In a separate concurring judgment R.M. Sahai, J. after
going into the case law in paragraph 3 of his judgment, made
an extremely perceptive observation. He stated that where the
filing of the suit within limitation is made dependent on any
condition precedent, then such condition precedent not
curtailing the limitation period within which a suit could be filed,
would be valid and not hit by Section 28. In paragraph 8 of the
judgment, the learned Judge put it thus:-
“It does not directly or indirectly curtail the period of
limitation nor does it anywhere provide that the
Corporation shall be precluded from filing suit after
expiry of six months. It can utmost be construed as
a condition precedent for filing of the suit that the
appellant should have exercised the right within the
period agreed to between the parties. The right was
enforced under the agreement when notice was
issued and the company was required to pay the
amount. Assertion of right is one thing than
enforcing it in a court of law. The agreement does
not anywhere deal with enforcement of right in a
court of law. It only deals with assertion of right. The
assertion of right, therefore, was governed by the
agreement and it is imperative as well that the party
concerned must put the other side on notice by
asserting the right within a particular time as
provided in the agreement to enable the other side
not only to comply with the demand but also to put
on guard that in case it is not complied it may have
to face proceedings in the court of law. Since
admittedly the Corporation did issue notice prior to
expiry of six months from the termination of
contract, it was in accordance with the Fidelity
Insurance clause and, therefore, the suit filed by the
appellant was within time.” [para 8]
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NOS.9087-9089 of 2016
UNION OF INDIA & ANR.
V
M/S INDUSIND BANK LTD. & ANR
Dated:September 15, 2016
2. 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.
1Page 2
3. 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.
4. 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.
5. 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
2Page 3
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 upto
28.2.1997.
6. 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
3Page 4
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.
7. 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
4Page 5
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.
8. 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.
9. 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
5Page 6
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.
10. 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.
11. Shri A.K. Panda, learned senior advocate 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 (1995) 2
SCC 630, R. Rajagopal Reddy v. Padmini
Chandrasekharan. According to learned counsel, the Division
6Page 7
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.
12. 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. 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
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
7Page 8
before us. 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.
13. The primary contention with which we are faced is
whether Section 28 applies in its original form or whether it
applies after amendment in 1997. In order to answer this
question, it is first necessary to set out Section 28 in its original
form and Section 28 after amendment. The Section reads as
under:-
8Page 9
Original Section
28. Every agreement, 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, is void to that extent.
Amendment w.e.f. 08.01.1997
28. Agreements in restraint of legal proceeding,
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 thus enforce
his rights, is void to that extent;
(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 by
usual legal proceedings, is void to that extent.”
14. In order to answer this primary question, we have first to
see whether the change made in Section 28 could be said to be
clarificatory or declaratory of the law, and hence retrospective. It
is common ground that the statute has not made the aforesaid
amendment retrospective as it is to come into force only with
effect from 8.1.1997.
9Page 10
15. The original Section is of 1872 vintage. It remained in this
incarnation for over 100 years and was the subject matter of
two Law Commission Reports. The 13th Report of the Law
Commission of India, September, 1958 examined the Section
and ultimately decided that it was not necessary to amend it,
given the fact that there is a well-known distinction between
agreements providing for relinquishment of rights as well as
remedies as against agreements for relinquishing remedies
only. This was reflected in para 57 of the Report as follows:-
“57. Decided cases reveal a divergence of opinion
in relation to certain clauses of insurance policies
with reference to the applicability of this Section. On
examination, it would appear that these cases do
not really turn on the interpretation of the Section,
but hinge on the construction of the insurance
policies in question. 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 Section 28. Thus, in our
opinion, no change is called for by reason of the
aforesaid conflict of judicial authority.”
16. Several decades passed, until the Law Commission in its
97th Report of March, 1984 suo motu decided that the Section
10Page 11
required amendment. An introduction to the Report stated the
point for consideration thus:-
“1.2 Under Section 28 of the Indian Contract Act,
1872 – to state the point in brief – an agreement
which limits the time within which a party to an
agreement may enforce his rights under any
contract by proceedings in a court of law is void to
that extent. But the Section does not invalidate an
agreement in the nature of prescription, that is to
say, an agreement which provides that, at the end
of a specified period. If the rights thereunder are
not enforced, the rights shall cease to exist. As will
be explained in greater detail in later Chapters of
this Report, this position creates serious anomalies
and hardship, apart from leading to unnecessary
litigation. Prima facie, it appeared to the
Commission that the Section stood in need of
reform on this point. The arguments for and against
amendment of the section will be set out later. For
the present, it is sufficient to state that the problem
is one of considerable practical importance as such
stipulations are frequently found in agreements
entered into in the course of business.”
17. After going through the existing case law and finding that
the existing case law resulted in economic injustice because of
unequal bargaining power, the Law Commission decided to
recommend a change in the Section. This was done as
follows:-
11Page 12
“5.1 We now come to the changes that are needed
in the present law. In our opinion, the present legal
position as to prescriptive clauses in contracts
cannot be defended as a matter of justice, logic,
commonsense or convenience. When accepting
such clauses, consumers either do not realize the
possible adverse impact of such clauses, or are
forced to agree because big corporations are not
prepared to enter into contracts except on these
onerous terms. “Take it or leave it all”, is their
general attitude, and because of their superior
bargaining power, they naturally have the upper
hand. We are not, at present, dealing with the
much wider field of “standard form contracts” or
“standard” terms. But confining ourselves to the
narrow issue under discussion, it would appear that
the present legal position is open to serious
objection from the common man’s point of view.
Further, such clauses introduce an element of
uncertainty in transactions which are entered into
daily by hundreds of persons.
5.2 It is hardly necessary to repeat all that we
have said in the preceding Chapters about the
demerits of the present law. Briefly, one can say
that the present law, which regards prescriptive
clauses as valid while invalidating time limit clauses
which merely bar the remedy, suffers from the
following principal defects:
(a) It causes serious hardship to those who are
economically disadvantaged and is violative of
economic justice.
(b) In particular, it harms the interests of the
consumer, dealing with big corporations.
(c) It is illogical, being based on a distinction
which treats the more severe flaw as valid,
while invalidating a lesser one.
(d) It rests on a distinction too subtle and refined
to admit of easy application in practice. It
thus, throws a cloud on the rights of parties,
12Page 13
who do not know with certainty where they
stand, ultimately leading to avoidable
litigation.
