Patna High Court
Balaji Infraro (I) Ltd vs Chanakya National Law University & Ors on 16 November, 2016
Author: Shivaji Pandey
Bench: Shivaji Pandey
IN THE HIGH COURT OF JUDICATURE AT PATNA
Request Case No.8 of 2014
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Balaji Infraro (i) Ltd. a company registered under the Company Act, 1956 having
its registered office at CJ-276, Sector-II, Salt Lake City, Kolkata-700091, through
its Director, Soumyapur Sen Gupta son of Mr. Subhash Sen Gupta, resident of
B/234 Survey Park, Santoshpur, Kolkata-700075, West Bengal.
.... .... Petitioner
Versus
1. Chanakya National Law University, through its Registrar, Nyaya Nagar,
Mithapur, Patna-800001.
2. The Project Engineer, Chankya National Law University, Patna, Nyaya Nagar,
Mithapur, Patna-800001.
.... .... Respondents
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Appearance:
For the Petitioner/s : Mr. Mrigank Mauli, Adv.
Mr. Prince Kumar Mishra, Adv.
Mr. Sanket, Adv.
For the Respondent No.1: Mr. P.K. Sahi, Senior Adv.
Mr. Dr. Anshuman, Adv.
Mr. Vikas Kumar, Adv.
Mr. Devesh Shakaran, Adv.
===========================================================
CORAM: HONOURABLE MR. JUSTICE SHIVAJI PANDEY
ORAL JUDGMENT
Date: 16-11-2016
1. This case has been filed under Section 11(6) of the
Arbitration and Conciliation Act, 1996 for the purposes of
appointment of Arbitrator.
2. The petitioner-company and the respondents have
entered into an agreement for the construction of Boys Hostel. The
petitioner-Company completed the construction work, accordingly
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the respondents, whatever amount was due, have been paid to the
petitioner-company by way of full and final settlement, nothing left
for further dispute.
3. The petitioner-company demanded the cost incurred in
„carriage of materials‟ amounting to Rs.63,18,345.49/-. The
Registrar of respondent-Chankya National Law University
informed the petitioner-company that the representation was
referred to the consultant M/s Gherzi Eastern Ltd. Kolkata, it has
opined, unless or otherwise, specially mentioned in the BOQ of
civil work, extra claim for carriage is not admissible and vide letter
dated 09.08.2012 it was informed to the petitioner-Company that
claim for extra carriage is not admissible to the petitioner-company,
in view of earlier communication vide letter dated 12.10.2011,
henceforth no correspondence in this regard will be entertained.
4. The petitioner-company vide letter dated 03.03.2012
has demanded the interest on the amount of Security Deposit.
Finally, the petitioner-company vide letter dated 07.05.2013
requested the respondents for appointment of Arbitrator in terms of
the contract that was replied by the respondent-Chankya National
Law University vide letter dated 18.05.2013, where it has been
mentioned about Clause-25 of the Contract, which stipulates 45
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days time limit for making demand for appointment of Arbitrator in
respect of any claim from the date of intimation of final bill ready
for payment. It has further been informed that the claim of the
petitioner-company shall be deemed to have been waived and
absolutely barred and respondent would be treated to have been
discharged of all the liabilities as per the terms of stipulation
mentioned in the agreement. Accordingly, the demand for
appointment of Arbitrator is barred as final payment has been made
on 07.1.2012 and within 45 days thereafter no demand for
appointment of Arbitrator was made in respect of any claim and as
such, the claim does not carry any merit for consideration and
rejected. It has further been stated that interest on Security Deposit
is also absolutely illusionary and without any substance.
5. In such view of the matter, when the respondents have
failed to respond positively, the petitioner has filed the present
application claiming appointment of Arbitrator, in terms of Clause-
25 of the agreement, empowers the petitioner in case respondent
does not respond in positive mode within 30 days of the request of
the contractor, but before adjudicating this dispute, the Court will
be obliged to deal with objection raised by the respondent.
6. Before going to the merit of the case, it will be
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appropriate to quote Clause-25 of the Contract, which reads as
follows:-
"Settlement of Dispute & Arbitration.
Except where otherwise provided in the contract all
questions and disputes relating to the meaning of the
specifications, design, drawings and instructions
here-in-before mentioned and so to the quality of
workmanship of materials used on the work are as to
any other question, claim right matter or thing
whatsoever in any way arising out of or relating to
contract, designs, drawings, specifications,
estimates, instructions, orders or these conditions or
otherwise concerning the work or the execution or
failure to execute the same whether arising during
the progress of the work or after the cancellation,
termination, completion or abandonment thereof
shall be dealt with as mentioned hereinafter.
i) If the contractor considered any work demanded
of him to be outside the requirements of the contract,
or dispute any drawings, record or decision given in
writing by the authorized representative of the
Employer or any matter in connection with or
arising out of the contract or carrying out of the
contract or carrying out of the work, to be
unacceptable, he shall promptly within 7 days
request the Consultant in writing for written
instructions or decisions. There upon, the consultant
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shall give his written instructions or decisions within
a period of 30 days from the receipt of the contractor
letter.
If the consultant failed to give his instructions or
decisions in writing within the aforesaid period or if
the contractor is dissatisfied with the instruction or
decision of the consultant, the contractor may, within
15 days of the receipt of consultant‟s decision,
appeal to the Employer who shall afford an
opportunity to the contractor to be heard, of the
letter so desires, and to offer evidence in support of
his appeal. The Employer shall give his decision
within 30 days of receipt of contractor‟s appeal. If
the contractor is dissatisfied with this decision, the
contractor shall within a period of 30 days from
receipt of the decision, give notice to the Employer
for appointment of arbitrator failing which the said
decision be final binding and conclusive and not
referable to adjudication by the arbitrator.
ii) Except where the decision has become final,
binding and conclusive in terms of Sub Para (i)
above disputes or difference shall be referred for
adjudication through arbitrator appointed by
Employer. If the arbitrator so appointed is unable or
unwilling to act or resign his appointment or vacates
his office due to any reason whatsoever another sole
arbitrator shall be appointed in the manner
aforesaid. Such person shall be entitled to proceed
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with the reference from the stage at which it was left
by his predecessor.
It is a term of this contact that the party
invoking arbitration shall give a list of disputes with
amounts claimed in respect of each such dispute
along with the notice for appointment of arbitrator
and giving reference to the rejection by the Employer
of the approval.
It is also a term of this contract no person other
than a person appointed by such Employer or the
administrative head of the department appointed by
such Employer or the administrative head of the
department as aforesaid should act as arbitrator and
if for any reason that is not possible, the matter shall
not be referred to arbitrator at all.
It is also a term of this contract that if the
contractor does not make any demand for
appointment of arbitrator in respect of any claims in
writing as aforesaid within 45 days of receiving the
intimation from the Employer or his authorized
representative that the final bill is ready for payment,
the claim of the contractor shall be deemed to have
been waived and absolutely barred and the Employer
shall be discharged and released of all liabilities
under the contract in respect of these claims.
The arbitration shall be conducted in
accordance with the provisions of the Arbitration
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and Conciliation Act, 1996 (26 of 1996) or any
statutory modification or re-enactment thereof and
the rules made there under and for the time being in
force shall apply to the arbitration proceeding under
this clause.
It is also a term of the contract that if any
fees are payable to the arbitrator these shall be paid
equally by both the parties.
It is also a term of the contract that the
arbitrator shall be deemed to have entered on the
reference on the date he issues notice to both the
parties calling them to submit their statement of
claims and counter statement of claims. The venue of
the arbitration shall be such place as may be fixed by
the arbitrator in his sole discretion. The fees, if any,
of the arbitrator shall, if required to be paid before
the award is made and published, be paid half by
each of the parties. The cost of the reference and of
the award (including the fees, if any, or the
arbitrator) shall be in the discretion of the arbitrator
who may direct to any by whom and in what manner
such costs or any part thereof shall be paid and fix
or settle the amount of costs to be so paid.
All arbitration shall be held at PATNA and
at no other place."
7. Learned counsel for the petitioner submits that any
condition mentioned in the agreement, putting clause of time within
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which the party has to take remedy is void, further submitted that
any clause in the agreement, which postulates forfeiture of right is
also bad in law. It has been submitted that, any clause in the
agreement would not be able to extinguish the right and remedy of
petitioner before the period prescribed in statutory provision; to that
extent that clause is void in view of Section 28(1) (b) of the
Contract Act and would be treated to have been deleted.
8. Whereas, learned counsel for the respondents submits
that as all the liabilities arising from the terms of the contract have
been discharged as full and final payment has been made and
within 45 days of payment of final bill the petitioner has not sought
for appointment of Arbitrator, hence, it will be treated that all the
liabilities have been discharged or waived, in such circumstances, it
is no longer the matter to be referred for arbitration as it does not
remain arbitral issue.
9. The second issue is required to be decided as to
whether the right of adjudication by Arbitrator has extinguished on
account of expiry of specified period in terms of the agreement as
the claim for appointment of Arbitrator was not made within
prescribed time limit, so it will be deemed that the claim has been
discharged.
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10. In this case, it has to be decided whether the claim
arising from the agreement or whether the claim made by the
petitioner-Company for referring the dispute, has already
extinguished on account of discharge of the contract as the
petitioner-Company has received entire amount arising out of the
work contract without any objection.
11. The third issue has to be adjudicated regarding the
limit of adjudication by this Court while deciding the issue of
appointment of Arbitrator and referring the dispute to the Arbitrator
as well as the payment of amount by the respondents and received
by the petitioner without demur, will be treated that no longer
dispute exist for arbitration, in such view of the matter, the dispute
raised in the present case is no longer an arbitral issue.
12. The respondents have taken the plea that the right of
appointment of Arbitrator has extinguished on account of terms of
the agreement, which stipulates that if the contractor does not make
any demand for appointment of arbitrator in respect of any claim, in
writing, as aforesaid, within 45 days from the date of receiving the
intimation from the employer or his authorized representative that
final bill is ready for payment, the claim of the contractor shall be
deemed to have been waived and absolutely barred and the
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employer shall be discharged / released from all the liabilities under
the contract in respect of all the claims. So, the period of 45 days‟
time, within which, to make a claim for appointment of arbitrator,
in failure, the claim of the contractor will be deemed to have been
waived and absolutely barred, employer shall be treated to have
been discharged or released from all the liabilities under the
Contract.
13. To understand the different facets of provisions, this
Court will have to examine the different angles of provisions of
Section 28 of the Contract Act and its affect on contract, prior to its
amendment and post amendment. It has been claimed by the
petitioner-Company that prior to amendment of Section 28 of the
Contract Act, the clause in agreement stipulating extinguishment of
remedy has been held by the Hon‟ble Supreme Court to be void as
it operates against the provisions of Section 28 of the Contract Act,
which provides that any agreement, restricting absolutely from
enforcing his right under or in respect of any contract by usual legal
proceeding in the ordinary Tribunal or reducing the period of
limitation other than the limitation provided under the statute to that
extent is void, but there is no bar prohibiting the parties to enter
into an agreement relating to extinguishment of the right if it is
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claimed within period mentioned in the agreement. The
extinguishment of remedy is one thing and extinguishment of right
is another thing.
14. To understand this issue, it will be relevant to quote
Section 28 of the Contract Act, prior to its amendment:-
"28. Every agreement by which any party thereto
is restricted absolutely from enforcing his right
under or in receipt of any contract by the usual
legal proceedings in the ordinary tribunals or
which limits the time which he may thus enforce
the right is void to that extent."
15. This portion of Section is prior to amendment, which
is relevant to understand the ultimate effect of amendment. Prior to
amendment of Section 28 of the Contract Act can be dissected in
two parts; first part which prohibits the terms of agreement by
which party thereto is restricted absolutely from enforcing his right
under on receipt of any contract by usual proceeding in ordinary
Tribunal. Meaning thereby, there cannot be any restriction
absolutely from enforcing his right in respect of contract by usual
legal proceeding, the Tribunal created under the ordinary law.
Second restriction has been imposed that the parties to an
agreement are not allowed to substitute their own period of
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limitation in place of the period laid down in the General Law. But
the parties to an agreement are allowed to insert the clause in
agreement in the nature of prescription that is to say, they are free
to provide that if a party does not enforce his right within a
specified period, then the rights accruing under the contract shall be
forfeited or extinguished or that a party shall be discharged from all
liabilities under the Contract. In other words, a clause limiting the
time for enforcing a remedy has been prohibited, but a clause
limiting the duration upto which the rights remain alive, and
extinguishing those rights at the end of such period, is permissible.
In sense, an agreement which limits the party within which a party
to an agreement may enforce his right under any contract by a
proceeding in a Court of law is void to that extent. But the Section
does not invalidate any clause in the agreement in nature of
stipulating their own period of prescription that is to say, an
agreement which mentions that at the end of specified period, if the
rights thereunder are not enforced the right itself will cease to exist.
16. This issue came for consideration before the Hon‟ble
Supreme Court and different High Courts, in which the Court has
considered the stipulation which provides the period within which
the right is not claimed, will be treated to have been forfeited /
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extinguished or party would be treated to have been discharged
from all the liabilities under the contract.
17. The issue of extinguishment of right on account of the
provisions in the terms of agreement came for consideration before
the Bombay High court in the case of the New India Assurance
Co. Ltd. vs. Radheshyam Motilal Khandelwal, reported in AIR
1974 Bombay, 228. The aforesaid case is related to incorporation
of the terms of contract on insurance. There was clear condition
forfeiture of in case of fraudulent claim or failure to bring an action
within the stipulated period on repudiation of claim by the insurer.
It was held that condition mentions terms clause of policy in
question and was binding on parties. Further it was held that the
condition did not violate the provisions of Section 28 of the
Contract Act.
18. Similar issue came for consideration before the Kerala
High court in Kerala Electrical and Allied . vs Canara Bank And
Ors. reported in AIR 1980 Kerela 151 . In that case, a clause in the
bank guarantee provided that suit or action to enforce claim under
the guarantee was to be filled within six months from the date of
expiry of guarantee, is not sustainable but the condition in
agreement postulates the party will be forfeited or released if he
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does not assert his right within the time. The question arose
whether the clause was valid with reference to section 28 of the
Contract Act, the claim stipulating forfeiture of right has been held
to be valid and the court held that right of claimant and liability of
the bank will remain alive only for a period of six months after the
expiry of the period of duration of the guarantee and that right of
the person in whose favour the guarantee was executed were
extinguished on expiry of that period. In other words, there is an
extinction of the right of the plaintiff under the contract and
discharge of the defendants from liability. The Court held that time
limit imposed in contractual clause keeping right and liability alive
was not hit by Section 28 of the Contract Act, conclusion so
reached is of course is in harmony with the earlier decisions.
