The Legal Effects of Restraint on Legal Proceedings and Arbitration Clauses
Author: Rashi
Student, Symbiosis Law School, Noida
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Quick Takeaways
- Access to Justice: Any contractual clause that absolutely prohibits a party from instituting legal proceedings is void ab initio to protect the fundamental right to a remedy.
- Limitation Period Protection: Following the 1997 amendment, parties cannot contractually shorten the limitation period prescribed by law; any such attempt to override the Limitation Act is void.
- Arbitration Exception: Agreements to refer future or existing disputes to arbitration are valid exceptions, as they provide an alternative resolution path rather than a total restraint.
Introduction
Section 28 of the Indian Contract Act, 1872 states:
“Agreements in restraint of legal proceedings are void.”
The foundation of the Indian Contract Act, 1872 lies in the principle of freedom of contract; however, this freedom is accompanied by certain restrictions. Section 28 is one such provision that governs the legal validity of contracts. It can nullify two types of contractual provisions: first, clauses that prohibit parties from instituting legal proceedings; and second, clauses that set a limitation period for enforcing contractual rights different from what is prescribed by law.
The rationale behind this provision is that access to justice is a fundamental right, and no person can be deprived of it, even by agreement.
However, this section contains certain exceptions:
- Exception 1: Saving of contracts to refer future disputes to arbitration.
- Exception 2: Saving of contracts to refer disputes that have already arisen to arbitration.
- Exception 3: Saving of guarantee agreements by banks or financial institutions.
This means that, when a dispute arises between parties whether future or past, they may choose arbitration instead of going to court. Similarly, banks and financial institutions are exempt from this section under specific circumstances. Such contractual provisions are considered valid because they do not completely prohibit legal remedies but instead provide an alternative means of resolving disputes.
This article primarily focuses on the judicial interpretation of Section 28 of the Indian Contract Act, 1872, the legislative changes in its application, and the conflict between the fundamental right to justice and the freedom of contract.
Aims and Scope of the Study
This study seeks to examine:
- The legislative and judicial position on agreements under Section 28 before and after the amendment.
- The impact of Section 28 on contract law in India and how its dilemmas can be resolved through alternative means.
It further aims to:
- Critically analyse agreements that restrain legal proceedings.
- Examine the effect of arbitration clauses under Section 28 of the Indian Contract Act, 1872.
Structure and Justification of Section 28
While contractual freedom is a private right, it is deliberately restricted by Section 28 in the interest of the public. Any agreement that limits a party’s right to seek legal remedies is void at its core and is considered void ab initio, meaning void from the very beginning. The courts have consistently held that no private agreement can override lawful jurisdiction.
This aligns with English law, which also declares any agreement that excludes the jurisdiction of the court as unlawful and contrary to public policy. In Vulcan Insurance Co. Ltd. v. Maharaj Singh (1976), the Supreme Court upheld that a contractual clause restricting the time available to file a suit under an insurance contract was void under Section 28.
In practice, agreements restraining legal proceedings take various forms. Any agreement that absolutely prohibits a party from bringing a claim under a contract violates Section 28 directly. Similarly, any contract that sets a limitation period shorter than the one provided by the Limitation Act, 1963 is void, as it attempts to override statutory provisions. The reason behind such restrictions is clear: parties may freely regulate their obligations, but they cannot deprive themselves of remedies provided by law.
This principle was reaffirmed in Food Corporation of India v. New India Assurance Co. Ltd. (1994), where the Supreme Court held that reducing the statutory limitation period is void as it infringes on legal rights.
This notion stands as an exception to the maxim modus et conventio vincunt legem, which means that agreements between parties can override general law. Although this maxim upholds the freedom of contract, its unrestricted application could lead to the privatisation of justice, something contrary to basic human rights. In National Insurance Co. Ltd. v. Sujir Ganesh Nayak & Co. (1997), the Supreme Court observed that public interest must prevail over contractual freedom. Thus, Section 28 plays a vital role in maintaining a balance between public interest and private autonomy.
Judicial Interpretation Before and After the 1997 Amendment
Before the 1997 amendment, courts distinguished between agreements that terminated substantive rights and those that imposed shorter limitation periods. Section 28 invalidated agreements that absolutely barred parties from seeking judicial remedies but permitted clauses that shortened the limitation period prescribed under the Limitation Act, 1963.
This interpretation proved detrimental to weaker parties, such as consumers or employees, who often faced difficulties when companies imposed very short time limits for bringing claims. Such clauses effectively deprived them of a fair chance to seek justice.
The 1997 amendment to Section 28 corrected this imbalance by removing the provision that allowed contracts to impose shorter limitation periods. Now, any contract that extinguishes the right to initiate legal proceedings within a period shorter than that provided under the Limitation Act, 1963 is considered void.
This reform was a major step toward ensuring fairness and protecting access to justice within contractual relations.
