it was held to be void as offending under Sec.28 but the later was held not to be a clause which shall fall within the mischief of the Sec. 28. It was, thus, concluded that curtailment of the period of limitation is non- permissible in view of Section 28 but extinction of the right itself is permissible and can be enforced unless exercised within the specified time.
New Delhi Municipal Committee v. Tirath Ram Ahuja (P.) Ltd.[iii]
In this particular case the petition was under Section 20 of the Arbitration Act for appointment of an arbitrator in accordance with agreement between one New Delhi Municipal Committee v. Tirath Ram Ahuja (P.) Ltd.,
A contract was entered into between the Committee and the contractor for construction of a Five Star Hotel New Delhi. That contract was reduced into writing with that agreement, the construction was to be started and completed by 30th November, 1966 to 28th February 1969. A sum of Rs. 1,00,000 was also deposited as security by the contractor with the Committee. Further the construction was to be made by the contractor under the supervision of an architect who was named in the original agreement.
The Architect issued a final certificate on 18th October 1970 certifying the payment of Rs. 18,001 which was due to the contractor. But the contractor was dissatisfied and requested for appointment of an arbitrator.
Accordingly, an arbitrator was appointed, and an additional compensation was made on 9th August 1974. That was filed in court on 22nd October 1974.
The dispute which was covered under Section 28 was whether the disputes are not referable to arbitration as alleged by the defendants?
In its decision the court held that the learned counsel for the committee contended that the aforesaid stipulation of limitation of 28 days was void in view of Section 28.
The Oriental Insurance Company and others vs. Karur Vysya Bank Limited Karur[iv]
The case held that, the plaintiff entered into a contract of insurance with the first defendant on 12th September 1983 to cover the second defendant’s buildings, stocks of all kinds, machinery, raw materials, gunny bags, barrels, tins, firewood waste cashew nut shells, etc., Due to the fire, the properties that are covered by the contract of insurance suffered a heavy loss.
The claim should be dismissed for not having been made the subject-matter of a suit in a court of law within the time period specified under condition 19 of the policy in question.
CONCLUSION AND SUGGESTION
Some of the agreements are unenforceable in a court of law because they are against public policy and interest. Such agreements are legal, they can still be made, but they are not enforceable in the court of law.
That is, in case any of the parties 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. So, Agreement in restraint of legal proceedings, restraint to marriage, trade are such examples given in the law.
[i] Hakam Singh v Gammon (India) Ltd (AIR-1971-S.C. 740)
[ii] M/S. Chander Kant & Co. vs The Vice Chairman, Dda & Ors. on 26 May 2009
[iii] New Delhi Municipal Committee vs Tirath Ram Ahuja (P.) Ltd AIR 1990 Delhi 1855
[iv] The Oriental Insurance Company and ors vs. Karur Vysya Bank Limited Karur AIR 2001 Mad 489