19. The same issue came for consideration before the
Hon‟ble supreme court in the case of Vulcan Insurance Co. Ltd vs.
Maharaj Singh & Another , reported in AIR 1976, page-287. In
that case, the Vulcan Insurance Company was engaged itself in the
general insurance business. After nationalization, it was named as
United India Fire and General Insurance Company Ltd. The
respondent-Maharaj Singh, the insurer, was carrying the business of
manufacturing Bone Manure etc. in his mills at Khatauli. He
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entered into an arrangement with respondent No. 2 for taking
advance of money on the security of the factory premises,
machineries and the stock of goods. A mortgage deed was executed
by him in favour of the respondent bank for that purpose. The Bank
insured the mortgage properties from time to time with the
appellant company under three insurance policies, the terms
governing the same being identical. A fire broken out in the factory
premises, caused a loss, informed the Insurance Company about the
fire, whereupon the representative of the Bank and the Insurance
Company and some surveyors visited the factory premises.
Respondent no. 1 claimed that due to fire he had suffered a loss on
account of damage to the fixed assets as well as to the stock of
goods. The amount of damage was assessed to the tune of Rs.
4,620/- The respondent No.1 wrote a letter dated 1.1.1963 as the
claim has been repudiate, under Clause-13 of the Insurance Policy,
a difference had arisen between the parties and hence respondent
no. 1 proposed to appoint a sole arbitrator to resolve the dispute and
if the company was not agreeable to the appointment of sole
arbitrator, he may be treated as a nominee of respondent no. 1. The
Insurance Company replied that as it had repudiated his claim the
arbitration clause in the policies was rendered inoperative and no
arbitration proceeding could be commenced by appointment of any
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arbitrator. An application under Section 20 of the Arbitration Act,
1940 was filed in the Civil Court, Muzaffarnagar (Uttar Pradesh).
The appellant took an objection to the jurisdiction of the Court to
entertain the application in view of special clause in the policies
excluding the jurisdiction of courts other than the court at Delhi.
The Muzaffarnagar Civil court allowed that objection and directed
the return of the application. The Delhi High Court dismissed the
application holding that the dispute arising out of the repudiation of
the liability under clause 13 by the Insurance Company was within
the scope of the arbitration agreement contained in clause 18 and a
reference to arbitration could be made, but, as per clause 19, the
petition was barred by limitation. The matter reached to the
Hon‟ble Supreme Court. Clause 19 of the agreement with the
Insurance Company provides that "in no case whatever shall the
company be liable for any loss or damage after the expiration of
twelve months from the happening of the loss or damage unless the
claim is the subject of pending action or arbitration."
20. This cause deals with the extinguishment of the right.
The Hon‟ble Supreme Court ultimately held that such clause 19
does not violate section 28 of the Contract Act. The clause of
Insurance Company provided that all the benefit under the
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Insurance Policy shall be forfeited if the claim was not brought
with specified period. The insertion of clause-19 has been held to
be valid.
21. It will be relevant to quote paragraph No.19 and 23 of
the said judgment, which read as follows:-
19. Following the decision of the House of Lords in
Jureidini's case (1915) AC 499 (supra) a Bench of the
Bombay High Court in the Eagle Star and British
Dominions Insurance Co. v. Dinanath, ILR 47 Bom 509 =
(AIR 1923 Bom 249) while interpreting an identical
Clause 13 said at p. 521 (of ILR) = (at p. 252 of AIR):
"But in clause 13 there are various contingencies set
out which is established entitle the insured to bring
an action without an award having been made by
arbitrators. One of these contingencies is "if the
claim be made and rejected" which if established
gives a right of action, the period of limitation
provided for the suit being filed at three months from
the date of the rejection. While it is also provided
that where arbitration takes place in pursuance of
condition 18 of the policy, three months' time should
be allowed for a suit to be brought after the award
has been made. Therefore it is quite obvious that a
right of action accrued after the company rejected
the claim. Naturally that question would have first to
be decided by suit as under clause 18 that question
could never have been referred to arbitration."
We approve the law so enunciated by the Bombay High
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Court.
23. We do not propose, as it is not necessary, to decide
whether the action commenced by respondent no. 1
under Section 20 of the Act for filing of the arbitration
agreement and for appointment of arbitrators was barred
under clause 19 of the policy. It has been repeatedly held
that such a clause is not hit by Section 28 of the Contract
Act and is valid; vide-The Baroda Spinning and Weaving
Company Limited v. The Satyanarayan Marine and Fire
Insurance Company Limited, ILR 39 Bom 344 = (AIR
1914 Bom 225 (2); Dawood Tar Mahomed Bros. v.
Queensland Insurance Co. Ltd., AIR 1949 Cal 390 and
The Ruby General Insurance Co. Ltd. v. The Bharat Bank
Ltd. AIR 1950 (East)Punj 352. Clause 19 has not
prescribed a period of 12 months for the filing of an
application under Section 20 of the Act. There was no
limitation prescribed for the filing of such an application
under the Indian Limitation Act, 1908 or the Limitation
Act, 1963. Article 181 of the former did not govern such
an application. The period of three years prescribed
in Article 137 of the Act of 1963 may be applicable to an
application under section 20. Nor are we concerned in
this case to decide whether the time taken by respondent
no. 1 in prosecuting his application in Muzaffarnagar
court could be excluded under section 14(2) of the
Limitation Act, 1963. Nor do we propose to decide
whether the application under section 20 could be
defeated on the ground of the extinction of the liability of
the company under clause 19. We may, however, observe
in passing that in view of the decision on this Court
in Wazirchand Mahajan and another v. Union of India,
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(1967) 1 SCR 303 at p. 308 = (AIR 1967 SC 990 at p.
993) if the difference which had arisen between the
parties was the one to which the arbitration clause
applied then the application under Section 20 of the Act
could not be dismissed on the ground that the claim
would not ultimately succeed either on facts or in law.
The matter will have to be left for the decision of the
arbitrator. Without any discussion we may just state that
the High Court is not right in its view that respondent no.
1's claim was not barred under clause 19 because of the
provision of law contained in Section 37(3) of the Act."
(Emphasis supplied)
22. The dispute of extinguishment of right in terms of the
agreement came for consideration before the Hon‟ble Supreme
Court in the case of East and West Steamship Co., Georgetown,
Madras, vs. S.K. Ramalingam Chettiar, reported in A.I.R. 1960,
S.C.C. 1058, there the ship was to bring consignments from Kerla,
destitution was fixed at Bombay port trust. The petitioner-company
took delivery of consignments and goods packed in bags, which
bore their distinctive and identifying marks, but were unable to
obtain delivery of 164 bags, out of the consignment sent by
consigner. In the agreement there was a clause that "in any event
the carrier and the ship shall be discharged from all liability in
respect of loss or damage unless suit is brought within one year
after the delivery of the goods or the date when the goods should
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have been delivered". One of the defence was taken that in terms of
the agreement which provides the limitation with respect to
extinction of right unless the suit is brought within the time
prescribed. The Court held that there is distinction between the
extinction of a right and the extinction of a remedy for the
enforcement of that right though fine distinction character, is of
greater importance. The Court has considered the discharge from
the liability and held that "ordinary grammatical sense of
"discharged from liability" does not connote "free from the remedy
as regards liability" but are more apt to mean a total extinction of
the liability following upon an extinction of the right." The Court
further held that it is difficult to draw a reasonable distinction
between the words "absolved from liability" and
"discharged from liability" and think that these words "discharged
from liability" were intended to mean and do mean that the liability
has totally disappeared and not only that the remedy as regards the
liability has disappeared".
23. It will be relevant to quote paragraph Nos. 25 and 31
of the said judgment, which read as follows:-
"25. On the next question whether this clause prescribes
only a rule of limitation or provides for the extinction of
a right to compensation, it will be observed that the
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Bombay High Court has not discussed it at all,
apparently because on the facts of the case before it
would have mattered little whether the provision was one
of limitation or of extinction of right. The question is
however of some importance in the facts of the Madras
case. For if the provision is one of limitation there would
be some scope for argument in the facts of that case that
the period was extended by acknowledgments of liability
within the meaning of Article 19 of the Limitation Act.
The question we have to decide is whether in saying that
the ship or the carrier will be "discharged from liability
", only the remedy of the shipper or the consignee was
being barred or the right was also being terminated. It is
useful to remember in this connection the international
character of these rules, as has been already emphasized
above. Rules of limitation are likely to vary from country
to country. Provisions for extension of periods
prescribed for limitation would similarly vary. We should
be slow therefore to put on the word " discharged from
liability" an interpretation which would produce results
varying in different countries and thus keeping the
position uncertain for both the shipper and the ship-
owner. Quite apart from this consideration, however, we
think that the ordinary grammatical sense of "discharged
from liability" does not connote "freed from the remedy
as regards liability " but are more apt to mean a total
extinction of the liability following upon an extinction of
the right. We find it difficult to draw any reasonable
distinction between the words "absolved from liability"
and " discharged from liability " and think that these
words " discharged from liability" were intended to mean
and do mean that the liability has totally disappeared
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and not only that the remedy as regards the liability has
disappeared. We are unable to agree with the learned
Judge of the Madras High Court that these words merely
mean that " that even though the right may inhere in the
person who is entitled to the benefits, still the liability in
the opposite party is discharged by the impossibility of
enforcement." The distinction between the extinction of a
right and the extinction of a remedy for the enforcement
of that right, though fine, is of great importance. The
Legislature could not but have been conscious of this
distinction when using the words "discharged from all
liability "in an article purporting to prescribe rights and
immunities of the ship-owners. The words are apt to
express an intention of total extinction of the liability and
should, especially in view of the international character
of the legislation, be construed in that sense. It is hardly
necessary to add that once the liability is extinguished
under this clause, there is no scope of any
acknowledgment of liability thereafter.
31. It cannot be seriously disputed that the stipulation
under consideration does directly offend against the
provisions of the 8th paragraph. For it seeks at least to
"lessen", otherwise than provided in the rules in the
Schedule the liability of the ship or carrier for loss or
damage to goods or in connection with goods caused by
the failure to deliver. This stipulation requiring claim for
compensation being made within one month from the
date of arrival of the ship is therefore null and void."
24. Similar issue came for consideration before the
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Hon‟ble Supreme Court in the case of National Insurance Co. Ltd.
vs. Sujir Ganesh Nayak & Co. and Another, reported in (1997) 4
S.C.C., 366. In that case, the Sujir Ganesh Nayak & Company was
carrying on business in import and export of cashew. The
respondent-company has taken insurance relating to riot and strike.
As there was a labour dispute, the strike was called by the worker,
physically obstructed the movement of goods, on that account the
respondent-Company sustained loss, which was refused by the
appellant-Insurance Company as condition No.19 of the Insurance
policy stipulates that "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". The plea was contested in view
of Section 28 of the Contract Act that the right to seek relief has
been shortened the time which was prescribed by the common law
and as such it would fall within the mischief of the provisions. The
Hon‟ble Supreme Court has considered the judgment of the Punjab
High Court, where it was held that "such a clause did not limit the
time within which the insured enforce his right, but only limits the
period during which the contract will remain alive". The Court after
considering the judgments passed in large number of cases held that
"an agreement which in effect seeks to curtail the period of
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limitation and prescribes a shorter period than that prescribed by
law would be void as offending Section 28 of the Contract Act, but
there could be an agreement which do not seek to curtail the time
for enforcement of the right, but which provide for forfeiture of the
waiver of the right itself. If no action is made within the period
stipulated by the agreement, such clause in the agreement would
not fall within the mischief of section 28 of the Contract Act". It
has further been held that curtailment of period of limitation to
approach the Court is not permissible, but the extinction of the right
itself unless exercised within the specified time limit is permissible,
in such situation, right cannot be enforced.
25. It will be relevant to quote paragraph Nos. 15 and 16
of the said judgment, which read as follows:-
"15. Sahai, J. who wrote a separate but concurring
judgment extracted the clause of the Fidelity Insurance
Guarantee (which we have extracted earlier) and then
posed the question 'what does it mean? What is the
impact of Section 28 of the Contract act on such clause?
Pointing out the said Section 28 was a departure from
the English law (there is no such statutory bar in
English law) the learned Judge observation that: (SCC
P. 330, para 3)
"Even though the phraseology of Section 28 is
explicit and strikes at the very root by declaring any
agreement curtailing the normal statutory period of
Patna High Court REQ. CASE No.8 of 2014 dt.16-11-2016
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limitation to be void the courts have been influenced
by the distinction drawn by English Courts in
extinction of right by agreement and curtailment of
limitation".
Referring to the language of the various terms of the
agreement, the learned judge holds in paragraph 8
thus: (SCC p.335)
"From the agreement it is clear that it does not
contain any clause which could be said to be
contrary to Section 28 of the Contract Act nor it
imposes any restriction to file a suit within six
months from the date of determination of the
contract as claimed by the company and held by
the High Court. What was agreed was that the
appellant would not have any right under this bond
after the expiry of six months from the date of the
termination of the contract. This cannot be
construed as curtailing the normal period of
limitation provided for filing of the suit. If it is
construed so it may run the risk of being violative
of Section 28 of the Contract Act. It only puts
embargo on the right of the appellant to make its
claim known not later of contract. It is in keeping
with the principle with has been explained in
English decisions and by our own court that the
insurance companies should not be kept in dark for
long and they must be apprised of their liabilities
immediately both for facility and certainty. The
High Court erroneously construed it as giving up
the right of enforceability of its claim after six
months."
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16. From the case-law referred to above the legal
position that emerges is that an agreement which in
effect seeks to curtail the period of limitation and
prescribes a shorter period than that prescribed by law
would be void as offending Section 28 of the Contract
Act. That is because such a an agreement would seek to
restrict the party from enforcing his right in Court after
the period prescribed under the agreement expires even
though the period prescribed by law for the enforcement
of his right has yet not expired. But there could be
agreements which do not seek to curtail the time for
enforcement of the right but which provide for the
forfeiture or waiver of the right itself if no action is
commenced with in the period stipulated by the
agreement. Such a clause in the agreement would not
fall within the mischief of section 28 of the Contract
Act. To put it differently, curtailment of the period of
limitation is not permissible in view of Section 28 but
extinction of the right itself unless exercised within a
specified time is permissible and can be enforced. If the
policy of insurance provides that if a claim is made and
rejected and no action is commenced within the time
stated in the policy, the benefits flowing from the policy
shall stand extinguished and any subsequent action
would be time barred. Such a clause would fall outside
the scope of Section 28 of the Contract Act. This, in
Brief, seems to be the settled legal position. We may
now apply it to the facts of this case."