5.3 On a consideration of all aspects of the
matter, we recommend that Section 28 of the Indian
Contract Act, 1872 should be suitably amended so
as to amend to render invalid contractual clauses
which purport to extinguish, on the expiry of a
specified term, right accruing from the contract.
Here is a suggestion for re-drafting the main
paragraph of Section 28.
Revised Section 28, main paragraph, Contract Act
as recommended
28. 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
(b) which limits the time within which he may thus
enforce his rights, or
(c) which extinguishes the rights 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 suit or other
legal proceeding within a specified period, or
(d) which discharges any party thereto from any
liability under or in respect of any contract in
the circumstances specified in clause (c), is
void to that extent.”
18. A period of 13 years passed after which this Report was
implemented. The Statement of Objects and Reasons of the
Amendment reads as follows:-
13Page 14
“The Law Commission of India has
recommended in its 97th report that Section 28 of
the Indian Contract Act, 1872 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 in the agreement is shorter than
the period of limitation provided 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 rights is valid. This
approach may be sound in theory but, in practice, it
causes serious hardship and might even be abused.
2. It is felt that Section 28 of the Indian Contract
Act, 1872 should be amended as it harms the
interests of the consumer dealing with big
corporations and causes serious hardship to those
who are economically disadvantaged.
3. The Bill seeks to achieve the above objects.
19. What emerges on a reading of the Law Commission
Report together with the Statement of Objects and Reasons for
the Amendment is that the Amendment does not purport to be
either declaratory or clarificatory. It seeks to bring about a
substantive change in the law by stating, for the first time, 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
Amendment therefore seeks to set aside the distinction made in
the case law up to date between agreements which limit the
time within which remedies can be availed and agreements
which do away with the right altogether in so limiting the time.
These are obviously substantive changes in the law which are
remedial in nature and cannot have retrospective effect.
20. In Sukhram v. Harbheji, [1969] 3 S.C.R. 752, this Court
held:-
“Now a law is undoubtedly retrospective if the law
says so expressly but it is not always necessary to
say so expressly to make the law retrospective.
There are occasions when a law may be held to be
retrospective in operation. Retrospection is not to
be presumed for the presumption is the other way
but many statutes have been regarded as
retrospective without a declaration. Thus it is that
remedial statutes are always regarded as
prospective but declaratory statutes are considered
retrospective. Similarly sometimes statutes have a
retrospective effect when the declared intention is
clearly and unequivocally manifest from the
language employed in the particular law or in the
context of connected provisions. It is always a
question whether the legislature has sufficiently
expressed itself. To find this one must look at the
general scope and purview of the Act and the
remedy the legislature intends to apply in the former
state of the law and then determine what the
legislature intended to do. This line of investigation
is, of course, only open if it is necessary. In the
words of Lord Selborne in Main v. Stark [1890] 15
A.C. 384 at 388, there might be something in the
context of an Act or collected from its language,
which might give to words prima facie prospective a
large operation. More retrospectivity is not to be
given than what can be gathered from expressed or
clearly implied intention of the legislature.” (pp.
758-759)
21. Considering that the subject matter of Section 28 is
“agreements”, the unamended Section 28 would be the law
applicable as on 31.1.1996, which is the date of the agreement
of bank guarantee. It now remains for us to deal with the case
law cited by both sides.
22. In R. Rajagopal Reddy v. Padmini Chandrasekharan,
(1995) 2 SCC 630, this Court was called upon to interpret the
Benami Transactions (Prohibition) Act, 1988. A 3-Judge Bench
of this Court overruled Mithilesh Kumari v. Prem Behari
Khare, (1989) 2 SCC 95, in arriving at the conclusion that the
1988 Act was prospective and not retrospective. In so
overruling the Division Bench judgment, this Court held that the
Act is not expressly retrospective, so that an enquiry would lie
as to whether it could be said to be clarificatory or declaratory.
The language of Section 4(1) of the statute made it clear that it
would apply to suits filed only after the 1988 Act came into force
Further, the Bench went on to quote Maxwell on Interpretation
as follows:
“Perhaps no rule of construction is more firmly
established than this — that a retrospective
operation is not to be given to a statute so as to
impair an existing right or obligation, otherwise than
as regards matters of procedure, unless that effect
cannot be avoided without doing violence to the
language of the enactment. If the enactment is
expressed in language which is fairly capable of
either interpretation, it ought to be construed as
prospective only.’ The rule has, in fact, two aspects,
for it, ‘involves another and subordinate rule, to the
effect that a statute is not to be construed so as to
have a greater retrospective operation than its
language renders necessary.” [para 14]
It then went on to hold as follows:
“As regards, reason 3, we are of the considered
view that the Act cannot be treated to be declaratory
in nature. Declaratory enactment declares and
clarifies the real intention of the legislature in
connection with an earlier existing transaction or
enactment, it does not create new rights or
obligations. On the express language of Section 3,
the Act cannot be said to be declaratory but in
substance it is prohibitory in nature and seeks to
destroy the rights of the real owner qua properties
held benami and in this connection it has taken
away the right of the real owner both for filing a suit
or for taking such a defence in a suit by benamidar.
Such an Act which prohibits benami transactions
and destroys rights flowing from such transactions
as existing earlier is really not a declaratory
enactment. With respect, we disagree with the line
of reasoning which commanded to the Division
Bench. In this connection, we may refer to the
following observations in Principles of Statutory
Interpretation, 5th Edn., 1992, by Shri G.P. Singh, at
page 315 under the caption ‘Declaratory statutes’:
“The presumption against retrospective operation
is not applicable to declaratory statutes. As stated
in Craies and approved by the Supreme Court:
‘For modern purposes a declaratory Act may be
defined as an Act to remove doubts existing as to
the common law, or the meaning or effect of any
statute. Such Acts are usually held to be
retrospective. The usual reason for passing a
declaratory Act is to set aside what Parliament
deems to have been a judicial error whether in the
statement of the common law or in the interpretation
of statutes. Usually, if not invariably, such an Act
contains a preamble, and also the word “declared”
as well as the word enacted.’
