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Saturday, September 17, 2016

interesting question as to the applicability of the 1997 Amendment to Section 28 of the Contract Act, 1872. = In H.P. State Forest Co. Ltd. v. United India Insurance Co. Ltd., (2009) 2 SCC 252, this Court had to decide whether clause 6(ii) of an insurance policy was hit by the unamended Section 28. This clause reads as follows:- “6(ii) In no case whatsoever shall the Company be liable for any loss or damage after the expiration of 12 months from the happening of the loss or damage unless the claim is the subject of pending action or arbitration: it being expressly agreed and declared that if the Company shall declaim liability for any claim hereunder and such claim shall not within 12 calendar months from the date of the disclaimer have been made the subject- matter of a suit in a court of law then the claim shall for all purposes be deemed to have been abandoned and shall not thereafter be recoverable hereunder.” After a copious reference to Food Corporation and S.G. Nayak’s case, this Court held that such clauses would not be hit by Section 28.Considering that the respondents’ first argument has been accepted by us, we do not think it necessary to go into the finer details of the second argument and as to whether the aforesaid clauses in the bank guarantee would be hit by Section 28(b) after the 1997 amendment. It may only be noticed, in passing, that Parliament has to a large extent redressed any grievance that may arise qua bank guarantees in particular, by adding an exception (iii) by an amendment made to Section 28 in 2012 with effect from 18.1.2013. Since we are not directly concerned with this amendment, suffice it to say that stipulations like the present would pass muster after 2013 if the specified period is not less than one year from the date of occurring or non-occurring of a specified event for extinguishment or discharge of a party from liability. The appeals are, therefore, dismissed with no order as to costs.

                                  REPORTABLE

                        IN THE SUPREME COURT OF INDIA

                        CIVIL APPELLATE JURISDICTION

                     CIVIL APPEAL NOS.9087-9089 of 2016
            (ARISING OUT OF SLP (CIVIL) NOS.16166-16168 OF 2011)


UNION OF INDIA & ANR.                   …APPELLANTS


                             VERSUS



M/S INDUSIND BANK LTD. & ANR.           …RESPONDENTS



                           J  U  D  G  M  E  N  T

R.F. Nariman, J.

1.    Leave granted.

2.    The present appeals  by  the  Union  of  India  raise  an  interesting
question as to the applicability of the 1997 Amendment to Section 28 of  the
Contract Act, 1872. The facts of the three appeals are similar  inasmuch  as
they concern four exporters who belong to what is known as the GPB Group  of
Companies.

3.    By a Memorandum dated 6.11.1995, issued by  the  Textile  Commissioner
under the Imports and Exports (Control) Act, 1947, terms and conditions  for
export of raw cotton and cotton waste for September,  1995  -  August,  1996
were laid down.  The shipment was  permitted  only  against  an  irrevocable
letter of credit.  The exporters were required to furnish a  bank  guarantee
in the prescribed form at the rate of 10% of the contract price.   The  bank
guarantee was required to be kept valid up to 6 months with a provision  for
claims for an additional three months, after the last date of shipment.  The
allocation of quota was on the basis of the highest unit value  realization.


4.    The Textile Commissioner invited  applications  vide  Press  Note  and
Memorandum, both dated 9.1.1996, for export of 10,000 bales  of  extra  long
staple cotton.  It was mentioned in the Press Note and the  Memorandum  that
the shipment period will be 180 days from the date of registration of  quota
or up to 31.8.1996, whichever is earlier.

5.    Pursuant to this Press Note and Memorandum, four sale  contracts  were
executed between M/s Indocomex Fibres Pvt.  Ltd.,  Singapore  and  the  four
exporters, all in January, 1996.  On 31.1.1996, the four exporters  made  an
application together with a bank guarantee of even date.  In  February,  the
exporters were permitted to export the total quantity of 9175 bales vide  an
Allocation-cum-Registration Certificate dated  6.2.1996  within  a  validity
period of shipment up to 31.7.1996.  It may be  mentioned  in  passing  that
this date was extended as many as three times,  the  third  extension  being
notified as upto 28.2.1997.