26. Identical issue came for consideration before the
Hon‟ble Supreme Court in the case of Food Corporation of India
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vs. New India Assurance Co. Ltd. and Others., reported (1994) 3
S.C.C. 324, there also Section 28 of the Contract Act vis-a-vis the
terms of Contract providing the period for the existence of the right
for a particular period and subsequent to that lead to the forfeiture
or extinction of the right was under consideration. In this case, the
suit was filed after six months by the Public Sector Undertaking
against the Insurance Company for recovery of money. There was
an agreement between the appellant-Food Corporation of India and
the rice miller, giving guarantee honest accounting and refund of
money received by the supplier for supplying rice to the appellant-
Food Corporation of India. The Insurance Company has given
guarantee to indemnify for any loss directly from the Company.
There was a stipulation in the guarantee that in the guarantee
agreement that the appellant would lose all the claims as against the
Insurance Company if it was not claimed within six months from
the date of expiry of the contract of fidelity. The Court has
considered that there is distinction between extinguishment of right
and extinguishment of the remedy, fixing the shorter period for
remedy, i.e. approaching the Court of Law, violates the provisions
of Section 28 of the Contract Act, holding that Section 28 is
explicit and strikes at the very root by declaring any agreement
curtailing the normal statutory period of limitation to be void, but
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the provision stipulating for the extinction of right, there is no
violation of Section 28 of the Contract Act.
27. It will be relevant to quote paragraph Nos. 3, 8, 17 and
18 of the said judgment, which read as follows:-
"3. Both the courts below thus found as a fact that an
agreement was entered between the appellant and the
company on March 24, 1970 stipulating period of
guarantee from February 15, 1970 to February 15,
1971, that the default occurred on July 1, 1970, that the
demand was made on June 17, 1971 and the suit was
filed on January 20, 1973 but they differed as a matter
of law on the effect of Section 28 of the Contract Act on
such agreement. Section 28 is extracted below :
"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."
The section is a departure from English law as there is
no such statutory bar restraining parties from entering
into such agreement. In Rehmatunnisa Begum v. Price it
was observed as a general principle that, "no man can
exclude himself from the protection of the courts". The
rationale obviously is to ensure protection against fair
dealing even between unequal bargaining parties. The
intention and objective being clear the courts' primary
responsibility is to construe and interpret it in a manner
so as to advance the objective and protect the interest of
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the party who might be frustrated by too technical and
expensive approach in such matters. Further it is trite
saying that the courts should lean in favour of
construction which keeps the remedy alive, that is if two
constructions are possible then the one favouring
continuance of the suit is to be preferred than the one
barring the remedy. Even though the phraseology of
Section 28 is explicit and strikes at the very root by
declaring any agreement curtailing the normal statutory
period of limitation to be void the courts have been
influenced by the distinction drawn by English Courts in
extinction of right by agreement and curtailment of
limitation. For instance in Baroda Spg. and Wvg. Co.
Ltd. v. Satyanarayen Marine and Fire Insurance Co.
Ltd. the agreement providing, "if the claim to be made
and rejected, an action or suit be not commenced within
three months after such rejection ... all benefits under
the policy shall be forfeited" was construed as
extinguishing right and not the remedy. Reliance for
this was placed on numerous English decisions and the
Court was of opinion that, "what the plaintiff was
forbidden to do under the agreement was to limit the
time within which he was to enforce the right but what
he had actually done was to limit the time within which
he was to have any rights to enforce and that appears to
be very different thing". In Vulcan Insurance Co. v.
Maharaj Singh this Court, incidentally, in a different
context referred to the decision in Baroda Spg. and
observed that a clause like the one which provided that:
"In no case whatever shall the company be liable for
any loss or damage after the expiration of twelve
months from the happening of the loss or damage unless
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the claim is the subject of pending action or arbitration"
was not hit by Section 28 of the Contract Act. Similar
clause was considered in Pearl Insurance Co. v. Atma
Ram on which reliance was placed by the High Court.
Since the Bombay decision in Baroda Spg.2 has been
referred, even though incidentally in Vulcan Insurance
and it has been observed that clause like the one which
came up for consideration in that case was not hit
by Section 28 of the Contract Act the distinction drawn
by the Bombay High Court on strength of English
decisions between agreements giving up the right to
enforce and the one curtailing limitation may be
assumed to be valid. The occasion to draw such
distinction flows from the anxiety of the courts to
interfere as less as possible in agreements unless it is
unconscionable or against public policy etc. Where
statutory prohibition is placed on agreements and they
are declared to be void the provision has to be
construed strictly and applied restrictively confining to
only those situations which are squarely covered in it. It
is for this reason that any agreement which was not
specifically covered in Section 28 was not held to be
invalid. When this Court observed in Vulcan Insurance
that clause like 19, in that, case was not violative
of Section 28 it, obviously, meant that where filing of
suit within specified time agreed between parties is
made dependent on any consideration precedent then
such agreement would not be void. And probably,
rightly, as then it is not an agreement curtailing
limitation but providing for doing one or other thing
and filing the suit only after condition precedent was
complied. Some of such decisions which were relied by
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the High Court were Kasim Ali Bulbul v. New India
Assurance Co. Girdharilal Honuman Bux v. Eagle Star
and British Dominions Insurance Co. Ltd.; G. Rainey v.
Burma Fire and Marine Insurance Co. Ltd.; Pt. Prithvi
Nath Mulla v. Union of India and Ramji Karamsi v.
Unique Motor and General Insurance Co. Ltd. In all
these the filing of the suit within stipulated period was
dependent on rejection of claim. It could be validly said
that it was not violative of Section 28 of the Contract
Act as the agreement did not curtail limitation but
provided for that if the suit was not filed within the
stipulated period after rejection of clause the plaintiff
shall lose all rights or benefits. No further is necessary
to be said as it shall be explained later that it was not
necessary for the High Court to enter into this aspect at
all. As regards the decision in South British Fire &
Marine Insurance Co. of New Zealand v. Brajanath
Shaha on which reliance was placed by the High Court,
it itself observed that it was not very relevant as the
effect of Section 28 of the Contract Act on such
agreement was not expressly considered. Yet it placed
reliance on observations to the effect "it was considered
in argument that in England the agreement in clause
(18) would be perfectly valid; and it cannot, I think, be
contended that insurance companies in India have less
need than such companies in England of the protection
afforded by an agreement for the acceleration of legal
proceedings to be brought against them. That being so,
there is no less reason to suppose that the legislature
intended Section 28 to have far-reaching effect for
which the plaintiff contended". But what the High Court
lost sight of was that there was no provision like Section
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28 of the Contract Act in English law and, therefore,
any agreement curtailing the period of limitation than
that what was provided under the ordinary law was not
void. The various English decisions, adverted to by the
High Court, namely, Bank of England v. Vagliano
Brothers, Ford v. Baron, Thimbley v. Barton, Walker v.
Nevil therefore, do not appear to be appropriate for
deciding either the effect of Section 28 or for the
construction of the Fidelity Insurance Guarantee
clause. The High Court further placed reliance on the
following passage from Porter's Law of Insurance :
"In Porter's Law of Insurance (6th Edn.) page 195
it is stated that insurance may lawfully limit the
time within which an action may be brought to a
period less than that allowed by the statute of
limitation and that the true ground, on which the
clause limiting the time of claim rests and is
maintainable is that, by the contract of the parties
the right to indemnity in case of loss and the
liability of the Company therefor do not became
absolute, unless the remedy is sought within the
time fixed by the condition in the policy."
It is indeed doubtful if the time-limit for bringing an
action can be lawfully limited and brought to a period
less than that allowed by the Statute. By lawful limit the
author appeared to mean by a valid and legal
agreement. But no agreement could be entered against
statute. The statement was made in context of English
law and not Section 28 of the Contract Act. The only
extent to which it could be helpful could be in the sense
explained in various decisions. That is if curtailment of
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limitation is dependent on happening or otherwise of
some other agreement it may not be strictly in the
mischief of Section 28.
8. From the agreement it is clear that it does not
contain any clause which could be said to be contrary
to Section 28 of the Contract Act nor it imposes any
restriction to file a suit within six months from the date
of determination of the contract as claimed by the
company and held by the High Court. What was agreed
was that the appellant would not have any right under
this bond after the expiry of six months from the date of
the termination of the contract. This cannot be
construed as curtailing the normal period of limitation
provided for filing of the suit. If it is construed so it may
run the risk of being violative of Section 28 of the
Contract Act. It only puts embargo on the right of the
appellant to make its claim known not later than six
months from the date of termination of contract. It is in
keeping with the principle which has been explained in
English decisions and by our own court that the
insurance companies should not be kept in dark for long
and they must be apprised of their liabilities
immediately both for facility and certainty. The High
Court erroneously construed it as giving up the right of
enforceability of its claim after six months. Since the
period is provided under the agreement the appellant
had to move within this period asserting its right and
apprising the company of the breach or violation by the
miller to enable it either to pay or to persuade the
miller to pay itself. It does not directly or indirectly
curtail the period of limitation nor does it anywhere
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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.
17. Indisputably, under the material clauses of the
respective bonds (contracts) of Fidelity Insurance
Guarantee which we have reproduced earlier as
contained in a representative bond, the Insurance
Company concerned therein has in unequivocal terms
undertaken to make good the sum of money up to the
limit specified therein, when claimed by the
Corporation (appellant) as the loss suffered by it on
account of breaches committed by the rice miller
Patna High Court REQ. CASE No.8 of 2014 dt.16-11-2016
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concerned of the terms of the agreement entered into
with it. But that undertaking of the Insurance Company
to make good the sum of money claimed by the
Corporation is made, as seen from the said clauses,
subject to the restriction which reads :
"... 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."
18. Contract, the termination of which is envisaged in
the above restriction is the contract (agreement) which
had been entered into by the rice miller with the
Corporation cannot be disputed and in fact does not
appear to have been disputed, both in the trial court
and the High Court. Since the restriction says that the
Corporation shall have no rights under the bond after
the expiry of six months from the date of termination of
the contract, the rights of the Corporation under the
contract continue to exist for six months beyond the
period during which the contract could be in force
unless the dues of the Corporation under the contract
are paid or satisfied in the manner provided for in the
clauses of the bond itself, as could be seen therefrom.
Therefore, what is envisaged by the 'restriction' is that
the Corporation, if wants to exercise or enforce the
rights given to it under the Fidelity Insurance
Guarantee Bond, it could present before the Insurance
Company, the claim for its loss under the contract
entered into with the rice miller even up to the period of
six months from the date of termination of the contract
and not beyond. None of the clauses nor the restriction
Patna High Court REQ. CASE No.8 of 2014 dt.16-11-2016
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in the bond, to which we have adverted, require that a
suit or legal proceeding should be instituted by the
Corporation for enforcing its right under the bond
against the Insurance Company within a period of six
months from the date of termination of the contract.
Therefore, the restriction adverted to in the clauses of
the bond, envisages the need for the Corporation to
lodge a claim based on the bond, before the Insurance
Company within a period of six months from the date of
termination of the contract as becomes clear from the
express language of the clause in which that restriction
is imposed and the express language of the clauses
which have preceded it. In fact the period of limitation
for filing a suit or instituting a legal proceeding by the
Corporation for recovery of the claim made against the
Insurance Company could also be regarded as
commencing from the date when the Insurance
Company expressly refuses to honour the claim or from
a date when its conduct amounts to refusal to honour
the claim, in that, such default could also give rise to
the cause of action for the institution of the suit or legal
proceeding by the Corporation against the Insurance
Company. Hence, it would not be correct to say that
suits filed by the Corporation out of which the present
appeals arise were barred under the restriction
adverted to, in that, they were not filed within six
months envisaged in that restriction. From this, it
follows that the High Court was not right in holding
that the „restriction' in the clause of the bond did not
enable the Corporation to file its suit against the
Insurance Company for non-honouring of its claims,
after the lapse of the period of six months from the date
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of termination of the contract and consequently in
setting aside the decrees of the trial courts on that
account".
28. In the case of Himachal Pradesh State Forest
Company Limited vs. United India Insurance company Limited,
reported in (2009) 2 S.C.C. 252, the question of extinguishment of
right in terms of the agreement between the parties came for
consideration as in that case there was a insurance with respect to
the timber, but on account of heavy rains the insured timber was
washed away and the appellant-Forest Company Limited suffered a
loss. Claim was made to the Insurance Company, which was
repudiated. The Hon‟ble Supreme Court has considered the issue
fixing a period of limitation extinguishing the right unless suit or
complaint is filed within certain stipulated period which could be
less than that prescribed by the Limitation Act, which held not
violative of Section 28 of the Contract Act. The Court has
considered the large number of judgments and approved the
principle that the agreement fixing the period of existence of right
less than the period prescribed in the Limitation Act is a proper
agreement does not violate any provisions of law, in such a case,
the Court has considered the decision passed in Sujir Ganesh Nayak
Case (supra) and approved the proposition and quoted paragraph
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Nos. 15, 16, 19, 21 and 23 of the said judgment. In approval, the
Court has also considered the decision of Food Corporation of
India case (supra).
29. It will be relevant to quote paragraph No. 15 of the
said judgment, which reads as under:-
15. In Sujir Ganesh Nayak's case, this Court was called
upon to consider condition 19 of the policy which was in
the following terms :(S.C.C. p.370, para 5 )
"5. ...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."
While construing this provision vis-`a-vis Section 28 of
the Contract Act and the cases cited above and several
other cases, in addition, this is what the Court ultimately
concluded: (Sujir Ganesh Nayak case, S.C.C. pp.375-77,
paras 16, 19 and 21)
"16. From the case-law referred to above the legal
position that emerges is that an agreement which in
effect seeks to curtail the period of limitation and
prescribes a shorter period than that prescribed by
law would be void as offending Section 28 of the
Contract Act. That is because such an agreement
would seek to restrict the party from enforcing his
right in Court after the period prescribed under the
agreement expires even though the period
prescribed by law for the enforcement of his right
has yet not expired. But there could be agreements
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which do not seek to curtail the time for
enforcement of the right but which provide for the
forfeiture or waiver of the right itself if no action is
commenced within the period stipulated by the
agreement. Such a clause in the agreement would
not fall within the mischief of Section 28 of the
Contract Act. To put it differently, curtailment of the
period of limitation is not permissible in view
of Section 28 but extinction of the right itself unless
exercised within a specified time is permissible and
can be enforced. If the policy of insurance provides
that if a claim is made and rejected and no action is
commenced within the time stated in the policy, the
benefits flowing from the policy shall stand
extinguished and any subsequent action would be
time-barred. Such a clause would fall outside the
scope of Section 28 of the Contract Act. This, in
brief, seems to be the settled legal position. We may
now apply it to the facts of this case.