But the use of the words ‘it is declared’ is not
conclusive that the Act is declaratory for these
words may, at times be used to introduce new rules
of law and the Act in the latter case will only be
amending the law and will not necessarily be
retrospective. In determining, therefore, the nature
of the Act, regard must be had to the substance
18Page 19
rather than to the form. If a new Act is to explain an
earlier Act, it would be without object unless
construed retrospective. An explanatory Act is
generally passed to supply an obvious omission or
to clear up doubts as to the meaning of the previous
Act. It is well settled that if a statute is curative or
merely declaratory of the previous law retrospective
operation is generally intended. The language ‘shall
be deemed always to have meant’ is declaratory,
and is in plain terms retrospective. In the absence of
clear words indicating that the amending Act is
declaratory, it would not be so construed when the
pre-amended provision was clear and
unambiguous. An amending Act may be purely
clarificatory to clear a meaning of a provision of the
principal Act which was already implicit. A
clarificatory amendment of this nature will have
retrospective effect and, therefore, if the principal
Act was existing law when the Constitution came
into force the amending Act also will be part of the
existing law.
In Mithilesh Kumari v. Prem Behari Khare [(1989) 2
SCC 95 : (1989) 1 SCR 621] Section 4 of the
Benami Transactions (Prohibition) Act, 1988 was, it
is submitted, wrongly held to be an Act declaratory
in nature for it was not passed to clear any doubt
existing as to the common law or the meaning or
effect of any statute. The conclusion however, that
Section 4 applied also to past benami transactions
may be supportable on the language used in the
section.” [para 17]
23. Similarly, in Purbanchal Cables & Conductors (P) Ltd.
v. Assam SEB, (2012) 7 SCC 462, this Court had to decide
whether the Interest on Delayed Payments to Small Scale and
19Page 20
Ancillary Industrial Undertakings Act, 1993 could be said to be
retrospective. After a review of various judgments of this Court,
this Court held:-
“There is no doubt about the fact that the Act is a
substantive law as vested rights of entitlement to a
higher rate of interest in case of delayed payment
accrues in favour of the supplier and a
corresponding liability is imposed on the buyer. This
Court, time and again, has observed that any
substantive law shall operate prospectively unless
retrospective operation is clearly made out in the
language of the statute. Only a procedural or
declaratory law operates retrospectively as there is
no vested right in procedure.
In the absence of any express legislative
intendment of the retrospective application of the
Act, and by virtue of the fact that the Act creates a
new liability of a high rate of interest against the
buyer, the Act cannot be construed to have
retrospective effect. Since the Act envisages that
the supplier has an accrued right to claim a higher
rate of interest in terms of the Act, the same can
only be said to accrue for sale agreements after the
date of commencement of the Act i.e. 23-9-1992
and not any time prior.” [paras 51 and 52]
24. Similarly, in CIT v. Vatika Township (P) Ltd., (2015) 1
SCC 1, this Court held that the proviso to Section 113 of the
Indian Income Tax Act, 1961 was prospective and not
retrospective. In so holding, the Constitution Bench adverted to
certain general principles as under:-
20Page 21
“Of the various rules guiding how a legislation has to
be interpreted, one established rule is that unless a
contrary intention appears, a legislation is presumed
not to be intended to have a retrospective operation.
The idea behind the rule is that a current law should
govern current activities. Law passed today cannot
apply to the events of the past. If we do something
today, we do it keeping in view the law of today and
in force and not tomorrow's backward adjustment of
it. Our belief in the nature of the law is founded on
the bedrock that every human being is entitled to
arrange his affairs by relying on the existing law and
should not find that his plans have been
retrospectively upset. This principle of law is known
as lex prospicit non respicit: law looks forward not
backward. As was observed in Phillips
v. Eyre [(1870) LR 6 QB 1], a retrospective
legislation is contrary to the general principle that
legislation by which the conduct of mankind is to be
regulated when introduced for the first time to deal
with future acts ought not to change the character of
past transactions carried on upon the faith of the
then existing law.
The obvious basis of the principle against
retrospectivity is the principle of “fairness”, which
must be the basis of every legal rule as was
observed in L'Office Cherifien des
Phosphates v. Yamashita-Shinnihon Steamship Co.
Ltd. [(1994) 1 AC 486 : (1994) 2 WLR 39 : (1994) 1
All ER 20 (HL)] Thus, legislations which modified
accrued rights or which impose obligations or
impose new duties or attach a new disability have to
be treated as prospective unless the legislative intent
is clearly to give the enactment a retrospective
effect; unless the legislation is for purpose of
supplying an obvious omission in a former legislation
or to explain a former legislation. We need not note
the cornucopia of case law available on the subject
because aforesaid legal position clearly emerges
21Page 22
from the various decisions and this legal position
was conceded by the counsel for the parties. In any
case, we shall refer to few judgments containing this
dicta, a little later.” [paras 28 and 29]
25. On a conspectus of the aforesaid decisions, it becomes
clear that Section 28, being substantive law, operates
prospectively as retrospectivity is not clearly made out by its
language. Being remedial in nature, and not clarificatory or
declaratory of the law, by making certain agreements covered
by Section 28(b) void for the first time, it is clear that rights and
liabilities that have already accrued as a result of agreements
entered into between parties are sought to be taken away. This
being the case, we are of the view that both the Single Judge
and Division Bench were in error in holding that the amended
Section 28 would apply.
26. Considering that the un-amended Section 28 is to apply, it
is important to advert to the said Section and see what are its
essential ingredients. First, a party should be restricted
absolutely from enforcing his rights under or in respect of any
contract. Secondly, such absolute restriction should be to
approach, by way of a usual legal proceeding, the ordinary
22Page 23
Tribunals set up by the State. Thirdly, such absolute restriction
may also relate to the limiting of time within which the party may
thus enforce its rights.
27. At this point, it is necessary to set out the exact clause in
the bank guarantees in the facts of the present cases. One
such clause reads as under:
“…. Unless a demand or claim under this guarantee
is made against us within three months from the
above date (i.e. On or before 30.4.97), all your
rights under the said guarantee shall be forfeited
and we shall be relieved and discharged from all
liabilities hereunder.”
28. A similar clause contained in another bank guarantee
reads thus:-
“….Provided however, unless a demand or claim
under this guarantee is made on us in writing within
3 months from the date of expiry of this guarantee in
respect of export of 416.500 M.T. 2450 Bales OF
Raw Cotton, we shall be discharged from all liability
under this guarantee thereafter.”