6.    As the four exporters  failed  and  neglected  to  furnish  supporting
documents regarding export of goods allocated to them within the  stipulated
period, the Textile Commissioner, by a letter dated  3.1.1997,  called  upon
the exporters to submit the necessary documents  within  15  days  from  the
date of issue of this letter but not later  than  20.1.1997,  failing  which
the bank  guarantees  would  be  enforced.   As  the  exporters  failed  and
neglected  to  furnish  these  documents,  the  Textile  Commissioner,  vide
letters dated 15.5.1997, invoked the bank guarantees.  Vide letters of  even
date, the Respondent Bank refused to pay under the said guarantees,  stating
that the same could be invoked only within  the  extended  period  of  three
months i.e. up to 30.4.1997, and not later. By a letter dated  27/28.8.1997,
the Textile Commissioner informed the Respondent Bank that in light  of  the
amendment to Section 28 of the Indian Contract Act, which  came  into  force
on 8.1.1997, the Bank was not absolved of its  obligation  to  make  payment
under the bank guarantee.  To this, the Bank vide  letter  dated  19.9.1997,
reiterated its earlier stand and stated that  it  was  not  liable  to  make
payment under the bank guarantee after 30.4.1997.  It may  be  mentioned  in
passing that two of the aforesaid group companies, namely  GPB  Fibres  Ltd.
and M/s Bhagwati Cotton Ltd. were amalgamated on 12.9.1997.

7.    On 23.7.1998, the Textile Commissioner called upon both the  exporters
and the Respondent Bank to pay the sums covered by the bank  guarantee.   As
this letter evoked no response,  three  summary  suits  -  being  2959/1999,
2963/1999 and 2996/1999 - were filed on 8.4.1999 by the Union of  India  and
the Textile Commissioner against the exporters and  the  Bank  in  the  High
Court of  Bombay.  By  order  dated  4.12.2001,  as  amended  on  22.1.2002,
unconditional leave to defend  the  suits  was  granted  to  the  Bank,  and
conditional leave to so defend the suits to the  exporters  upon  depositing
the amount of Rs.3,82,59,450/- in the Court within 12 weeks  from  the  date
of the said order. On 20.1.2003/27.2.2003, the Division Bench dismissed  the
appeal filed  by  the  Union  of  India  on  the  ground  that  it  was  not
maintainable under Clause 15 of the Letters Patent of the  High  Court.   On
14.8.2003, an SLP filed by the Union of India met with the same fate.

8.    All four exporters remained ex parte, as a result of which  the  suits
came to be decreed ex parte against the said exporters on 29.11.2004.

9.    On contest with the Bank, a learned Single Judge of  the  Bombay  High
Court on 22.2.2008, was of the view that as the bank guarantees in  question
were in force on 8.1.1997, when the amendment to Section 28 of the  Contract
Act took place, the amended Section 28 would apply to  the  facts  of  these
cases. This being the case, the clause in the bank guarantees  extinguishing
rights and discharging the liability of the Bank if a claim were not  to  be
made within three months of the date of expiry of the  bank  guarantee,  was
held to be void.  Consequently, it was  held  that  the  invocation  of  the
aforesaid bank guarantees, being without the aforesaid time constraint,  was
valid, and the said suits were, therefore, decreed in favour  of  the  Union
of India and against the bank.

10.     In an appeal against this judgment, by the impugned  judgment  dated
20.4.2011, a Division Bench of the Bombay High  Court,  while  holding  that
the amended Section 28 would apply to the facts of these cases, came to  the
opposite conclusion by  following  certain  judgments  of  this  Court,  and
therefore, reversed the learned Single Judge, holding that  since  the  bank
guarantees were not invoked within the  time  prescribed,  the  suits  would
have to be dismissed.  The Union of India  has  filed  the  present  appeals
before us.

11.   Shri A.K. Panda, learned senior advocate appearing on  behalf  of  the
Union of India, has stated that the Single Judge  was  correct  in  applying
Section 28(b) as amended in 1997, and that the condition  contained  in  the
bank guarantee which restricted the period within which it could be  invoked
is, therefore, void.  To buttress his submission,  he  cited  (1995)  2  SCC
630, R. Rajagopal Reddy v. Padmini  Chandrasekharan.  According  to  learned
counsel, the Division Bench, having  reiterated  that  the  amended  Section
28(b) would apply, was not correct in its conclusion  that  such  clause  in
the bank guarantees would not be void.  According to  learned  counsel,  the
Supreme Court judgments relied upon were all pre-amendment,  and  could  not
therefore be relied upon to arrive at the opposite result from  the  learned
Single Judge.