19. The clause before this Court in Food Corpn.
case extracted hereinbefore can instantly be
compared with the clause in the present case. The
contract in that case said that the right shall stand
extinguished after six months from the termination
of the contract. The clause was found valid because
it did not proceed to say that to keep the right alive
the suit was also required to be filed within six
months. Accordingly, it was interpreted to mean
that the right was required to be asserted during
that period by making a claim to the Insurance
Company. It was therefore held that the clause
extinguished the right itself and was therefore not
Patna High Court REQ. CASE No.8 of 2014 dt.16-11-2016
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hit by Section 28 of the Contract Act. Such clauses
are generally found in insurance contracts for the
reason that undue delay in preferring a claim may
open up possibilities of false claims which may be
difficult of verification with reasonable exactitude
since memories may have faded by then and even
ground situation may have changed. Lapse of time
in such cases may prove to be quite costly to the
insurer and therefore it would not be surprising that
the insurer would insist that if the claim is not made
within a stipulated period, the right itself would
stand extinguished. Such a clause would not be hit
by Section 28 of the Contract Act.
21. 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 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
Patna High Court REQ. CASE No.8 of 2014 dt.16-11-2016
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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 while interpreting a clause
couched in similar terms this Court said: (SCC p.
952, para 23)
"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."
In the light of the fact that Food Corpn. case has been
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considered in Sujir Nayak case, no further argument
remains in the present matter, as Clause 6(ii) and
Condition 19 are, in their essence, pari materia."
30. Same issue came for consideration before the Hon‟ble
Supreme Court in the case of Wild Life Institute of India,
Dehradun vs. Vijay Kumar Garg, reported in (1997) 10 S.C.C.
528. In that case, the Wild Life Institute of India entered into a
contract with private respondent for construction of building of
Dehradun on the terms of contract set out in the Contract.
According to the Wild Life Institute several extensions were
granted to complete the construction. Ultimately, the Contract was
terminated and payments were made. In that case as per the written
agreement claim was to be made within 90 days, otherwise claim of
the Contractor will be deemed to have been waived and absolutely
barred and the Wild Life Institute of India will be treated to have
been discharged and released from all the liabilities, has been held
to be a legal term of the agreement, does not violate the provisions
of law, which has been discussed in paragraph No.6 of the said
judgment. It will be useful to quote paragraph No.6 of the said
judgment, which reads as under:-
"6. It is also necessary to refer to the arbitration clause
under the contract which clearly provides that if the
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contractor does not make any demand for arbitration in
respect of any claim in writing within 90 days of
receiving the intimation from the appellants that the bill
is ready for payment, the claim of the contractor will be
deemed to have been waived and absolutely barred and
the appellants shall be discharged and released of all
liabilities under the contract in respect of these claims.
The liability, therefore, of the appellants ceases if no
claim of the contractor is received within 90 days of
receipt by the contractor of an intimation that the bill is
ready for payment. This clause operates to discharge
the liability of the appellants on expiry of 90 days as set
out therein and is not merely a clause providing a
period of limitation. In the present case, the contractor
has not made any claim within 90 days of even receipt
of the amount under the final bill. The dispute has been
raised for the first time by the contractor 10 months
after the receipt of the amount under the final bill."
31. The Law Commission of India was constituted to
examine the justification of clause stipulated in the agreement,
extinguishing the right less then the period stipulating in common
law. The Law Commission considered the formulation of provision
of Section 28 of the Contract Act and its fall out on the general
public, who generally enter into an agreement especially with
respect to the insurance matter, was found are at the receiving end.
Looking to the financial capacity of insurance company vis-à-vis
the general public and on account of the high bargaining power of
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the Insurance Company they though had no alternative but to
accept the conditions provided in the Contract. The Law
Commission found itself in anomalous situation that prevail under
the present law in regard to prescription clause in contract
extinguishing right under the contract on expiry of specified period.
The point of consideration, an agreement which limits time within
which a party to an agreement may enforce his right under any
contract by proceeding 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 specified period, if the right thereunder is not enforced, the
right shall cease to exist. The Law Commission of India has
considered the judgment of the Bombay, Kerla and Pubjab High
Courts and the Hon‟ble Supreme Court. The Law Commission has
posed a question whether in the present position requires reform in
the interest of justice in connection with Section 28 of the Contract
Act. The Law Commission in paragraph No.3.2 has taken the
following view:-
"3.2. ...But we are not impressed by this argument. The
barring of remedy affects only the adjective part of the
legal system, while extinction of the right may cause
serious hardship and injustice. It is difficult to
understand why the parties should be allowed to invent
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their own rules of prescription, when they are not
allowed to invent something lesser - their own rules of
limitation. This position is prima facie illogical, and we
have not been able to thing of any countervailing or
overriding consideration that may justify the
illogicality."
32. In paragraph Nos. 3.7, 5.1, 5.2 and 5.3 the Law
Commission has taken the views in the following terms:-
"3.7. A revision of the law, by invalidating even
prescriptive contractual clauses, is not only required on
the merits (for the reasons mentioned above), but will
also make the law simplier. At present, in every case, a
subtle distinction has to be applied as to whether a
clause merely bars a remedy or extinguishes the right.
The decision hangs on a fine distinction that is not easy
of application, creating uncertainty in the minds of
parties for a conflict of approach in actual cases in
courts. For example, it has been held that a condition in
a life insurance policy that no suit shall be brought on
the policy after one year from the death of the insured is
void. But a condition in a fire insurance policy that the
company shall not be liable for loss or damage after the
expiry of twelve months from the happening of the loss
or damage, unless the claim was the subject of a
pending action of arbitration, does not contravene
section 28.
5.1. We now come to the changes that are needed in the
present law. In our opinion, the present legal position
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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 from 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 proceeding 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, in harms the interest of the
consumer, dealing with big corporations.
(c) It is illogical, being based on a distinction
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which treats the more sever 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,
who do not know with certainly 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 render
invalid contractual clauses which purport to extinguish,
on the expiry of a specified terms, rights 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 right of any party
thereto under or in respect of any contract on
the expiry of a specified period or on failure to
make a claim or to institute a suit or other legal
proceeding within a specified period , or
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(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."
33. The Parliament of India on the basis of the
recommendation of the Law Commission of India has amended the
provisions of Section 28 of the Contract Act and declared that any
condition reducing the period with respect to extinguishment of
right or discharging the party from liability apart from the common
law has been declared void to that extent.
34. It will be relevant to quote the amended provisions of
Section 28 of the Contract Act.
"28. Agreements in restraint of legal proceedings,
void:-
(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 he may thus enforce his
rights‟ or
(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, is void to that
extent."
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35. All the judgments, as stated hereinabove, were decided
by the Hon‟ble Supreme Court and the different High Courts prior
to the amendment in Section 28 of the Contract Act, but after the
amendment the matter again came for considerations before the
different High Courts.
36. In Delhi High Court the issue came for consideration
in the case of D. Pal & Co. vs. M.C.D., I.L.R. (2007) Supp (6)
Delhi 75. In that case, amended provisions of Section 28 of the
Contract Act came for consideration and Delhi High Court has held
that there is an agreement between the parties to the effect that if
the Contractor does not make any demand for appointment of
arbitrator in respect of any claim, in writing, as aforesaid, within 90
days of receiving the initiation that final bill is ready for payment,
the claim of the contractor shall be deemed to be waived and
absolutely barred, ignoring such clause in view of Section 28 of the
Arbitration Act appointed the arbitrator and referred the matter for
consideration.
37. The Delhi High Court further held that Section 28(b)
of the Contract Act declared that every agreement which discharges
a party from any liability or extinguishes right of any party by
prescribing in a contract a specific restrictive period for enforcing
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the right shall be void. In view of Section 28(a) of the Contract Act
by an agreement, parties cannot prescribe a shorter period of
limitation than the one prescribed by the law to seek remedy in the
Court of Law. Period of limitation prescribed by the statute cannot
be reduced and restricted by an agreement. Similarly, in view of
section 28(b) of the Contract Act, identical ratio will equally apply
and there cannot be an agreement providing for release or forfeiture
of right prescribing the shorter period than the period prescribed
under the Limitation Act or under any Statute.
38. It will be relevant to quote paragraph No.11 and 12 of
the said judgment, which read as under:-
"11. The aforesaid observations of the Supreme Court
in National Insurance and Company Ltd. (Supra) have
now to be read and understood in light of Section 28(b)
of the Contract Act. Section 28(b) of the Contract Act
declares that every agreement which discharges a party
from any liability or extinguishes right of any party by
prescribing in a contract a specified restrictive period
for enforcing rights shall be void. Thus in view of
Section 28(a) of the Contract Act 1872, by an
agreement, parties cannot prescribe a shorter period of
limitation than the one prescribed by law. Period of
limitation prescribed by the statute cannot be reduced
and restricted by an agreement. Similarly, in view of
Section 28(b) of the Contract Act, 1872, the said ration
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will equally apply where an agreement provides for
release or forfeiture of rights by prescribing a shorter
period than the period prescribed under the Limitation
Act, 1963 or under any statute. By a contract, the
statutory period for making a claim cannot now be
reduced by prescribing forfeiture or discharge, if a
claim is not made within a specified time. By the
aforesaid amendment, prescriptive clauses which
extinguish or provide for forfeiture of rights or
discharge of liability for failure by a party to sue within
a prescribed time, have been held to be void. The
aforesaid amendment has been considered by this court
in Expore Computers Pvt. Ltd. Vs. Cals Ltd. and Anr.
MANU/DE/2914/2006:131 (2006) DLT 477, M/s
Naresh Kumar Gupta Vs.The Vice Chairman/Engineer
Member D.D.A and Ors. 2000 II AD (Del) 628 and J.K.
Anand vs. Delhi Development Authority and Anr.
MANU/DE/0555/2001 : 2001 (2) Arb. LR 663 (Delhi)
and has been interpreted in the manner stated above.
12. In the case of Expllore Computers Pvt. Ltd.
(Supra), it has been held that:-
"On a conspectus of the aforesaid judgments, two
aspects have to be noted. The first is that it is the
terms of the bank guarantee which have to be
given due weight and the second is the distinction
which is sought to be carved out in National
Insurance Company case (supra) between a clause
curtailing the period of limitation being void under
Section 28 of the Contract Act and a clause which
provides for a forfeiture or waiver of a right if no
action is commenced within the period stipulated
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by the agreement. Insofar as the second aspect is
concerned, it cannot be lost sight of that the
judgment in National Insurance Company case
(supra) was delivered on 23.3.1997 and thus
related to the provisions of Section 28 as it stood
prior to the amendment because that was the
substantive law in force at the time when the cause
of action had arisen. The amendment to Section 28
was made with effect from 8.1.1997 and it is not
disputed that the cause of action in respect of the
subject matter in the present suit arose after the
amendment. Sub-clause (b) of the amended Section
28 deals with the clauses which extinguish the
rights of any party thereto or discharge any party
from any liability begin void under the said
Section. Thus the scope of Section 28 has been
widened whereby Clause (a) deals with the
position prior to the amendment alone and Clause
(b)is in addition."
39. Again the matter came for consideration in the case of
JSW Steel Ltd. vs. AI Ghurir Iron and Steel LLC, reported in
2015(2) Arb. L.R. 373 (Bombay) and the same issue has been dealt
with in paragraph No.17 and 25 of the said judgment, there also the
Court has taken into consideration the effect of the amendment in
section 28 of the Contract Act and the Court has in paragraph
No.25 has declared that the contract to extent limiting shorter
period with respect to discharge from liability and extinguishment
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of right will be void in view of section 28 and the award was held
to be valid.
40. It will be relevant to quote paragraph Nos. 18, 19, 20,
24 and 25 of the said judgment, which read as under:-
"18. The learned arbitrators have considered the
parameters of Section 28. A reading of the section
becomes material as the learned arbitrators must be
seen to have passed an award in accordance with law.
Section 28, as it initially stood, consisted of only the
first part of the aforesaid section which is now shown to
be Section 28(a). That part dealt with contracts which
restricted absolutely a party enforcing any right in any
legal proceeding or which limited the time to enforce
such right. The first part of the section dealt with such
contracts which did not allow one party to at all sue. If
the restriction was absolute the contract would be void.
Certain contracts only conferred a time less than time
which would otherwise be available under the
Limitation Act, 1963 to a party to sue. Such contracts
which limited the time to enforce the rights were also
void to the extent of such limitation. If the contract,
therefore, provided that no claim could be made (in a
court of law or in any alternate forum such an
arbitration) after 30 days from a given date when the
law of limitation would allow 3 years within which a
party can sue, the contract would be void to the extent
of the provision of the period of 30 days. The remainder
of the contract would, of course, be effectuated.
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19. The legislature amended the section by the addition
of clause (b) to Section 28. This amendment was made
for specific reasons. The reasons have been set out in
the Statement of objects and Reasons (SOR) of the
gazetted amendment. The SOR has been shown to court
by Mr. Seervai upon the argument of law requiring the
court to consider whether clause such as Clause 4.2(b)
could be considered void under Section 28(b). It would
be material to see the SOR to understand the legal
position which prevailed by the judge made law prior to
the amendment and for which the legislature considered
it necessary to amend the law. The SOR runs thus:-
"Statement of Objects and Reasons-
1. 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
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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."
20. This would show that there was an anomalous
situation created upon the interpretation of Section 28
as it then prevailed. That was under Section 28(a) cited
above. The SOR states that it has been held by the
courts that the unamended Section 28 would invalidate
only a clause which would restrict the party from
absolutely enforcing its rights or from limiting the time
to sue. The SOR further states that the courts have held
that this section would not come into operation when
any contractual term sets out the extinction of the right
to sue or discharges a party from the liability when
sued. The legislature considered that, therefore, even
when a remedy was relinquished, the agreement would
be hit by Section 28. This would be on the basis of
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reasonableness of agreements. However, the
legislature thought that though this would be sound in
theory, it caused serious hardship to parties and could
be abused specially if they were consumers dealing with
large corporations. The legislature, therefore, did the
act of power balancing. The law came to be amended.