29. A reading of the aforesaid clauses makes it clear that
neither clause purports to limit the time within which rights are
to be enforced. In other words, neither clause purports to
23Page 24
curtail the period of limitation within which a suit may be
brought to enforce the bank guarantee. This being the case, it is
clear that this Court’s judgment in Food Corpn. of India v. New
India Assurance Co. Ltd., (1994) 3 SCC 324, would apply on
all fours to the facts of the present case.
30. The judgment of Venkatachala,J. and Bharucha,J. set out
the relevant clause in a fidelity insurance guarantee as follows:-
“…however, that the Corporation shall have no
rights under this bond after the expiry of (period) six
months from the date of termination of the contract.”
31. On the facts in that case, the High Court had allowed the
appeals of the Insurance Companies stating that the said
clause did not entitle the Corporation to file suits against
Insurance companies after the expiry of the six months period
from the date of termination of the respective contracts entered
into. In setting aside the High Court judgment, this Court held
that none of the clauses in the bond required that a suit should
be instituted by the Corporation for enforcing its rights under the
bond within a period of six months from the date of termination
of the contract. The restriction adverted to in the clauses of the
bond envisaged the need for the Corporation to lodge a claim
based on the bond, and that if this was done, a suit to invoke
rights under the bond could be filed within the limitation period
set out in the Limitation Act.
32. In a separate concurring judgment R.M. Sahai, J. after
going into the case law in paragraph 3 of his judgment, made
an extremely perceptive observation. He stated that where the
filing of the suit within limitation is made dependent on any
condition precedent, then such condition precedent not
curtailing the limitation period within which a suit could be filed,
would be valid and not hit by Section 28. In paragraph 8 of the
judgment, the learned Judge put it thus:-
“It does not directly or indirectly curtail the period of
limitation nor does it anywhere provide that the
Corporation shall be precluded from filing suit after
expiry of six months. It can utmost be construed as
a condition precedent for filing of the suit that the
appellant should have exercised the right within the
period agreed to between the parties. The right was
enforced under the agreement when notice was
issued and the company was required to pay the
amount. Assertion of right is one thing than
enforcing it in a court of law. The agreement does
not anywhere deal with enforcement of right in a
court of law. It only deals with assertion of right. The
assertion of right, therefore, was governed by the
agreement and it is imperative as well that the party
concerned must put the other side on notice by
asserting the right within a particular time as
provided in the agreement to enable the other side
not only to comply with the demand but also to put
on guard that in case it is not complied it may have
to face proceedings in the court of law. Since
admittedly the Corporation did issue notice prior to
expiry of six months from the termination of
contract, it was in accordance with the Fidelity
Insurance clause and, therefore, the suit filed by the
appellant was within time.” [para 8]
33. In National Insurance Co. Ltd. v. Sujir Ganesh Nayak
& Co., (1997) 4 SCC 366, this Court had to decide whether
condition 19 of an insurance policy was hit by the unamended
Section 28. Condition 19 reads as follows:-
“Condition 19.—In no case whatever shall the
company be liable for any loss or damage after the
expiration of 12 months from the happening of loss
or the damage unless the claim is the subject of
pending action or arbitration.”
34. After referring to the relevant case law and a detailed
reference to the Food Corporation judgment, this Court held:-
“Clause 19 in terms said that in no case would the
insurer be liable for any loss or damage after the
expiration of twelve months from the happening of
loss or damage unless the claim is subject of any
pending action or arbitration. Here the claim was not
subject to any action or arbitration proceedings. The
26Page 27
clause says that if the claim is not pressed within
twelve months from the happening of any loss or
damage, the Insurance Company shall cease to be
liable. There is no dispute that no claim was made
nor was any arbitration proceeding pending during
the said period of twelve months. The clause
therefore has the effect of extinguishing the right
itself and consequently the liability also. Notice the
facts of the present case. The Insurance Company
was informed about the strike by the letter of
28-4-1977 and by letter dated 10-5-1977. The
insured was informed that under the policy it had no
liability. This was reiterated by letter dated
22-9-1977. Even so more than twelve months
thereafter on 25-10-1978 the notice of demand was
issued and the suit was filed on 2-6-1980. It is
precisely to avoid such delays and to discourage
such belated claims that such insurance policies
contain a clause like clause 19. That is for the
reason that if the claims are preferred with
promptitude they can be easily verified and settled
but if it is the other way round, we do not think it
would be possible for the insurer to verify the same
since evidence may not be fully and completely
available and memories may have faded. The
forfeiture clause 12 also provides that if the claim is
made but rejected, an action or suit must be
commenced within three months after such
rejection; failing which all benefits under the policy
would stand forfeited. So, looked at from any point
of view, the suit appears to be filed after the right
stood extinguished. That is the reason why
in Vulcan Insurance case [(1976) 1 SCC 943] while
interpreting a clause couched in similar terms this
Court said: (SCC p. 952, para 23)
“It has been repeatedly held that such a clause is
not hit by Section 28 of the Contract Act.”
Even if the observations made are in the nature
of obiter dicta we think they proceed on a correct
reading of the clause.” [para 21]
35. In H.P. State Forest Co. Ltd. v. United India Insurance
Co. Ltd., (2009) 2 SCC 252, this Court had to decide whether
clause 6(ii) of an insurance policy was hit by the unamended
Section 28. This clause reads as follows:-
“6(ii) In no case whatsoever shall the Company be
liable for any loss or damage after the expiration of
12 months from the happening of the loss or
damage unless the claim is the subject of pending
action or arbitration: it being expressly agreed and
declared that if the Company shall declaim liability
for any claim hereunder and such claim shall not
within 12 calendar months from the date of the
disclaimer have been made the subject-matter of a
suit in a court of law then the claim shall for all
purposes be deemed to have been abandoned and
shall not thereafter be recoverable hereunder.”
After a copious reference to Food Corporation and S.G.
Nayak’s case, this Court held that such clauses would not be
hit by Section 28.
36. Considering that the respondents’ first argument has been
accepted by us, we do not think it 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 18.1.2013. Since we are not directly concerned
with this amendment, suffice it to say that stipulations like the
present would pass muster after 2013 if the specified period is
not less than one year from the date of occurring or
non-occurring of a specified event for extinguishment or
discharge of a party from liability. The appeals are, therefore,
dismissed with no order as to costs.
……………………J.
(C. Nagappan)
……………………J.