12.   On the other hand, Dr. A.M.  Singhvi,  learned  senior  advocate,  and
Shri Krishnan Venugopal learned senior advocate,  contended  that  both  the
Single Judge and the  Division  Bench  were  not  correct  in  applying  the
amendment to Section 28. According to both the  learned  counsel,  the  bank
guarantees themselves being dated 31.1.1996, would not  be  affected  by  an
amendment made one year later i.e. on 8.1.1997.  The relevant date  and  the
relevant law applicable would  be  as  on  31.1.1996,  which  would  be  the
unamended Section 28.  This being the case, according to them, a  catena  of
judgments has held that if a clause in a  contract  does  not  restrict  the
limitation period within  which  one  can  approach  a  Court,  then  it  is
perfectly valid and not hit by Section 28 (unamended).   For  this  purpose,
they cited several judgments  before  us.   An  alternative  plea  was  also
raised by them that, on the assumption that the  amended  Section  28  would
apply, even then, regard being had  to  the  limited  object  sought  to  be
achieved by the amendment, which followed a Law Commission Report, it  would
be clear that even on application of Section 28(b), the aforesaid clause  in
the bank guarantees would not be hit.  In particular, they argued  that  the
revised Section 28 suggested by the Law Commission was not in  fact  enacted
verbatim in Section 28(b), and that the crucial  words  “or  on  failure  to
make a claim” are missing in the amended Section 28.  They also referred  to
a subsequent amendment of Section 28  in  2012,  specifically  dealing  with
bank guarantees, in the course of their arguments.

13.   The primary contention with which we are faced is whether  Section  28
applies in its original form or whether it applies after amendment in  1997.
 In order to answer this question, it is first necessary to set out  Section
28 in its original form and Section 28 after amendment.  The  Section  reads
as under:-


Original Section
28. Every agreement, by which any party  thereto  is  restricted  absolutely
from enforcing his rights under or in respect of any contract, by the  usual
legal proceedings in the  ordinary  tribunals,  or  which  limits  the  time
within which he may thus enforce his rights, is void to that extent.

Amendment w.e.f. 08.01.1997

28. Agreements in restraint of legal proceeding, void.  Every Agreement,
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;
which extinguishes the rights of any party thereto, or discharges any  party
thereto, from any liability, under or in respect  of  any  contract  on  the
expiry of a specified period so as to restrict any party from enforcing  his
rights by usual legal proceedings, is void to that extent.”


14.   In order to answer  this  primary  question,  we  have  first  to  see
whether the change made in Section 28 could be said to be  clarificatory  or
declaratory of the law, and hence retrospective. It is  common  ground  that
the statute has not made the aforesaid amendment retrospective as it  is  to
come into force only with effect from 8.1.1997.

15.   The original  Section  is  of  1872  vintage.   It  remained  in  this
incarnation for over 100 years  and  was  the  subject  matter  of  two  Law
Commission Reports.  The  13th  Report  of  the  Law  Commission  of  India,
September, 1958 examined the Section and ultimately decided that it was  not
necessary  to  amend  it,  given  the  fact  that  there  is  a   well-known
distinction between agreements providing for  relinquishment  of  rights  as
well as remedies as against  agreements  for  relinquishing  remedies  only.
This was reflected in para 57 of the Report as follows:-

“57.  Decided cases reveal a divergence of opinion in  relation  to  certain
clauses of insurance policies with reference to the  applicability  of  this
Section. On examination, it would appear that  these  cases  do  not  really
turn on the interpretation of the Section, but hinge on the construction  of
the  insurance  policies  in  question.   The  principle  itself   is   well
recognized that an agreement providing for the relinquishment of rights  and
remedies is valid, but an agreement  for  relinquishment  of  remedies  only
falls within the mischief of Section 28.  Thus, in our  opinion,  no  change
is called for by reason of the aforesaid conflict of judicial authority.”