The amended law, therefore, caused all contracts where
the remedy was relinquished as also where the right to
sue was extinguished or a discharge was claimed. All
the aforesaid 3 types of agreements would be void and,
therefore, unenforceable under the amended law. Mr.
Seervai would argue that the learned arbitrators held
that consequently Clause 4.2(b) is void as falling within
the mischief of Section 28(b) of the Contract Act.
24. In fact, it may be seen that the right of
examination of the goods and the consequent right of
rejection of the goods which are two statutory rights of
the respondent as they buyer would be defeated because
the respondent would not have reasonable opportunity
of examining the goods and a reasonable time to reject
the goods outside the period of 30 days specified in
Clause 4.2(b) of the contract. Such an agreement would
be void under Section 23 of the Contract Act because if
permitted it would defeat the provisions contained in
Section 41 and 42 of the Sale of Goods Act.
25. It is, therefore, clear that such a contract would be
void under Section 28. The arbitrators have so held.
The award is, therefore, in accordance with law as seen
from the statute."
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41. The Delhi High court in the case of Chander Kant and
Co. vs. The Vice Chairman, D.D.A. and Ors.
MANU/DE/2221/2009, considered the effect of amendment in
Section 28 of the Contract Act. In the aforesaid case, there was a
provision stipulating 90 days for raising the claim, otherwise, it will
be deemed to have been waived and absolutely barred and the
authority shall be treated to have been discharged from all the
liabilities under the Contract in respect of all claims. The Court has
held that the effect of amendment in Section 28 of the Contract Act
will be that any clause extinguishing the right of any party thereto,
or discharge of any party from any liability under or in respect of
any contract on the expiry of a specified period less than the period
prescribed in the limitation Act so as to restrict the time period is
void.
42. It will be relevant to quote paragraph No.8 and 9 of the
said judgment, which reads as under:-
"8. The 1997 Amendment to the Section now also
prohibits clauses which seek to extinguish the rights of
any party thereto, or discharge any party 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. The amendment gave effect to
the 97th report of the Law Commission of India. The
effect of the amended Section 28 was considered by the
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learned single judges of this Court in Hindustan
Construction Company Vs. DDA; Kalyan Chand Goyal
Vs. Delhi Development Authority (supra); J.K. Anand
Vs. DDA & Anr.; MANU/DE/0555/2001: 2001(59) DRJ
380 and Union of India Vs. Simplex Concrete Piles
India (P) Ltd.;MANU/DE/1119/2003; 2003 (3) Arb. LR
536 (Delhi) in which similar causes were held to be not
valid in view of the amended provisions of Section
28 (b) of the Contract Act. In Explore Computers Pvt.
Ltd. Vs. Cals Ltd. & Anr. (supra), Sanjay Kishan Kaul,
J considered the decision of Supreme Court in National
Insurance Co. Ltd. Vs. Sujir Ganesh Nayak & Co.
(supra) and other decisions and held as follows :-
"48. The effect of the amendment of Section
28 thus made it clear that any clause extinguishing
the right of a party or discharging any party from
the liability in respect of any contract on expiry of
specific period so as to restrict the time period
would be void.
53. On a conspectus of the aforesaid judgments,
two aspects have to be noted. The first is that it is
the terms of the bank guarantee which have to be
given due weight and the second is the distinction
which is sought to be carved out in National
Insurance Company Ltd. Case between a clause
curtailing the period of limitation being void
under Section 28 of the Contract Act and a clause
which provides for forfeiture or waiver of a right if
no action is commenced within the period
stipulated by the agreement. Insofar as the second
aspect is concerned, it cannot be lost sight of that
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the judgment in National Insurance Company Ltd.
Case was delivered on 23.3.1997 and thus related
to the provisions of Section 28 as it stood prior to
the amendment because that was the substantive
law in force at the time when the cause of action
had arisen. The amendment to Section 28 was
made with effect from 8.1.1997 and it is not
disputed that the cause of action in respect of the
subject matter in the present suit arose after the
amendment. Sub-clause (b) of the amended Section
28 deals with the clauses which extinguish the
rights of any party thereto or discharge any party
from any liability being void under the said
section. Thus, the scope of Section 28 has been
widened whereby clause (a) deals with the position
prior to the amendment alone and clause (b) is in
addition.
54. In view of the amended section coming into
force, the distinction sought to be carved out
earlier by the legal pronouncements would not
hold good.
55. In my considered view it is not open for
defendant no.2 to contend that if any suit or claim
is not filed within one month of the expiry of the
bank guarantee, the right of the plaintiff to
institute any legal proceedings itself is
extinguished. Such a plea would fly in the face of
the amended Section 28 as defendant no.2 cannot
be discharged from the liability nor can the rights
of the plaintiff be extinguished by inclusion of the
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clause providing so. I am thus of the considered
view that to the extent there is restriction on any
suit or claim being filed by the plaintiff beyond a
period of one month from the expiry of the bank
guarantee, the said clause would not prohibit the
plaintiff from instituting the suit as it would be
barred by the provisions of the amended Section
28 of the Contract Act."
9. We are in respectful agreement with the view taken
by the learned Judge. In our opinion, in view of the
amendment, the distinction which was drawn earlier
has been obliterated and the clauses providing for
extinction or discharge of the rights of the parties on the
expiry of the specified period are also covered by
inserting Clause (b) in Section 28 of the Contract Act."
43. In the Madras High Court again identical issue came
for consideration in the case of the Oriental Insurance Company
Limited vs. Karur Vysya Bank Limited, reported in AIR 2001
Mad.489. In the aforesaid case, the Court has considered the effect
of amendment in Section 28 of the Contract act and held that
"however, the law as it now stands after this amendment not only
the curtailment of limitation period is impermissible, but also the
extinction of right, if sought to be brought by the agreement within
a specified period, which period is less than the period of limitation
prescribed for the suit under the contract in question is also
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rendered void".
44. In the Karnataka High Court same issue came for
consideration in the case of Central Ware Housing Corporation vs.
Ravi Constructions, (AIR 2013 Kant 18), there the question was
raised with respect to referring the matter to the arbitrator. In the
aforesaid case, there was a clause which stipulates that if the
respondent-company does not invoke arbitration clause within 90
days from the date of stipulated therein, claim was deemed to have
been waived and barred as per Clause-25 of the Contract. The High
Court has also considered the effect of amendment and held that the
agreement which restricts the period of limitation within which
claims could be referred, as also agreements which extinguish the
right of a party to prefer a claim or discharges any party from any
liability under a contract on expiry of a specified period, are void to
the aforesaid extent. Lastly, it has been held that in view of the
amendment to Section 28 of the Contract Act Clause 25 of the
Contract which seeks to extinguish the right to claim on expiry of
the specified period, less then the period provided under the
Common Law, offends Section 28(b) of the Contract Act and hence
the same is void.
45. It will be relevant to quote paragraph Nos.5 and 6 of
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the said judgment, which read as under:-
"5. Before the amendment of Section 28 in 1997, the
agreements reducing the period of limitation were
distinguished from those which did not limit the time
within which a party might enforce his rights, but which
provided for a release or forfeiture of rights, if no suit
was brought within the period stipulated in the
agreement; and the latter class of agreements, being
outside the scope of the section, were held to be binding
between the parties. Thus, in National Insurance Co.
Ltd. v. Sujir Ganesh Nayak & Co.
(MANU/SC/0491/1997 : AIR 1997 SC 2049), the
Supreme Court drew a clear distinction between an
agreement which curtails the period of limitation and
an agreement which provides for forfeiture or waiver of
the right itself, if no action is commenced within the
period stipulated by the agreement. The first was held to
be void as offending Section 28 but the later was held
not falling within the mischief of Section 28. It was,
thus, held that curtailment of the period of limitation
was not permissible in view of Section 28 but extinction
of the right itself, unless exercised within the specified
time, was permissible and can be enforced.
6. After the 1997 amendment to Section 28 of the Indian
Contract Act, 1872, not only the curtailment of the
period of limitation is void, but also the extinction of
right, if sought to be brought by the agreement within a
specific period, which period is less than the period of
limitation prescribed for the suit under the Contract in
question, is also rendered void. In other words, after the
amendment to Section 28 of the Indian Contract Act,
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1872 by Act 1 of 1997, the distinction between
curtailing of the period of limitation and extinction of
the right itself, after the specified period, no longer
exists."
46. In view of the aforesaid provisions, the amendment
made in Section 28 of the Contract Act specifically states that the
period other than the prescribed in the Limitation Act or any other
Statutory provisions, within which the claim has to be made,
otherwise it will be treated to have been extinguished, waived and
partly relieved from all liabilities, has been declared to be void in
view of Section 28 (i)(b) the Contract Act.
47. In the present case, an agreement has been reached
between the parties, which stipulates that if the contractor does not
make any demand for appointment of arbitrator in respect of any
claim in writing, as aforesaid, within 45 days from receiving the
intimation from the employer or his authorized representative that
final bill is ready for payment, the claim of the contractor shall be
deemed to have been waived and absolutely barred and the
employer shall be discharged or released from all the liabilities
under the Contract in respect of his claims, is declared to be void on
account of the amendment in Section 28(i)(b) of the Contract Act
and it should be ignored to be a part of the agreement as the period
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which has been provided has been reduced than the period
stipulated in the Limitation Act. In such circumstances, ignoring
this provision, this Court holds that parties who have a dispute have
a right to get adjudication of the said dispute through an arbitrator.
In the present case the Chankya National Law University did not
respond by appointing the arbitrator. Hence, this Court in exercise
of power under Section 11(6) of this Arbitration Act has power and
jurisdiction for appointment of Arbitrator to adjudicate the dispute
involved in the present case.
48. The second point has been raised by the respondents
that as the final payment has been received by the petitioner-
company without demur will be treated that all the liabilities have
been discharged and no contract between the parties subsists and it
is no longer remain an arbitral issue and does not require to appoint
an arbitrator for adjudication of the dispute.
49. It will be proper to examine the facts at hand, under
what limit this Court will have to exercise its own jurisdiction to
entertain the request for appointment of arbitrator vis-à-vis the
objection raised by the respondents taking a plea that in view of
acceptance of final bill, it is no longer an arbitral dispute for
reference.
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50. This aspect has been dealt with by the Constitution
Bench of the Hon‟ble Supreme Court in the case of S.B.P. & Co.
vs. Patel Engineering Ltd. and Another, reported in (2005) 8
S.C.C. page 618, there the Hon‟ble Supreme Court has considered
the circumstances where the Court has to form an opinion before
passing the order in reference considering the situation. There have
been some cases where the appointment of an arbitrator has been
sought, after the parties had settled the dispute and the party
concerned had certified that he had no further claims against the
other contracting party. In other words, there have been occasions
when dead claims are sought to be resurrected and there have been
cases where assertions are made of the existence of arbitration
agreements when, in fact, such existence is strongly disputed by the
other side, who appears on issuance of notice. The controversies are
also raised as to whether the claim that is sought to be put forward
comes within the purview of the arbitration clause. The Chief
Justice or his designate has necessarily to apply his mind to these
aspects before coming to conclusion, one way or the other and
before proceeding to appoint an arbitrator or declining to appoint an
arbitrator. The Court has also directed that the Chief Justice or his
designate has to examine as to whether there is an arbitration
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agreement, as defined in the Act and whether the person who has
made the request before him, is a party to such an agreement. It is
further held that it is necessary to indicate that he can also decide
the question whether the claim was a dead one; or a long-barred
claim that was sought to be resurrected and whether the parties
have concluded the transaction by recording satisfaction of their
mutual rights and obligations or by receiving the final payment
without objection. It may not be possible at that stage, to decide
whether a live claim made, is one which comes within the purview
of the arbitration clause. It will be proper to leave that question to
be decided by Arbitral Tribunal on taking evidence, along with the
merits of the claims involved in the arbitration.
51. It will be relevant to quote paragraph Nos. 36, 37, 39,
47 of the Patel Engineering Case (supra):-
"36. Going by the above test it is seen that at least in
the matter of deciding his own jurisdiction and in the
matter of deciding on the existence of an arbitration
agreement, the Chief Justice when confronted with two
points of view presented by the rival parties, is called
upon to decide between them and the decision vitally
affects the rights of the parties in that, either the claim
for appointing an Arbitral Tribunal leading to an award
is denied to a party or the claim to have an arbitration
proceeding set in motion for entertaining a claim is
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facilitated by the Chief Justice. In this context, it is not
possible to say that the Chief Justice is merely
exercising an administrative function when called upon
to appoint an arbitrator and that he need not even issue
notice to opposite side before appointing an arbitrator.
37. ...There have been cases where the appointment of
an arbitrator has been sought, after the parties had
settled the accounts and the concerned party had
certified that he had no further claims against the other
contracting party. In other words, there have been
occasions when dead claims are sought to be
resurrected. There have been cases where assertions
are made of the existence of arbitration agreements
when, in fact, such existence is strongly disputed by the
other side who appears on issuance of notice.
Controversies are also raised as to whether the claim
that is sought to be put forward comes within the
purview of the concerned arbitration clause at all. The
Chief Justice has necessarily to apply his mind to these
aspects before coming to a conclusion one way or the
other and before proceeding to appoint an arbitrator or
declining to appoint an arbitrator. Obviously, this is an
adjudicatory process. An opportunity of hearing to both
parties is a must....
39. It is necessary to define what exactly the Chief
Justice, approached with an application under Section
11 of the Act, is to decide at that stage. Obviously, he
has to decide his own jurisdiction in the sense whether
the party making the motion has approached the right
High Court. He has to decide whether there is an
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arbitration agreement, as defined in the Act and
whether the person who has made the request before
him, is a party to such an agreement. It is necessary to
indicate that he can also decide the question whether
the claim was a dead one; or a long-barred claim that
was sought to be resurrected and whether the parties
have concluded the transaction by recording
satisfaction of their mutual rights and obligations or by
receiving the final payment without objection. It may
not be possible at that stage, to decide whether a live
claim made, is one which comes within the purview of
the arbitration clause. It will be appropriate to leave
that question to be decided by the arbitral tribunal on
taking evidence, along with the merits of the claims
involved in the arbitration. The Chief Justice has to
decide whether the applicant has satisfied the
conditions for appointing an arbitrator under Section
11(6) of the Act. For the purpose of taking a decision on
these aspects, the Chief Justice can either proceed on
the basis of affidavits and the documents produced or
take such evidence or get such evidence recorded, as
may be necessary. We think that adoption of this
procedure in the context of the Act would best serve the
purpose sought to be achieved by the Act of expediting
the process of arbitration, without too many approaches
to the court at various stages of the proceedings before
the Arbitral Tribunal.