New Delhi; (R.F. Nariman)
September 15, 2016
going into the case law in paragraph 3 of his judgment, made
an extremely perceptive observation. He stated that where the
filing of the suit within limitation is made dependent on any
condition precedent, then such condition precedent not
curtailing the limitation period within which a suit could be filed,
would be valid and not hit by Section 28. In paragraph 8 of the
judgment, the learned Judge put it thus:-
“It does not directly or indirectly curtail the period of
limitation nor does it anywhere provide that the
Corporation shall be precluded from filing suit after
expiry of six months. It can utmost be construed as
a condition precedent for filing of the suit that the
appellant should have exercised the right within the
period agreed to between the parties. The right was
enforced under the agreement when notice was
issued and the company was required to pay the
amount. Assertion of right is one thing than
enforcing it in a court of law. The agreement does
not anywhere deal with enforcement of right in a
court of law. It only deals with assertion of right. The
assertion of right, therefore, was governed by the
agreement and it is imperative as well that the party
concerned must put the other side on notice by
asserting the right within a particular time as
provided in the agreement to enable the other side
not only to comply with the demand but also to put
on guard that in case it is not complied it may have
to face proceedings in the court of law. Since
admittedly the Corporation did issue notice prior to
expiry of six months from the termination of
contract, it was in accordance with the Fidelity
Insurance clause and, therefore, the suit filed by the
appellant was within time.” [para 8]
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NOS.9087-9089 of 2016
UNION OF INDIA & ANR.
V
M/S INDUSIND BANK LTD. & ANR
Dated:September 15, 2016
2. 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.
1Page 2
3. 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.
4. 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.
5. 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
2Page 3
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 upto
28.2.1997.
6. 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
3Page 4
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.
7. 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
4Page 5
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.
8. 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.
9. 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
5Page 6
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.
10. 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.
11. Shri A.K. Panda, learned senior advocate 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 (1995) 2
SCC 630, R. Rajagopal Reddy v. Padmini
Chandrasekharan. According to learned counsel, the Division
6Page 7
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.
12. 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. 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
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
7Page 8
before us. 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.
13. The primary contention with which we are faced is
whether Section 28 applies in its original form or whether it
applies after amendment in 1997. In order to answer this
question, it is first necessary to set out Section 28 in its original
form and Section 28 after amendment. The Section reads as
under:-
8Page 9
Original Section
28. Every agreement, 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, is void to that extent.
Amendment w.e.f. 08.01.1997
28. Agreements in restraint of legal proceeding,
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 thus enforce
his rights, is void to that extent;
(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 by
usual legal proceedings, is void to that extent.”
14. In order to answer this primary question, we have first to
see whether the change made in Section 28 could be said to be
clarificatory or declaratory of the law, and hence retrospective. It
is common ground that the statute has not made the aforesaid
amendment retrospective as it is to come into force only with
effect from 8.1.1997.
9Page 10
15. The original Section is of 1872 vintage. It remained in this
incarnation for over 100 years and was the subject matter of
two Law Commission Reports. The 13th Report of the Law
Commission of India, September, 1958 examined the Section
and ultimately decided that it was not necessary to amend it,
given the fact that there is a well-known distinction between
agreements providing for relinquishment of rights as well as
remedies as against agreements for relinquishing remedies
only. This was reflected in para 57 of the Report as follows:-
“57. Decided cases reveal a divergence of opinion
in relation to certain clauses of insurance policies
with reference to the applicability of this Section. On
examination, it would appear that these cases do
not really turn on the interpretation of the Section,
but hinge on the construction of the insurance
policies in question. 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 Section 28. Thus, in our
opinion, no change is called for by reason of the
aforesaid conflict of judicial authority.”
16. Several decades passed, until the Law Commission in its
97th Report of March, 1984 suo motu decided that the Section
10Page 11
required amendment. An introduction to the Report stated the
point for consideration thus:-
“1.2 Under Section 28 of the Indian Contract Act,
1872 – to state the point in brief – an agreement
which limits the time within which a party to an
agreement may enforce his rights under any
contract by proceedings in a court of law is void to
that extent. But the Section does not invalidate an
agreement in the nature of prescription, that is to
say, an agreement which provides that, at the end
of a specified period. If the rights thereunder are
not enforced, the rights shall cease to exist. As will
be explained in greater detail in later Chapters of
this Report, this position creates serious anomalies
and hardship, apart from leading to unnecessary
litigation. Prima facie, it appeared to the
Commission that the Section stood in need of
reform on this point. The arguments for and against
amendment of the section will be set out later. For
the present, it is sufficient to state that the problem
is one of considerable practical importance as such
stipulations are frequently found in agreements
entered into in the course of business.”
17. After going through the existing case law and finding that
the existing case law resulted in economic injustice because of
unequal bargaining power, the Law Commission decided to
recommend a change in the Section. This was done as
follows:-
11Page 12
“5.1 We now come to the changes that are needed
in the present law. In our opinion, the present legal
position as to prescriptive clauses in contracts
cannot be defended as a matter of justice, logic,
commonsense or convenience. When accepting
such clauses, consumers either do not realize the
possible adverse impact of such clauses, or are
forced to agree because big corporations are not
prepared to enter into contracts except on these
onerous terms. “Take it or leave it all”, is their
general attitude, and because of their superior
bargaining power, they naturally have the upper
hand. We are not, at present, dealing with the
much wider field of “standard form contracts” or
“standard” terms. But confining ourselves to the
narrow issue under discussion, it would appear that
the present legal position is open to serious
objection from the common man’s point of view.
Further, such clauses introduce an element of
uncertainty in transactions which are entered into
daily by hundreds of persons.
5.2 It is hardly necessary to repeat all that we
have said in the preceding Chapters about the
demerits of the present law. Briefly, one can say
that the present law, which regards prescriptive
clauses as valid while invalidating time limit clauses
which merely bar the remedy, suffers from the
following principal defects:
(a) It causes serious hardship to those who are
economically disadvantaged and is violative of
economic justice.
(b) In particular, it harms the interests of the
consumer, dealing with big corporations.
(c) It is illogical, being based on a distinction
which treats the more severe flaw as valid,
while invalidating a lesser one.
(d) It rests on a distinction too subtle and refined
to admit of easy application in practice. It
thus, throws a cloud on the rights of parties,
12Page 13
who do not know with certainty where they
stand, ultimately leading to avoidable
litigation.