Arbitration as a Method of Dispute Resolution
It is important to note that arbitration agreements remain valid as exceptions under Section 28. Arbitration is a formal mechanism for resolving disputes outside the court system. In this process, parties refer their disputes to an independent and neutral third party an arbitrator, whose decision, known as an award, is binding on both sides.
In India, arbitration is governed by the Arbitration and Conciliation Act, 1996. It offers several advantages: it is faster, more confidential, and less formal than court proceedings. Arbitration also eases the burden on the judiciary by resolving disputes privately. Courts generally uphold arbitral awards, as arbitration provides a legitimate form of judicial review through an alternative forum.
However, the system is not without shortcomings. Arbitration may sometimes favour the stronger party, particularly when the arbitrator is appointed solely by that party. Safeguards are therefore necessary to ensure neutrality and fairness.
Exception for Banks and Financial Institutions
While Section 28 clearly states that no agreement can deprive a person of the right to legal proceedings, a specific exception applies to banks and financial institutions. Under Exception 3 to Section 28, these entities enjoy limited statutory protection, allowing them to discharge liability after a specified period agreed upon in the contract.
Before the 1997 amendment, banks faced the problem of indefinite liability, meaning there was no fixed endpoint for certain obligations. The amendment introduced this exception to safeguard the commercial interests of financial institutions involved in large-scale transactions. It allows contracts such as guarantees and indemnities to provide for discharge after a stipulated period so long as the limitation period remains reasonable.
Courts have examined this exception extensively to ensure a balance between contractual freedom and fair access to justice. In State Bank of India v. Mula Sahakari Sahar Karkhana Ltd., the Supreme Court held that a specific time period in bank guarantees is necessary to ensure financial certainty. Similarly, in Union of India v. IndusInd Bank Ltd., the Court ruled that such clauses do not automatically violate Section 28 if they fall within the statutory exception and are based on mutual consent.
These provisions have significant practical application in contracts relating to insurance, loans, and guarantees. Despite such privileges, courts have repeatedly clarified that these clauses must not be used oppressively or for unfair practices. This relaxation ensures risk management, predictability, and smoother financial transactions.
Issues and Possible Solutions
Although Section 28 allows arbitration as an alternative to court proceedings, certain issues remain. In many agreements, the arbitrator is appointed by the dominant party, which creates an imbalance and raises concerns of bias. This undermines the equality of justice between the parties. Furthermore, arbitral awards are difficult to challenge, as arbitrators operate independently and have limited oversight.
To address this, an amendment could be introduced requiring that arbitrators be appointed by a neutral authority such as the court, a district magistrate, or a judicial officer. Additionally, arbitral awards could be subjected to limited judicial review to ensure fairness.
Another concern arises from Exception 3, which grants banks and financial institutions the right to set limitation periods. Such contracts often take the form of standard-form agreements, where customers have little or no bargaining power. This creates an unequal relationship in which the terms are largely dictated by financial entities. The customer’s consent, therefore, may not be entirely free but rather influenced by economic pressure or lack of alternatives.
To overcome this, strict regulatory oversight is required. Authorities should ensure that such contracts are drafted with reasonable and mutually agreed terms, so that no party is bound by conditions they did not freely accept.
Contemporary Relevance and Evolving Jurisprudence
In recent years, the interpretation of Section 28 has gained renewed attention due to the increasing use of standard-form contracts, e-commerce agreements, and digital arbitration clauses. Modern contractual practices especially in online platforms, insurance policies, and banking apps often include terms limiting recourse or directing disputes to particular forums. Although such terms may not explicitly restrain legal proceedings, they can indirectly affect access to justice by increasing procedural barriers.
The judiciary has also been proactive in upholding the public policy dimension of Section 28. Courts continue to strike down contractual clauses that, in effect, restrict statutory rights or deprive consumers of fair remedies, while simultaneously encouraging legitimate arbitration and conciliation. This reflects an evolving balance between efficiency and fairness, adapting Section 28 to the realities of a rapidly modernising commercial environment.
Going forward, the provision may serve as a guiding principle in assessing digital contracts and cross-border arbitration clauses, ensuring that technological convenience does not erode the substantive right to judicial redress. The adaptability of Section 28 thus reinforces its continuing significance in India’s legal and commercial landscape.
Conclusion
Section 28 of the Indian Contract Act, 1872 represents an evolving balance between contractual freedom and the right to access justice. Initially, the provision invalidated only those clauses that absolutely prohibited legal proceedings, while allowing parties to contractually reduce limitation periods. This approach led to unfairness, particularly where powerful entities could deny remedies to weaker parties.
The 1997 amendment corrected this by making any clause that shortens the statutory limitation period void. Section 28 also recognises arbitration as a valid alternative mechanism for resolving disputes. Although arbitration presents challenges such as potential bias and limited avenues for appeal, these can be mitigated through proper reforms and judicial supervision. Overall, Section 28 ensures that contractual freedom operates within the limits of fairness and public policy. It safeguards the fundamental right of access to justice while accommodating the legitimate needs of commerce and alternative dispute resolution.
** Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the views of The Lawscape.
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