47....(iv)The Chief Justice or the designated judge will
have the right to decide the preliminary aspects as
indicated in the earlier part of this judgment. These will
be his own jurisdiction to entertain the request, the
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existence of a valid arbitration agreement, the existence
or otherwise of a live claim, the existence of the
condition for the exercise of his power and on the
qualifications of the arbitrator or arbitrators. The Chief
Justice or the judge designated would be entitled to seek
the opinion of an institution in the matter of nominating
an arbitrator qualified in terms of Section 11(8) of the
Act if the need arises but the order appointing the
arbitrator could only be that of the Chief Justice or the
designated judge..."
52. In the case of Ambica Construction vs. Union of
India, reported in (2006) 13, S.C.C., page- 475, there the dispute
was that the Railway has issued a tender for new works, additions,
alterations, repair and maintenance. The appellant-Company
submitted its tender, which was accepted and work Orders were
issued accordingly and Contract was executed between the parties.
As the appellant- Company could not complete the work within the
time framed, made a prayer for extension of time, but his request
was turned down and certain deductions were made from the
running bill submitted by the appellant-Company. As per the claim
of appellant-Company, the Railway administration refused to
refund even the security deposit unless the appellant submitted a
no-claim certificate in terms of Clause 43(2) of the General
Conditions of Contract. The appellant-company called upon to
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appoint an arbitrator. In view of failure to give proper response
filed an application under Section 11 of the Arbitration Act before
the High Court of Calcutta. Accordingly, the arbitrator was
appointed, who passed an award with cost to the appellant. Feeling
aggrieved, challenged the award before the learned Single Bench of
the Calcutta High Court. The High Court set aside the award and
appointed a new arbitrator. Plea was taken that in view of the
submissions of no claim certificate in terms of Clause 43(2) of the
General Conditions of Contract the dispute have been settled and it
is no longer an arbitral issue. The appellant-Company pleaded that
that the Railway administration has obtained no objection
certificate under coercion and duress. The Hon‟ble Supreme Court
has taken into consideration the age-old maxim necessitas non
habet legem which means, necessity knows no law. In paragraph
No.18 of the said judgment, the Hon‟ble Supreme Court has held
that it is apparent that unless a discharge certificate is given in
advance, payment of bills are generally delayed. Although, Clause
43(2) has been included in the General Conditions of Contract, the
same is meant to be a safeguard as against frivolous claims after
final measurement. Having regard to the decision in Reshmi
Constructions 2004(2) S.C.C.663, it can no longer be said that such
a clause in the contract would be an absolute bar to a contractor
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raising claims which are genuine, even after the submission of such
no-claim certificate.
53. It will be relevant to quote paragraph Nos. 13, 14 and
18 of the said judgment, which read as under:-
"13. Mr.Mehta also urged that wrong reliance had been
placed by the Division Bench on the decision of this
Court in the case of P.K. Ramaiah and Co. vs.
Chairman & MD, National Thermal Power Corpn..
According to Mr. Mehta the Division Bench should
have, on the other hand, taken into consideration the
age old maxim Necessitas non habet legem which
means that necessity knows no law. According to Mr.
Mehta it was out of necessity, namely, to recover its
security deposit, that a no-claim certificate had been
submitted by the appellant and the same ought not to be
held as a bar against the appellant for raising claims in
respect of its lawful duties.
14. In support of the aforesaid submissions, Mr.Mehta
referred to and relied upon the decision of this Court in
Chairman and MD, NTPC Ltd. vs. Reshmi
Constructions, wherein the aforesaid maxim had been
explained and applied to a similar situation where a
question had arisen for decision as to whether an
arbitration clause in a contract agreement continues to
survive despite the purported satisfaction thereof. This
Court while adverting to various decisions on the
subject, including the decision in P.K. Ramaiah's case
(supra), came to the conclusion that notwithstanding the
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submission of a no-demand Certificate, the arbitration
agreement continued to subsist because of the several
reasons indicated in the judgment. Having regard to the
views expressed in the aforesaid judgment, Mr. Mehta
submitted that the Division Bench of the Calcutta High
Court had erred in relying solely on Clause 43(2) of the
General Conditions of Contract and the no- Claim
Certificate submitted by the appellant in arriving at a
conclusion that no further dispute existed for
determination in arbitration and the judgment and
orders under appeal were liable to be set aside.
18. From the submissions made on behalf of the
respective parties and in particular from the
submissions made on behalf of the appellant, it is
apparent that unless a discharge certificate is given in
advance, payment of bills are generally delayed.
Although, Clause 43(2) has been included in the
General Conditions of Contract, the same is meant to be
a safeguard as against frivolous claims after final
measurement. Having regard to the decision in Reshmi
Constructions, it can no longer be said that such a
clause in the contract would be an absolute bar to a
contractor raising claims which are genuine, even after
the submission of such no-claim certificate."
54. In the case of Indian Oil Corporation Limited vs. SPS
Engineering Limited, reported in (2011) 3 S.C.C. page- 507,
similar issue has been raised how far the Chief Justice or his
designate however would chose to decide whether the claim is a
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dead claim or whether the parties have, by recording satisfaction,
exhausted all rights, obligations and remedies under the contract, so
that neither the contract nor the arbitration agreement survived.
When it is said that the Chief Justice or his designate may choose to
decide whether the claim is a dead claim, it is implied that he will
do so only when the claim is evidently and patently a long time
barred claim and there is no need for any detailed consideration of
claims. Illustration was given that if a contractor makes a claim a
decade or so after completion of the work without referring to any
acknowledgement of a liability or other factors that kept the claim
alive in law, and the claim is patently long time barred, the Chief
Justice or his designate will decide the issue whether it is a dead
claim or still is a alive claim, but if the claim has been made
beyond three years of completion of work, but say within five years
i.e. from the date of completion of work, bill was drawn up and
payments were made within three years before the claim, the Court
will not enter into a disputed question, the Court will leave the
matter to the decision of the tribunal. There is distinction between
apparent and obvious dead claims, and claims involving disputed
issues of limitation is not kept in view, the Chief Justice or his
designate will end up deciding the question of limitation in all
applications under Section 11 of the act.
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55. It will be relevant to quote paragraph Nos. 15 and 16
of the said judgment, which reads as under:-
"15. An application under Section 11 of the Act is
expected to contain pleadings about the existence of a
dispute and the existence of an arbitration agreement to
decide such dispute. The applicant is not expected to
justify the claim or plead exhaustively in regard to
limitation or produce documents to demonstrate that the
claim is within time in proceedings under Section 11 of
the Act. That issue should normally be left to the Arbitral
Tribunal. If the Chief Justice or his designate is of the
view that in addition to examining whether there is an
arbitration agreement between the parties, he should
consider the issue whether the claim is a dead one (long
time barred) or whether there has been satisfaction of
mutual rights and obligation under the contract, he
should record his intention to do so and give an
opportunity to the parties to place their materials on
such issue. Unless parties are put on notice that such an
issue will be examined, they will be under the impression
that only questions of jurisdiction and existence of
arbitration agreement between the parties will be
considered in such proceedings.
16. The question whether a claim is barred by res
judicata, does not arise for consideration in a
proceedings under Section 11 of the Act. Such an issue
will have to be examined by the arbitral tribunal. A
decision on res judicata requires consideration of the
pleadings as also the claims/issues/points and the award
in the first round of arbitration, in juxtaposition with the
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pleadings and the issues/points/claims in the second
arbitration. The limited scope of Section 11 of the Act
does not permit such examination of the maintainability
or tenability of a claim either on facts or in law. It is for
the arbitral tribunal to examine and decide whether the
claim was barred by res judicata. There can be no
threshold consideration and rejection of a claim on the
ground of res judicata, while considering an application
under Section 11 of the Act."
56. Similar issue came for consideration in the case of
Chairman and M.D., N.T.P.C. Ltd. vs. Reshmi Constructions,
Builders and contractors, reported in (2004) 2 S.C.C. 663. In that
case, the respondent-Reshmi Constructions has entered into an
agreement with the N.T.P.C. for a project at Kayamkulam. After
completion of the work, the respondent-Reshmi Constructions
submitted the final bill, which was allegedly not accepted by the
N.T.P.C., whereafter they themselves prepared the final bill and
forwarded the same along with a printed format of "No-Demand
Certificate". The said No-Demand Certificate was signed by the
respondent-Reshmi Constructions. However, on the same date the
respondent-Reshmi Construction raised objection, mentioning
therein that the alleged final bill was signed under coercion, under
undue influence and under protest only without prejudice to rights
and claims whatsoever. There was no accord and satisfaction
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between the contracting parties. Respondent-Reshmi Construcitons
invoked the arbitration Clause for reference, which was resisted on
the ground that total amount of payment has been made and the
final bill has been settled without protest and "No Dues Certificate
in the standard Performa has been submitted by the Contractor. The
respondent- Reshmi Constructions filed an application under
Section 20 of the Arbitration Act before the Subordinate Court,
which was dismissed. The same was challenged before the Kerala
High Court, which was allowed. The matter went to the Hon‟ble
Supreme Court where plea was taken that the application under
Section 20 of the Arbitration Act was not sustainable to be taken
into consideration as the respondent-Reshmi Constructions did not
raise the plea that they have submitted the "No Demand
Certificate" under coercion and the High Court committed an error
in passing the impugned order. In paragraph no. 13, the Hon‟ble
Supreme Court has framed following questions, which are as
follows:-
"(i) Whether after the contract comes to an end by
completion of the contract work and acceptance of the
final bill in full and final satisfaction and after issuing a
No- Demand Certificate by the contractor, can any
party to the contract raise any dispute for reference to
arbitration?
(ii) Whether in view of letter dated 20-12-1990 sent by
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the respondent contractor the arbitration clause
contained in the agreement can be invoked?
(iii) Whether the arbitration clause in the agreement
has perished with the contract?"
57. Discussing the same the Hon‟ble Supreme Court held
that the issues required to be adjudicated by the Arbitrator, placing
reliance on several judgments and applied the principle that on
completion of the work, the right to get the payment normally arise
and it is also true that on settlement of the final bill, the right to get
further payment gets weakened, but claims subsists or does not
subsist, it is an arbitral issue.
58. It will be relevant to quote paragraphs Nos. 17-22 and
39 of the said judgment which read as under:-
17. In Damodar Valley Corporation vs. K.K. Kar this
Court held : ( SCC p. 144, para 6 ):
"6. It appears to us that the question whether there
has been a full and final settlement of a claim
under the contract is itself a dispute arising 'upon'
or 'in relation to' or 'in connection with' the
contract. These words are wide enough to cover
the dispute sought to be referred."
18. Normally, an accord and satisfaction by itself would
not affect the arbitration clause but if the dispute is that
the contract itself does not subsist, the question of
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invoking the arbitration clause may not arise. But in the
event it be held that the contract survives, recourse to
the arbitration clause may be taken. (See Union of India
v. Kishorilal Gupta and Naihati Jute Mills Ltd. v.
Khyaliram Jagannath.)
19. In Bharat Heavy Electricals Limited this Court
observed that whether there was discharge of the
contract by accord and satisfaction or not is a dispute
arising out of a contract and is liable to be referred to
arbitration.
20. Yet again in L.K. Ahuja Sabyasachi Mukharji, J., as
the learned Chief Justice then was, laid down the
ingredients of Section 20 of the Arbitration Act stating
SCC p. 80, para 6)
"6. It appears that these questions were
discussed in the decision of the Calcutta High
Court in Jiwnani Engineering Works Pvt. Ltd. v.
Union of India where one of us (Sabyasachi
Mukharji, J.) was a party and which held after
discussing all these authorities that the question
whether the claim sought to be raised was barred
by limitation or not, was not relevant for an
order under Section 20 of the Act. Therefore,
there are to aspects. One is whether the claim
made in the arbitration is barred by limitation
under the relevant provisions of the Limitation
Act and secondly, whether the claim made for
application under Section 20 is barred. In order
to be a valid claim for reference under Section
20 of the Arbitration Act, 1940, it is necessary
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that there should be an arbitration agreement
and secondly differences must arise to which the
agreement in question applied and, thirdly, that
must be within time as stipulated in Section 20 of
the Act."
21. It was held that having regard to the fact that the
existence of an arbitration agreement was not denied
and there had been an assertion of claim and denial
thereof, the matter would be arbitrable. It was
observed: ( SCC p. 81, para 8 )
"In order to be entitled to ask for a reference
under Section 20 of the Act, there must be an
entitlement to money and a difference or dispute
in respect of the same. It is true that on
completion of the work, right to get payment
would normally arise and it is also true that on
settlement of the final bill, the right to get further
payment gets weakened but the claim subsists
and whether it does subsist, is a matter which is
arbitrable." (emphasis supplied)
22. This aspect of the matter has also been considered
in Jayesh Engineering Works, wherein following L.K.
Ahuja it was held: ( SCC p. 179, para 1)
"Whether any amount is due to be paid and how
far the claim made by the appellant is tenable are
matters to be considered by the arbitrator. In fact,
whether the contract has been fully worked out and
whether the payments have been made in full and
final settlement are questions to be considered by
the arbitrator when there is a dispute regarding
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the same."
39. The fact situation in the present case, would lead to
the conclusion that the arbitration agreement subsists
because:
(i) Disputes as regards final bill arose prior to its
acceptance thereof in view the fact that the same
was prepared by the respondent but was not
agreed upon in its entirety by the appellant herein;
(ii) The appellant has not pleaded that upon
submission of the final bill by the respondent
herein any negotiation or settlement took place as
a result whereof the final bill, as prepared by the
appellant, was accepted by the respondent
unequivocally and without any reservation
therefor;
(iii) The respondent herein immediately after
receiving the payment of the final bill, lodged its
protest and reiterated its claims.
(iv) Interpretation and/or application of clause 52
of the agreement would constitute a dispute which
would fall for consideration of the arbitrator.
(v) The effect of the correspondences between the
parties would have to be determined by the
arbitrator, particularly as regard the claim of the
respondent that the final bill was accepted by it
without prejudice.
(vi) The appellant never made out a case that any
novation of the contract agreement took place or
that the contract agreement was substituted by a
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new agreement. Only in the event, a case of
creation of new agreement is made out the
question of challenging the same by the respondent
would have arisen.
(vii) The conduct of the appellant would show that
on receipt of the notice of the respondent through
its advocate dated 21.12.1991 the same was not
rejected outright but existence of disputes was
accepted and the matter was sought to be referred
to the arbitration.