5.3 On a consideration of all aspects of the
matter, we recommend that Section 28 of the Indian
Contract Act, 1872 should be suitably amended so
as to amend to render invalid contractual clauses
which purport to extinguish, on the expiry of a
specified term, right accruing from the contract.
Here is a suggestion for re-drafting the main
paragraph of Section 28.
Revised Section 28, main paragraph, Contract Act
as recommended
28. 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
(b) which limits the time within which he may thus
enforce his rights, or
(c) which extinguishes the rights 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 suit or other
legal proceeding within a specified period, or
(d) which discharges any party thereto from any
liability under or in respect of any contract in
the circumstances specified in clause (c), is
void to that extent.”
18. A period of 13 years passed after which this Report was
implemented. The Statement of Objects and Reasons of the
Amendment reads as follows:-
13Page 14
“The Law Commission of India has
recommended in its 97th report that Section 28 of
the Indian Contract Act, 1872 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 in the agreement is shorter than
the period of limitation provided 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 rights is valid. This
approach may be sound in theory but, in practice, it
causes serious hardship and might even be abused.
2. It is felt that Section 28 of the Indian Contract
Act, 1872 should be amended as it harms the
interests of the consumer dealing with big
corporations and causes serious hardship to those
who are economically disadvantaged.
3. The Bill seeks to achieve the above objects.
19. What emerges on a reading of the Law Commission
Report together with the Statement of Objects and Reasons for
the Amendment is that the Amendment does not purport to be
either declaratory or clarificatory. It seeks to bring about a
substantive change in the law by stating, for the first time, 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
Amendment therefore seeks to set aside the distinction made in
the case law up to date between agreements which limit the
time within which remedies can be availed and agreements
which do away with the right altogether in so limiting the time.
These are obviously substantive changes in the law which are
remedial in nature and cannot have retrospective effect.
20. In Sukhram v. Harbheji, [1969] 3 S.C.R. 752, this Court
held:-
“Now a law is undoubtedly retrospective if the law
says so expressly but it is not always necessary to
say so expressly to make the law retrospective.
There are occasions when a law may be held to be
retrospective in operation. Retrospection is not to
be presumed for the presumption is the other way
but many statutes have been regarded as
retrospective without a declaration. Thus it is that
remedial statutes are always regarded as
prospective but declaratory statutes are considered
retrospective. Similarly sometimes statutes have a
retrospective effect when the declared intention is
clearly and unequivocally manifest from the
language employed in the particular law or in the
context of connected provisions. It is always a
question whether the legislature has sufficiently
expressed itself. To find this one must look at the
general scope and purview of the Act and the
remedy the legislature intends to apply in the former
state of the law and then determine what the
legislature intended to do. This line of investigation
is, of course, only open if it is necessary. In the
words of Lord Selborne in Main v. Stark [1890] 15
A.C. 384 at 388, there might be something in the
context of an Act or collected from its language,
which might give to words prima facie prospective a
large operation. More retrospectivity is not to be
given than what can be gathered from expressed or
clearly implied intention of the legislature.” (pp.
758-759)
21. Considering that the subject matter of Section 28 is
“agreements”, the unamended Section 28 would be the law
applicable as on 31.1.1996, which is the date of the agreement
of bank guarantee. It now remains for us to deal with the case
law cited by both sides.
22. In R. Rajagopal Reddy v. Padmini Chandrasekharan,
(1995) 2 SCC 630, this Court was called upon to interpret the
Benami Transactions (Prohibition) Act, 1988. A 3-Judge Bench
of this Court overruled Mithilesh Kumari v. Prem Behari
Khare, (1989) 2 SCC 95, in arriving at the conclusion that the
1988 Act was prospective and not retrospective. In so
overruling the Division Bench judgment, this Court held that the
Act is not expressly retrospective, so that an enquiry would lie
as to whether it could be said to be clarificatory or declaratory.
The language of Section 4(1) of the statute made it clear that it
would apply to suits filed only after the 1988 Act came into force
Further, the Bench went on to quote Maxwell on Interpretation
as follows:
“Perhaps no rule of construction is more firmly
established than this — that a retrospective
operation is not to be given to a statute so as to
impair an existing right or obligation, otherwise than
as regards matters of procedure, unless that effect
cannot be avoided without doing violence to the
language of the enactment. If the enactment is
expressed in language which is fairly capable of
either interpretation, it ought to be construed as
prospective only.’ The rule has, in fact, two aspects,
for it, ‘involves another and subordinate rule, to the
effect that a statute is not to be construed so as to
have a greater retrospective operation than its
language renders necessary.” [para 14]
It then went on to hold as follows:
“As regards, reason 3, we are of the considered
view that the Act cannot be treated to be declaratory
in nature. Declaratory enactment declares and
clarifies the real intention of the legislature in
connection with an earlier existing transaction or
enactment, it does not create new rights or
obligations. On the express language of Section 3,
the Act cannot be said to be declaratory but in
substance it is prohibitory in nature and seeks to
destroy the rights of the real owner qua properties
held benami and in this connection it has taken
away the right of the real owner both for filing a suit
or for taking such a defence in a suit by benamidar.
Such an Act which prohibits benami transactions
and destroys rights flowing from such transactions
as existing earlier is really not a declaratory
enactment. With respect, we disagree with the line
of reasoning which commanded to the Division
Bench. In this connection, we may refer to the
following observations in Principles of Statutory
Interpretation, 5th Edn., 1992, by Shri G.P. Singh, at
page 315 under the caption ‘Declaratory statutes’:
“The presumption against retrospective operation
is not applicable to declaratory statutes. As stated
in Craies and approved by the Supreme Court:
‘For modern purposes a declaratory Act may be
defined as an Act to remove doubts existing as to
the common law, or the meaning or effect of any
statute. Such Acts are usually held to be
retrospective. The usual reason for passing a
declaratory Act is to set aside what Parliament
deems to have been a judicial error whether in the
statement of the common law or in the interpretation
of statutes. Usually, if not invariably, such an Act
contains a preamble, and also the word “declared”
as well as the word enacted.’
