2016 (9) TMI 1601 - SC - Indian Laws

Applicability of the 1997 Amendment to Section 28 of the Contract Act, 1872 - Section 28 applies in its original form or whether it applies after amendment in 1997? - HELD THAT - 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. 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. Appeal dismissed.

Issues Involved:
1. Applicability of the 1997 Amendment to Section 28 of the Indian Contract Act, 1872.
2. Validity of the bank guarantees invoked after the stipulated period.
3. Retrospective effect of the 1997 Amendment to Section 28.
4. Interpretation of Section 28 in its original and amended forms.
5. Legal precedents and their applicability to the current case.

Issue-Wise Detailed Analysis:

1. Applicability of the 1997 Amendment to Section 28 of the Indian Contract Act, 1872
The primary contention was whether the amended Section 28, which came into force on 8.1.1997, applied to the bank guarantees issued on 31.1.1996. The Single Judge held that the amended Section 28 applied, making the clause in the bank guarantees void. However, the Division Bench reversed this decision, concluding that the amended Section 28 did not apply to agreements made before its enactment.

2. Validity of the Bank Guarantees Invoked After the Stipulated Period
The bank guarantees contained clauses that required claims to be made within three months after the expiry date. The Textile Commissioner invoked the guarantees after this period, leading to a dispute over their validity. The Single Judge ruled in favor of the Union of India, stating that the invocation was valid under the amended Section 28. The Division Bench, however, held that the suits should be dismissed as the guarantees were not invoked within the prescribed time.

3. Retrospective Effect of the 1997 Amendment to Section 28
The Court examined whether the 1997 Amendment was retrospective. It was determined that the amendment was not explicitly retrospective and was intended to bring about substantive changes in the law. Therefore, it could not apply to agreements made before its enactment. The Court cited several precedents, including R. Rajagopal Reddy v. Padmini Chandrasekharan and Purbanchal Cables and Conductors (P) Ltd. v. Assam SEB, to support the principle that substantive laws are presumed to operate prospectively unless explicitly stated otherwise.

4. Interpretation of Section 28 in Its Original and Amended Forms
The original Section 28 invalidated agreements that restricted a party from enforcing their rights through legal proceedings or limited the time for such enforcement. The amended Section 28 added that agreements extinguishing rights or discharging liabilities after a specified period were also void. The Court concluded that the unamended Section 28 was applicable as of the date of the bank guarantees (31.1.1996), making the clauses in the guarantees valid under the original Section 28.

5. Legal Precedents and Their Applicability to the Current Case
The Court referred to several judgments, including Food Corporation of India v. New India Assurance Co. Ltd., National Insurance Co. Ltd. v. Sujir Ganesh Nayak and Co., and H.P. State Forest Co. Ltd. v. United India Insurance Co. Ltd., to determine the validity of the clauses in the bank guarantees. These judgments established that clauses requiring claims to be made within a specific period did not limit the time for enforcing rights through legal proceedings and were therefore not void under the original Section 28.

Conclusion:
The Supreme Court dismissed the appeals, holding that the unamended Section 28 applied to the bank guarantees dated 31.1.1996. The clauses in the guarantees were valid as they did not curtail the period of limitation for filing suits but merely required claims to be made within a specified period. The amended Section 28, being substantive and not retrospective, did not apply to the guarantees. The appeals were dismissed with no order as to costs.

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