(viii) Only when the clarificatory letter was issued
the plea of settlement of final bill was raised.
(ix) The finding of the High Court that a prima
facie in the sense that there are triable issues
before the Arbitrator so as to invoke the provisions
of Section 20 of the Arbitration Act, 1940 cannot
be said to be perverse or unreasonable so as to
warrant interference in exercise of extraordinary
jurisdiction under Article 136 of the Constitution
of India.
(x) The jurisdiction of the arbitrator under the
1940 Act although emanates from the reference, it
is trite, that in a given situation the arbitrator can
determine all questions of law and fact including
the construction of the contract agreement. (See
Pure Helium India Pvt. Ltd. Vs. Oil and Natural
Gas Commission).
(xi) The cases cited by the learned counsel for the
appellant (P.K. Ramaiah and Company and
Nathani Steels) would show that the decisions
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therein were rendered having regard to the finding
of fact that the contract agreement containing the
arbitrator clause was substituted by another
agreement. Such a question has to be considered
and determined in each individual case having
regard to the fact situation obtaining therein."
59. In the case of National Insurance Company Ltd. vs.
Boghara Polyfab Pvt. Ltd. reported in 2009(1) SCC 267, the
Hon‟ble Supreme Court has delineated what dispute can be gone
into and what dispute can be left for Arbitrator to decide. In this
case the respondent-Boghara Polyfab Private Limited obtained a
standard fire and special perils (with a floater) policy from the
appellant- Insurance Company. The sum insured was rupees three
crores, subsequently; it was increased to rupees six crores. The
respondent-Company has requested the insurer to increase the sum
insured by another rupees six crores for a period of two months.
Accordingly, the appellant-Insurance Company issued an additional
endorsement increasing the sum insured amount. It was alleged by
the respondent- Company that the additional endorsement cover
issued by the appellant-Insurance Company was for a period of 69
days, whereas, the appellant-Insurance Company claimed that the
period was for 60 days only. The respondent- Company suffered a
loss on account of heavy rains and flooding, the surveyor
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assessed the amount of loss to the tune of Rs. 3,18,00000/- and odd.
The respondent- Company informed the surveyor about the wrong
assessment, the same was modified to Rs. 3,34,00000/- and odd,
which was resisted by the respondent- Company and made an
application that the appellant-Insurance Company forced the
respondent-Company to accept a lower settlement. The appellant-
Insurance Company again informed the respondent- Company that
unless and until the Company issued an undated "discharge
voucher-in- advance" in full and final settlement, no payment will
be released towards the claim that in that behalf, the appellant-
company sent the format of the discharge voucher to be signed by
the respondent, on account of non-release of the claim, it was a dire
financial condition and it had no alternative, but to yield to the
coercion and pressure applied by the appellant. Simultaneously,
raised the objection and sought for appointment of arbitrator for
adjudication of the issue, which was rejected. The matter came for
consideration before the Bombay High Court for appointment of
arbitrator. The matter was referred to the arbitrator, which was
challenged before the Hon‟ble Supreme Court. The Hon‟ble
Supreme Court has framed the following questions for
considerations:-
"In what circumstances, a court will refuse to refer a
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dispute relating to quantum to arbitration, when the
contract specifically provides for reference of disputes
and differences relating to the quantum to arbitrator?
In particular, what is the position when a respondent in
an application under Section 11 of the Act, resists
reference to arbitration on the ground that the
petitioner has issued a full and final settlement
discharge voucher and the petitioner contends that he
was constrained to issue it dues to coercion, undue
influence and economic compulsion?"
60. The Hon‟ble Supreme Court has considered the
decision passed in Patel Engineering Limited case (supra). In
paragraph No. 22 the Hon‟ble Supreme Court has categorized the
issues which the Chief Justice or his designate is bound to decide
and the issues which should be left out for the arbitral tribunal to
decide.
61. It will be relevant to quote paragraph No. 22 of the
said judgment, which reads as under:-
"22. Where the intervention of the court is sought for
appointment of an Arbitral Tribunal under section 11,
the duty of the Chief Justice or his designate is defined
in SBP & Co. This Court identified and segregated the
preliminary issues that may arise for consideration in
an application under section 11 of the Act into three
categories, that is (i) issues which the Chief Justice or
his Designate is bound to decide;(ii) issues which he
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can also decide, that is issues which he may choose to
decide; and (iii) issues which should be left to the
Arbitral Tribunal to decide.
22.1. The issues (first category) which Chief Justice/his
designate will have to decide are:
(a) Whether the party making the application has
approached the appropriate High Court.
(b) Whether there is an arbitration agreement
and whether the party who has applied under
Section 11 of the Act, is a party to such an
agreement.
22.2. The issues (second category) which the Chief
Justice/his designate may choose to decide (or leave
them to the decision of the arbitral tribunal) are:
(a) Whether the claim is a dead (long barred)
claim or a live claim.
(b) Whether the parties have concluded the
contract/ transaction by recording satisfaction of
their mutual rights and obligation or by
receiving the final payment without objection.
22.3. The issues (third category) which the Chief
Justice/his designate should leave exclusively to the
arbitral tribunal are :
(i) Whether a claim made falls within the
arbitration clause (as for example, a matter
which is reserved for final decision of a
departmental authority and excepted or excluded
from arbitration).
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(ii) Merits or any claim involved in the
arbitration."
62. In the aforesaid judgment the Hon‟ble Supreme Court
also considered the effect of acceptance of final amount and effect
of "No Dues Certificate. It will be relevant to quote paragraph Nos.
27, 28, 29, 34, 36, 38 and 52 of the said judgment:-
"27. While discharge of contract by performance refers
to fulfillment of the contract by performance of all the
obligations in terms of the original contract, discharge
by `accord and satisfaction' refers to the contract being
discharged by reason of performance of certain
substituted obligations. The agreement by which the
original obligation is discharged is the accord, and the
discharge of the substituted obligation is the
satisfaction. A contract can be discharged by the same
process which created it, that is, by mutual agreement.
A contract may be discharged by the parties to the
original contract either by entering into a new contract
in substitution of the original contract; or by
acceptance of performance of modified obligations in
lieu of the obligations stipulated in the contract.
28. The classic definition of the term `accord and
satisfaction' given by the Privy Council in Payana
Reena Saminathan vs. Pana Lana Palaniappa
(reiterated in Kishorilal Gupta) is as under: (I.A. PP.
145-46)
"...The `receipt' given by the appellants and
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accepted by the respondent, and acted on by both
parties proves conclusively that all the parties
agreed to a settlement of all their existing disputes
by the arrangement formulated in the `receipt'. It
is a clear example of what used to be well known
as common law pleading as `accord and
satisfaction by a substituted agreement'. No matter
what were the respective rights of the parties inter
se they are abandoned in consideration of the
acceptance by all of a new agreement. The
consequence is that when such an accord and
satisfaction takes place the prior rights of the
parties are extinguished. They have in fact been
exchanged for the new rights; and the new
agreement becomes a new departure, and the
rights of all the parties are fully represented by it."
[Emphasis supplied]"
29. It is thus clear that the arbitration agreement
contained in a contract cannot be invoked to seek
reference of any dispute to arbitration, in the following
circumstances, when the contract is discharged on
account of performance, or accord and satisfaction,
or mutual agreement, and the same is reduced to
writing (and signed by both parties or by the party
seeking arbitration) :
(a) Where the obligations under a contract are
fully performed and discharge of the contract by
performance is acknowledged by a full and final
discharge voucher/receipt. Nothing survives in
regard to such discharged contract.
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(b) Where the parties to the contract, by mutual
agreement, accept performance of altered,
modified and substituted obligations and confirm
in writing the discharge of contract by
performance of the altered, modified or
substituted obligations.
(c) Where the parties to a contract, by mutual
agreement, absolve each other from performance
of their respective obligations (either on account
of frustration or otherwise) and consequently
cancel the agreement and confirm that there is
no outstanding claims or disputes.
34. What requires to be noticed is that in Nav Bharat
Builders and Nathani Steels, this Court on examination
of facts, was satisfied that there were negotiations and
voluntary settlement of all pending disputes, and the
contract was discharged by accord and satisfaction. In
P. K. Ramaiah, the Court was satisfied that there was a
voluntary acceptance of the measurements and full and
final payment of the amount found due, resulting in
discharge of the contract, leaving no outstanding claim
or pending dispute. In those circumstances, this Court
held that after such voluntary accord and satisfaction or
discharge of the contract, there could be no arbitrable
disputes.
36. In Damodar Valley Corporation, the question that
arose for consideration of this Court was as follows:
"...where one of the parties refers a dispute or
disputes to arbitration and the other party takes
a plea that there was a final settlement of all
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claims, is the Court, on an application
under Sections 9(b) and 33 of the Act, entitled to
enquire into the truth and validity of the
averment as to whether there was or was not a
final settlement on the ground that if that was
proved it would bar a reference to the arbitration
inasmuch as the arbitration clause itself would
perish."
In that case the question arose with reference to a claim
by the supplier. The purchaser required the supplier to
furnish a full and final receipt. But the supplier did not
give such a receipt. Even though there was no discharge
voucher, the purchaser contended that the payments
made by it were in full and final settlement of the bills.
This Court rejected that contention and held that the
question whether there has been a settlement of all the
claims arising in connection with the contract also
postulates the existence of the contract which would
mean that the arbitration clause operates. This Court
held that the question whether there has been a full and
final settlement of a claim under the contract is itself a
dispute arising `upon' or `in relation to' or `in
connection with' the contract; and where there is an
arbitration clause in a contract, notwithstanding the
plea that there was a full and final settlement between
the parties, that dispute can be referred to arbitration.
It was also observed that mere claim of accord and
satisfaction may not put an end to the arbitration
clause. It is significant that neither P.K. Ramaiah nor
Nathani Steels disagreed with the decision in Damodar
Valley Corporation but only distinguished it on the
ground that there was no full and final discharge
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voucher showing accord and satisfaction in that case.
38. In Union of India vs. L.K. Ahuja & Co. this Court
observed: ( SCC p.81, para 8) :
"8. ...In order to be entitled to ask for a
reference under section 20 of the Act, there must
be an entitlement to money and a difference or
dispute in respect of the same. It is true that on
completion of the work, right to get payment
would normally arise and it is also true that on
settlement of the final bill, the right to get further
payment gets weakened but the claim subsists
and whether it does subsist, is a matter which is
arbitrable."
There was no full and final discharge or accord and
satisfaction in that case.
52. Some illustrations (not exhaustive) as to when
claims are arbitrable and when they are not, when
discharge of contract by accord and satisfaction are
disputed, to round up the discussion on this subject are
:
(i) A claim is referred to conciliation or a pre-
litigation Lok Adalat. The parties negotiate and
arrive at a settlement. The terms of settlement
are drawn up and signed by both the parties and
attested by the Conciliator or the members of the
Lok Adalat. After settlement by way of accord
and satisfaction, there can be no reference to
arbitration.
(ii) A claimant makes several claims. The
admitted or undisputed claims are paid.
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Thereafter negotiations are held for settlement of
the disputed claims resulting in an agreement in
writing settling all the pending claims and
disputes. On such settlement, the amount agreed
is paid and the contractor also issues a
discharge voucher/no claim certificate/full and
final receipt. After the contract is discharged
by such accord and satisfaction, neither the
contract nor any dispute survives for
consideration. There cannot be any reference of
any dispute to arbitration thereafter.
(iii) A contractor executes the work and claims
payment of say Rupees Ten Lakhs as due in terms
of the contract. The employer admits the claim
only for Rupees six lakhs and informs the
contractor either in writing or orally that unless
the contractor gives a discharge voucher in the
prescribed format acknowledging receipt of
Rupees Six Lakhs in full and final satisfaction of
the contract, payment of the admitted amount
will not be released. The contractor who is hard
pressed for funds and keen to get the admitted
amount released, signs on the dotted line either
in a printed form or otherwise, stating that the
amount is received in full and final settlement. In
such a case, the discharge is under economic
duress on account of coercion employed by the
employer. Obviously, the discharge voucher
cannot be considered to be voluntary or as
having resulted in discharge of the contract by
accord and satisfaction. It will not be a bar to
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arbitration.
(iv) An insured makes a claim for loss suffered.
The claim is neither admitted nor rejected. But
the insured is informed during discussions that
unless the claimant gives a full and final voucher
for a specified amount (far lesser than the
amount claimed by the insured), the entire claim
will be rejected. Being in financial difficulties,
the claimant agrees to the demand and issues an
undated discharge voucher in full and final
settlement. Only a few days thereafter, the
admitted amount mentioned in the voucher is
paid. The accord and satisfaction in such a case
is not voluntary but under duress, compulsion
and coercion. The coercion is subtle, but very
much real. The `accord' is not by free consent.
The arbitration agreement can thus be invoked to
refer the disputes to arbitration.
(v) A claimant makes a claim for a huge sum, by
way of damages. The respondent disputes the
claim. The claimant who is keen to have a
settlement and avoid litigation, voluntarily
reduces the claim and requests for settlement.
The respondent agrees and settles the claim and
obtains a full and final discharge voucher. Here
even if the claimant might have agreed for
settlement due to financial compulsions and
commercial pressure or economic duress, the
decision was his free choice. There was no
threat, coercion or compulsion by the
respondent. Therefore, the accord and
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satisfaction is binding and valid and there cannot
be any subsequent claim or reference to
arbitration."
63. The Hon‟ble Apex Court held that, where the obligation
under a contract are fully performed and discharged of contract by
performance is acknowledged by full and final discharge/receipt
nothing survives in regard to such discharged contract, where the
parties to the contract, by mutual agreement, accept performance of
altered, modified and substituted and confirm in writing the
discharge of contract by performance of the altered, modified or
substituted obligation, where the parties to a contract, by mutual
agreement, absolve each other from performance of their respective
obligation and consequently cancel the agreement and confirmed
that there is no outstanding claim and dues.
64. Ultimately, the Hon‟ble Supreme Court has refused to
interfere with the order of reference and held that nothing stated
any final opinion on the issue whether there was accord and
satisfaction nor discharge of contract and held that any thing stated
or any expression will not be taken into consideration with respect
to merits of any claim or contentions of the parties.
65. In the case of Union of India and Others vs. Master
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Construction Company, reported in (2011) 12 S.C.C., page 349,
challenge was made of the order of the High Court; thereby the
matter was referred under Section 11(6) of the Arbitration Act for
adjudication of the dispute by the arbitrator. In that case, the
respondent-Master Construction Company was awarded a contract
by the Union of India for construction of the building within
specified time. There was a provision for adjudication of the
dispute through arbitrator. Work was completed by the respondent-
Company albeit belatedly. The petitioner-Company furnished no
claim certificate and the final bill was signed. The final bill was
released to the respondent-Company including the bank guarantee.