But the use of the words ‘it is declared’ is not
conclusive that the Act is declaratory for these
words may, at times be used to introduce new rules
of law and the Act in the latter case will only be
amending the law and will not necessarily be
retrospective. In determining, therefore, the nature
of the Act, regard must be had to the substance
18Page 19
rather than to the form. If a new Act is to explain an
earlier Act, it would be without object unless
construed retrospective. An explanatory Act is
generally passed to supply an obvious omission or
to clear up doubts as to the meaning of the previous
Act. It is well settled that if a statute is curative or
merely declaratory of the previous law retrospective
operation is generally intended. The language ‘shall
be deemed always to have meant’ is declaratory,
and is in plain terms retrospective. In the absence of
clear words indicating that the amending Act is
declaratory, it would not be so construed when the
pre-amended provision was clear and
unambiguous. An amending Act may be purely
clarificatory to clear a meaning of a provision of the
principal Act which was already implicit. A
clarificatory amendment of this nature will have
retrospective effect and, therefore, if the principal
Act was existing law when the Constitution came
into force the amending Act also will be part of the
existing law.
In Mithilesh Kumari v. Prem Behari Khare [(1989) 2
SCC 95 : (1989) 1 SCR 621] Section 4 of the
Benami Transactions (Prohibition) Act, 1988 was, it
is submitted, wrongly held to be an Act declaratory
in nature for it was not passed to clear any doubt
existing as to the common law or the meaning or
effect of any statute. The conclusion however, that
Section 4 applied also to past benami transactions
may be supportable on the language used in the
section.” [para 17]
23. Similarly, in Purbanchal Cables & Conductors (P) Ltd.
v. Assam SEB, (2012) 7 SCC 462, this Court had to decide
whether the Interest on Delayed Payments to Small Scale and
19Page 20
Ancillary Industrial Undertakings Act, 1993 could be said to be
retrospective. After a review of various judgments of this Court,
this Court held:-
“There is no doubt about the fact that the Act is a
substantive law as vested rights of entitlement to a
higher rate of interest in case of delayed payment
accrues in favour of the supplier and a
corresponding liability is imposed on the buyer. This
Court, time and again, has observed that any
substantive law shall operate prospectively unless
retrospective operation is clearly made out in the
language of the statute. Only a procedural or
declaratory law operates retrospectively as there is
no vested right in procedure.
In the absence of any express legislative
intendment of the retrospective application of the
Act, and by virtue of the fact that the Act creates a
new liability of a high rate of interest against the
buyer, the Act cannot be construed to have
retrospective effect. Since the Act envisages that
the supplier has an accrued right to claim a higher
rate of interest in terms of the Act, the same can
only be said to accrue for sale agreements after the
date of commencement of the Act i.e. 23-9-1992
and not any time prior.” [paras 51 and 52]
24. Similarly, in CIT v. Vatika Township (P) Ltd., (2015) 1
SCC 1, this Court held that the proviso to Section 113 of the
Indian Income Tax Act, 1961 was prospective and not
retrospective. In so holding, the Constitution Bench adverted to
certain general principles as under:-
20Page 21
“Of the various rules guiding how a legislation has to
be interpreted, one established rule is that unless a
contrary intention appears, a legislation is presumed
not to be intended to have a retrospective operation.
The idea behind the rule is that a current law should
govern current activities. Law passed today cannot
apply to the events of the past. If we do something
today, we do it keeping in view the law of today and
in force and not tomorrow's backward adjustment of
it. Our belief in the nature of the law is founded on
the bedrock that every human being is entitled to
arrange his affairs by relying on the existing law and
should not find that his plans have been
retrospectively upset. This principle of law is known
as lex prospicit non respicit: law looks forward not
backward. As was observed in Phillips
v. Eyre [(1870) LR 6 QB 1], a retrospective
legislation is contrary to the general principle that
legislation by which the conduct of mankind is to be
regulated when introduced for the first time to deal
with future acts ought not to change the character of
past transactions carried on upon the faith of the
then existing law.
The obvious basis of the principle against
retrospectivity is the principle of “fairness”, which
must be the basis of every legal rule as was
observed in L'Office Cherifien des
Phosphates v. Yamashita-Shinnihon Steamship Co.
Ltd. [(1994) 1 AC 486 : (1994) 2 WLR 39 : (1994) 1
All ER 20 (HL)] Thus, legislations which modified
accrued rights or which impose obligations or
impose new duties or attach a new disability have to
be treated as prospective unless the legislative intent
is clearly to give the enactment a retrospective
effect; unless the legislation is for purpose of
supplying an obvious omission in a former legislation
or to explain a former legislation. We need not note
the cornucopia of case law available on the subject
because aforesaid legal position clearly emerges
21Page 22
from the various decisions and this legal position
was conceded by the counsel for the parties. In any
case, we shall refer to few judgments containing this
dicta, a little later.” [paras 28 and 29]
25. On a conspectus of the aforesaid decisions, it becomes
clear that Section 28, being substantive law, operates
prospectively as retrospectivity is not clearly made out by its
language. Being remedial in nature, and not clarificatory or
declaratory of the law, by making certain agreements covered
by Section 28(b) void for the first time, it is clear that rights and
liabilities that have already accrued as a result of agreements
entered into between parties are sought to be taken away. This
being the case, we are of the view that both the Single Judge
and Division Bench were in error in holding that the amended
Section 28 would apply.
26. Considering that the un-amended Section 28 is to apply, it
is important to advert to the said Section and see what are its
essential ingredients. First, a party should be restricted
absolutely from enforcing his rights under or in respect of any
contract. Secondly, such absolute restriction should be to
approach, by way of a usual legal proceeding, the ordinary
22Page 23
Tribunals set up by the State. Thirdly, such absolute restriction
may also relate to the limiting of time within which the party may
thus enforce its rights.
27. At this point, it is necessary to set out the exact clause in
the bank guarantees in the facts of the present cases. One
such clause reads as under:
“…. Unless a demand or claim under this guarantee
is made against us within three months from the
above date (i.e. On or before 30.4.97), all your
rights under the said guarantee shall be forfeited
and we shall be relieved and discharged from all
liabilities hereunder.”
28. A similar clause contained in another bank guarantee
reads thus:-
“….Provided however, unless a demand or claim
under this guarantee is made on us in writing within
3 months from the date of expiry of this guarantee in
respect of export of 416.500 M.T. 2450 Bales OF
Raw Cotton, we shall be discharged from all liability
under this guarantee thereafter.”