Thereafter, the respondent-Company withdrew no claim certificate
and lodged certain claims, in such circumstances, the plea was
taken by the respondent-company that no claim certificate was
issued under the financial constrain and coercion, claimed that the
appellant-Union of India has arbitrarily withheld the payment. The
Hon‟ble Supreme Court has considered the large number of
references and extensively quoted the different paragraphs of
Bhargo Polyfab case (supra) in paragraph Nos. 2 to 17 and held
that in a case where the claimant contends that discharge voucher
or no claim certificate has been obtained by fraud, coercion, duress
or undue influence and the other side contends the correctness
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thereof, the Chief Justice or his designate must look into this aspect
to find out at least, prima facie, whether or not the dispute is bona
fide and genuine. The dispute raised by the claimant with regard to
validity of discharge voucher or no-claim certificate or settlement
agreement, if prima facie, appears to be lacking in credibility, there
may not be necessary to refer the dispute for arbitration at all in
view of the fact. In that case, the Hon‟ble Supreme Court arrived to
finding that "No Claim Certificates" were given voluntarily and set
aside the order of High Court, refused to send the matter for
arbitration.
66. It will be relevant to quote paragraph Nos. 12 to 17 of
the said judgment, which read as under:-
12. With regard to the jurisdiction of the Chief
Justice/his designate in the proceedings under Section
11 of the 1996 Act, this Court culled out the legal
position in paragraph 51 of the report as follows:
(Bhoghara Polyfab (P) Ltd. case, S.C.C. p. 294)
"51. The Chief Justice/his designate exercising
jurisdiction under Section 11 of the Act will
consider whether there was really accord and
satisfaction or discharge of contract by
performance. If the answer is in the affirmative,
he will refuse to refer the dispute to arbitration.
On the other hand, if the Chief Justice/his
designate comes to the conclusion that the full
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and final settlement receipt or discharge voucher
was the result of any fraud/coercion/ undue
influence, he will have to hold that there was no
discharge of the contract and consequently, refer
the dispute to arbitration. Alternatively, where
the Chief Justice/his designate is satisfied prima
facie that the discharge voucher was not issued
voluntarily and the claimant was under some
compulsion or coercion, and that the matter
deserved detailed consideration, he may instead
of deciding the issue himself, refer the matter to
the Arbitral Tribunal with a specific direction
that the said question should be decided in the
first instance."
13. The Bench in Boghara Polyfab Private Limited in
S.C.C. paras 42 and 43 (p.291), with reference to the
cases cited before it, inter alia, noted that there were
two categories of the cited cases; (one) where the Court
after considering the facts found that there was a full
and final settlement resulting in accord and satisfaction,
and there was no substance in the allegations of
coercion/undue influence and, consequently, it was held
that there could be no reference of any dispute to
arbitration and (two) where the court found some
substance in the contention of the claimants that `no
dues/claim certificates' or `full and final settlement
discharge vouchers' were insisted and taken (either in
printed format or otherwise) as a condition precedent
for release of the admitted dues and thereby giving rise
to an arbitrable dispute.
14. In Boghara Polyfab Private Limited, the
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consequences of discharge of the contract were also
considered. In S.C.C. para 25 (p. 284), it was explained
that when a contract has been fully performed, then
there is a discharge of the contract by performance and
the contract comes to an end and in regard to such a
discharged contract, nothing remains and there cannot
be any dispute and, consequently, there cannot be
reference to arbitration of any dispute arising from a
discharged contract. It was held that the question
whether the contract has been discharged by
performance or not is a mixed question of fact and law,
and if there is a dispute in regard to that question, such
question is arbitrable.
15. The Court in Boghara Polyfab case, however, noted
an exception to this proposition. The exception noticed
is that where both the parties to a contract confirm in
writing that the contract has been fully and finally
discharged by performance of all obligations and there
are no outstanding claims or disputes, courts will not
refer any subsequent claim or dispute to arbitration. Yet
another exception noted therein is with regard to those
cases where one of the parties to the contract issues a
full and final discharge voucher (or no-dues certificate,
as the case may be) confirming that he has received the
payment in full and final satisfaction of all claims, and
he has no outstanding claim. It was observed that
issuance of full and final discharge voucher or no-dues
certificate of that kind amounts to discharge of the
contract by acceptance or performance and the party
issuing the discharge voucher/certificate cannot
thereafter make any fresh claim or revive any settled
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claim nor can it seek reference to arbitration in respect
of any claim.
16. In SCC para 26 (pp. 284-85), this Court in Boghara
Polyfab Private Limited held that if a party which has
executed the discharge agreement or discharge
voucher, alleges that the execution of such document
was on account of fraud/coercion/undue influence
practised by the other party, and if that party
establishes the same, then such discharge voucher or
agreement is rendered void and cannot be acted upon
and consequently, any dispute raised by such party
would be arbitrable.
17. In S.C.C. para 24 (p. 284) in Boghara Polyfab
Private Limited1, this Court held that a claim for
arbitration cannot be rejected merely or solely on the
ground that a settlement agreement or discharge
voucher has been executed by the claimant. The Court
stated that such dispute will have to be decided by the
Chief Justice/his designate in the proceedings
under Section 11 of the 1996 Act or by the Arbitral
Tribunal."
67. In the case of Bharat Rasiklal Ashra vs. Gautam
Rasiklal Ashra and another, reported in (2012) 2 S.C.C. 144, the
Hon‟ble Supreme Court in paragraph No.10 has framed the
following issue for consideration:-
10. Therefore, the following question arises for
consideration in this appeal:
"Where the arbitration agreement between the
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parties is denied by the respondent, whether the
Chief Justice or his designate, in exercise of power
under section 11 of the Act, can appoint an
arbitrator without deciding the question whether
there was an arbitration agreement between the
parties, leaving it open to be decided by the
arbitrator?"
68. Placing reliance on the judgment of Patel Engineering
Limited (supra and the National Insurance Company Limited
(supra) held that an arbitrator can be appointed only if there is an
arbitration agreement in regard to the contract in question. If there
is an arbitration agreement in regard to contract with A and no
arbitration agreement in regard to contract with B, obviously a
dispute relating to contract B cannot be referred to arbitration on
the ground that contract A has an arbitration agreement. The
Hon‟ble Supreme Court further held that the Chief Justice or his
designate is required to examine the allegations of fabrication and
forgery made by a party in regard to the contract containing the
arbitration agreement, before appointing an arbitrator under Section
11 of the Act, the proceedings under the said section will cease to
be summary proceedings.
69. It will be relevant to quote paragraph Nos. 12, 16 and
17 of the said judgment, which read as under:-
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"12. Following the decision in S.B.P. & Co., this court
in National Insurance Co. Ltd. held as follows:
(National Insurance Co. Ltd. case, SCC p. 283, paras
22 & 22.1-22.3)
"22. Where the intervention of the court is sought
for appointment of an Arbitral Tribunal
under section 11, the duty of the Chief Justice or
his designate is defined in SBP & Co. This Court
identified and segregated the preliminary issues
that may arise for consideration in an application
under section 11 of the Act into three categories,
that is (i) issues which the Chief Justice or his
Designate is bound to decide; (ii) issues which he
can also decide, that is issues which he may
choose to decide; and (iii) issues which should be
left to the Arbitral Tribunal to decide.
22.1) The issues (first category) which Chief
Justice/his designate will have to decide are:
(a) Whether the party making the application has
approached the appropriate High Court.
(b) Whether there is an arbitration agreement
and whether the party who has applied
under section 11 of the Act, is a party to such an
agreement.
22.2) The issues (second category) which the Chief
Justice/his designate may choose to decide (or leave
them to the decision of the arbitral tribunal) are:
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(a) Whether the claim is a dead (long barred)
claim or a live claim.
(b) Whether the parties have concluded the
contract/ transaction by recording satisfaction of
their mutual rights and obligation or by
receiving the final payment without objection.
22.3) The issues (third category) which the Chief
Justice/his designate should leave exclusively to
the arbitral tribunal are :
(i) Whether a claim made falls within the
arbitration clause (as for example, a matter
which is reserved for final decision of a
departmental authority and excepted or
excluded from arbitration).
(ii) Merits or any claim involved in the
arbitration."
16. The learned counsel for the first respondent next
submitted that if the Chief Justice or his designate is
required to examine the allegations of fabrication and
forgery made by a party in regard to the contract
containing the arbitration agreement, before appointing
an arbitrator under section 11 of the Act, the
proceedings under the said section will cease to be a
summary proceedings, and become cumbersome and
protracted, necessitating recording of evidence, thereby
defeating the object of the Act. In our considered view
this apprehension has no relevance or merit. Existence
of a valid and enforceable arbitration agreement is a
condition precedent before an arbitrator can be
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appointed under section 11 of the Act. When serious
allegations of fraud and fabrication are made, it is not
possible for the Court to proceed to appoint an
arbitrator without deciding the said issue which relates
to the very validity of the arbitration agreement.
Therefore the fact that the allegations of fraud, forgery
and fabrication are likely to involve recording of
evidence or involve some delay in disposal, are not
grounds for refusing to consider the existence of a valid
arbitration agreement.
17. The apprehension that such contentions are likely to
be raised frequently to protract the proceedings
under section 11 of the Act or to delay the arbitration
process, thereby defeating the purpose of section 11 of
the Act is also without basis. Where agreements have
been performed in part, such a contention will not be
entertained. It is only in a very few cases, where an
agreement which had not seen the light of the day is
suddenly propounded, or where the agreement had
never been acted upon or where sufficient
circumstances exist to doubt the genuineness of the
agreement, the Chief Justice of his designate will
examine this issue. This course has repeatedly held that
on the ground of termination, performance or
frustration of the contract, arbitration agreement
cannot be avoided. The legislature has entrusted the
power of appointment of an arbitrator to the holders of
high judicial offices like the Chief Justice or Judge of
the Supreme Court/High Court, with a view that they
can identify and effectively deal with false or vexatious
claims made only to protract the proceedings or defeat
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arbitration. If a party is found to have falsely contended
that the contract was forged/fabricated, the Chief
Justice or his designate may subject such part to heavy
costs so that such false claims are discouraged. Be that
as it may."
70. On conspectus of the aforesaid facts and circumstances
of the case with judicial circumspection, it has to be looked into as
to arbitral dispute fit for reference before the Arbitrator. From
aforesaid discussion, the principle that has been derived and culled
out, has to be applied and has to be decided in the present case
whether it is desirable for this Court to appoint an arbitrator and
refer the matter for adjudication of the dispute as it appears that
from the record that there was an agreement between the parties for
construction of the boys hostel. Claim was all through made by the
petitioner-Company for cost incurred in "carriage of materials",
amounting to Rs.63,18,345.40/-. Claim was made by 22.02.2009,
24.08.2009, 02.09.2010, 24.12.2010, 24.2.2011, 5.5.2011, 02.09.2011 and 14.09.2011. The respondent-Chankya National Law University replied by letter dated 21.02.2011, mentioning that the representation has been referred to the consultant M/s. Gherzi Estern Ltd., Kolkata and vide letter dated 09.08.2012 refused to entertain the claim of extra carriage charge and stated that no further correspondence in this regard will be entertained. Patna High Court REQ. CASE No.8 of 2014 dt.16-11-2016 104/106
71. The petitioner-company made additional claim for interest against accumulated security deposit. Correspondence was again made vide letter dated 03.03.2012 and vide letter dated 07.05.2013 the petitioner-company requested the respondents to appoint an arbitrator to settle the dispute, which was responded by the respondent-Chankya National Law University vide letter dated 18.05.2013, stating therein that Clause-25 of the agreement prescribed 45 days time limit for making demand for appointment of arbitrator or in respect of any claim from the date of intimation of final bill ready for payment. If the claim is not made within stipulated period, the claim of the contractor shall be deemed to have been waived and absolutely barred and the institution shall be discharged of all the liabilities under the contract in respect of these claims. Accordingly, the demand for appointment of Arbitrator is absolutely barred and as such rejected as the final order bill was paid on 7.1.2012 and within 45 days no demand was made in respect of any claim. It has further been stated that even otherwise the claim of carriage material does not have any merit and rejected with intimation on 12.10.2011 itself and so far the claim of interest on security deposit is concerned, the same is absolutely imaginary, hostile and without substance.
Patna High Court REQ. CASE No.8 of 2014 dt.16-11-2016 105/106
72. It appears from the record that consistent claim has been made by the petitioner-Company for release of the additional amount, which was resisted by the respondent-Chankya National Law University and finally rejected the claim of the petitioner- company for appointment of arbitrator, applying Clause 25 of the agreement, which extinguish the right and treated to have been discharged from all liability, unless the claim for appointment of Arbitrator is made within 45 days is void as it violates the provisions of Section 28 of the Contract Act as discussed hereinabove and same cannot be invoked to the prejudice of the petitioner-company. The respondents have not brought any "No Dues Certificate", or "Discharge Certificate" only claiming that final payment has been made on 7.1.2012.
73. It has been argued by the respondents that as the payment has been made without demur on that account, it will be treated to have been discharged. However, on perusal of the materials available on record, it cannot be said that the claim of the petitioner-Company is a dead claim as all through the petitioner- company is claiming the additional amount. Whether the petitioner- company is entitled to the payment of additional amount or whether the respondent-Chankya National Law University has discharged Patna High Court REQ. CASE No.8 of 2014 dt.16-11-2016 106/106 from all the liability, are the questions of facts is an arbitrable issue that has to be decided by the Arbitral Tribunal. Hence, this Court holds that the dispute of less payment or entire payment or Chankya National Law University has any liability to pay any amount, is a subject matter of arbitration for adjudication cannot be decided in view of limited jurisdiction and in view of the attending facts and circumstances of the case. This issue is left to be decided by the Arbitral Tribunal.
74. In such view of the matter, the contention of the respondent-Chankya National Law University that this Court should refuse to appoint an arbitrator as the dispute is no longer an arbitral issue is not acceptable to this Court and the same is rejected. Accordingly, this Court is of the view that that the matter is fit to be referred to the arbitrator for adjudication of the dispute.
75. Let this case be listed 29.11.2016 for appointment of the arbitrator.
Sd/-
(Shivaji Pandey, J) pawan/-
AFR/NAFR A.F.R. CAV DATE 26.08.2016 Uploading Date 22.11.2016 Transmission Date