29. A reading of the aforesaid clauses makes it clear that
neither clause purports to limit the time within which rights are
to be enforced. In other words, neither clause purports to
23Page 24
curtail the period of limitation within which a suit may be
brought to enforce the bank guarantee. This being the case, it is
clear that this Court’s judgment in Food Corpn. of India v. New
India Assurance Co. Ltd., (1994) 3 SCC 324, would apply on
all fours to the facts of the present case.
30. The judgment of Venkatachala,J. and Bharucha,J. set out
the relevant clause in a fidelity insurance guarantee as follows:-
“…however, that the Corporation shall have no
rights under this bond after the expiry of (period) six
months from the date of termination of the contract.”
31. On the facts in that case, the High Court had allowed the
appeals of the Insurance Companies stating that the said
clause did not entitle the Corporation to file suits against
Insurance companies after the expiry of the six months period
from the date of termination of the respective contracts entered
into. In setting aside the High Court judgment, this Court held
that none of the clauses in the bond required that a suit should
be instituted by the Corporation for enforcing its rights under the
bond within a period of six months from the date of termination
of the contract. The restriction adverted to in the clauses of the
bond envisaged the need for the Corporation to lodge a claim
based on the bond, and that if this was done, a suit to invoke
rights under the bond could be filed within the limitation period
set out in the Limitation Act.
32. In a separate concurring judgment R.M. Sahai, J. after
going into the case law in paragraph 3 of his judgment, made
an extremely perceptive observation. He stated that where the
filing of the suit within limitation is made dependent on any
condition precedent, then such condition precedent not
curtailing the limitation period within which a suit could be filed,
would be valid and not hit by Section 28. In paragraph 8 of the
judgment, the learned Judge put it thus:-
“It does not directly or indirectly curtail the period of
limitation nor does it anywhere provide that the
Corporation shall be precluded from filing suit after
expiry of six months. It can utmost be construed as
a condition precedent for filing of the suit that the
appellant should have exercised the right within the
period agreed to between the parties. The right was
enforced under the agreement when notice was
issued and the company was required to pay the
amount. Assertion of right is one thing than
enforcing it in a court of law. The agreement does
not anywhere deal with enforcement of right in a
court of law. It only deals with assertion of right. The
assertion of right, therefore, was governed by the
agreement and it is imperative as well that the party
concerned must put the other side on notice by
asserting the right within a particular time as
provided in the agreement to enable the other side
not only to comply with the demand but also to put
on guard that in case it is not complied it may have
to face proceedings in the court of law. Since
admittedly the Corporation did issue notice prior to
expiry of six months from the termination of
contract, it was in accordance with the Fidelity
Insurance clause and, therefore, the suit filed by the
appellant was within time.” [para 8]
33. In National Insurance Co. Ltd. v. Sujir Ganesh Nayak
& Co., (1997) 4 SCC 366, this Court had to decide whether
condition 19 of an insurance policy was hit by the unamended
Section 28. Condition 19 reads as follows:-
“Condition 19.—In no case whatever shall the
company be liable for any loss or damage after the
expiration of 12 months from the happening of loss
or the damage unless the claim is the subject of
pending action or arbitration.”
34. After referring to the relevant case law and a detailed
reference to the Food Corporation judgment, this Court held:-
“Clause 19 in terms said that in no case would the
insurer be liable for any loss or damage after the
expiration of twelve months from the happening of
loss or damage unless the claim is subject of any
pending action or arbitration. Here the claim was not
subject to any action or arbitration proceedings. The
26Page 27
clause says that if the claim is not pressed within
twelve months from the happening of any loss or
damage, the Insurance Company shall cease to be
liable. There is no dispute that no claim was made
nor was any arbitration proceeding pending during
the said period of twelve months. The clause
therefore has the effect of extinguishing the right
itself and consequently the liability also. Notice the
facts of the present case. The Insurance Company
was informed about the strike by the letter of
28-4-1977 and by letter dated 10-5-1977. The
insured was informed that under the policy it had no
liability. This was reiterated by letter dated
22-9-1977. Even so more than twelve months
thereafter on 25-10-1978 the notice of demand was
issued and the suit was filed on 2-6-1980. It is
precisely to avoid such delays and to discourage
such belated claims that such insurance policies
contain a clause like clause 19. That is for the
reason that if the claims are preferred with
promptitude they can be easily verified and settled
but if it is the other way round, we do not think it
would be possible for the insurer to verify the same
since evidence may not be fully and completely
available and memories may have faded. The
forfeiture clause 12 also provides that if the claim is
made but rejected, an action or suit must be
commenced within three months after such
rejection; failing which all benefits under the policy
would stand forfeited. So, looked at from any point
of view, the suit appears to be filed after the right
stood extinguished. That is the reason why
in Vulcan Insurance case [(1976) 1 SCC 943] while
interpreting a clause couched in similar terms this
Court said: (SCC p. 952, para 23)
“It has been repeatedly held that such a clause is
not hit by Section 28 of the Contract Act.”
Even if the observations made are in the nature
of obiter dicta we think they proceed on a correct
reading of the clause.” [para 21]
35. In H.P. State Forest Co. Ltd. v. United India Insurance
Co. Ltd., (2009) 2 SCC 252, this Court had to decide whether
clause 6(ii) of an insurance policy was hit by the unamended
Section 28. This clause reads as follows:-
“6(ii) In no case whatsoever shall the Company be
liable for any loss or damage after the expiration of
12 months from the happening of the loss or
damage unless the claim is the subject of pending
action or arbitration: it being expressly agreed and
declared that if the Company shall declaim liability
for any claim hereunder and such claim shall not
within 12 calendar months from the date of the
disclaimer have been made the subject-matter of a
suit in a court of law then the claim shall for all
purposes be deemed to have been abandoned and
shall not thereafter be recoverable hereunder.”
After a copious reference to Food Corporation and S.G.
Nayak’s case, this Court held that such clauses would not be
hit by Section 28.
36. Considering that the respondents’ first argument has been
accepted by us, we do not think it 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 18.1.2013. Since we are not directly concerned
with this amendment, suffice it to say that stipulations like the
present would pass muster after 2013 if the specified period is
not less than one year from the date of occurring or
non-occurring of a specified event for extinguishment or
discharge of a party from liability. The appeals are, therefore,
dismissed with no order as to costs.
……………………J.
(C. Nagappan)
……………………J.
New Delhi; (R.F. Nariman)
September 15, 2016
No comments:
Post a Comment