16.   Several decades passed, until the Law Commission in  its  97th  Report
of March, 1984 suo motu decided that the  Section  required  amendment.   An
introduction to the Report stated the point for consideration thus:-

“1.2  Under Section 28 of the Indian Contract  Act,  1872  –  to  state  the
point in brief – an agreement which limits the time within which a party  to
an agreement may enforce his rights under any contract by proceedings  in  a
court of law is void to that extent.  But the Section  does  not  invalidate
an agreement in the nature of prescription, that is  to  say,  an  agreement
which provides that, at the end  of  a  specified  period.   If  the  rights
thereunder are not enforced, the rights shall cease to  exist.  As  will  be
explained in greater detail in later Chapters of this Report, this  position
creates serious anomalies and hardship, apart from  leading  to  unnecessary
litigation. Prima facie, it appeared to  the  Commission  that  the  Section
stood in need of reform on  this  point.   The  arguments  for  and  against
amendment of the section will be set out later.   For  the  present,  it  is
sufficient to state that  the  problem  is  one  of  considerable  practical
importance as such stipulations are frequently found in  agreements  entered
into in the course of business.”



17.   After going through  the  existing  case  law  and  finding  that  the
existing  case  law  resulted  in  economic  injustice  because  of  unequal
bargaining power, the Law Commission decided to recommend a  change  in  the
Section.  This was done as follows:-

“5.1  We now come to the changes that are needed in  the  present  law.   In
our opinion, the present  legal  position  as  to  prescriptive  clauses  in
contracts cannot be defended as a matter of justice, logic,  commonsense  or
convenience. When accepting such clauses, consumers either  do  not  realize
the possible adverse impact of such clauses, or are forced to agree  because
big corporations are not prepared to enter into contracts  except  on  these
onerous terms.  “Take it or leave it all”, is their  general  attitude,  and
because of their superior bargaining power, they naturally  have  the  upper
hand.  We are not,  at  present,  dealing  with  the  much  wider  field  of
“standard form contracts” or “standard” terms.  But confining  ourselves  to
the narrow issue under discussion, it would appear that  the  present  legal
position is open to serious objection from the common man’s point  of  view.
  Further, such clauses introduce an element of uncertainty in  transactions
which are entered into daily by hundreds of persons.

5.2   It is hardly necessary  to  repeat  all  that  we  have  said  in  the
preceding Chapters about the demerits of the present law.  Briefly, one  can
say that the present law, which regards prescriptive clauses as valid  while
invalidating time limit clauses which merely bar the  remedy,  suffers  from
the following principal defects:

It causes serious hardship to those who are economically  disadvantaged  and
is violative of economic justice.

In particular, it harms the interests of  the  consumer,  dealing  with  big
corporations.

It is illogical, being based on a distinction which treats the  more  severe
flaw as valid, while invalidating a lesser one.

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 certainty  where  they  stand,  ultimately  leading  to
avoidable litigation.

5.3   On a consideration of all aspects of the  matter,  we  recommend  that
Section 28 of the Indian Contract Act, 1872 should be  suitably  amended  so
as  to  amend  to  render  invalid  contractual  clauses  which  purport  to
extinguish, on the expiry of a  specified  term,  right  accruing  from  the
contract.  Here is a  suggestion  for  re-drafting  the  main  paragraph  of
Section 28.

Revised Section 28, main paragraph, Contract Act as recommended

28.   Every agreement –

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, or

which extinguishes the rights of any party thereto under or  in  respect  of
any contract on the expiry of a specified period (or on failure  to  make  a
claim) or to institute a suit or other legal proceeding within  a  specified
period, or

which discharges any party thereto from any liability under  or  in  respect
of any contract in the circumstances specified in clause  (c),  is  void  to
that extent.”



18.   A period of 13 years passed after which this Report  was  implemented.
The Statement of Objects and Reasons of the Amendment reads as follows:-

    “The Law Commission of India has recommended in  its  97th  report  that
Section 28 of the Indian Contract Act, 1872  may  be  amended  so  that  the
anomalous situation created by the existing Section may  be  rectified.   It
has been held by the courts that the said Section 28 shall  invalidate  only
a clause in any agreement which restricts any party thereto  from  enforcing
his rights absolutely or which limits the time within which he  may  enforce
his rights. The courts have, however, held that this Section shall not  come
into operation when the contractual term spells out  an  extinction  of  the
right of a party to sue or spells out the discharge  of  a  party  from  all
liability in respect of the claim.  What is thus hit by  Section  28  is  an
agreement relinquishing the remedy only i.e. where the time-limit  specified
in the agreement is shorter than the period of limitation provided  by  law.
A distinction is  assumed  to  exist  between  remedy  and  right  and  this
distinction is the basis of  the  present  position  under  which  a  clause
barring a remedy is void, but a clause extinguishing the  rights  is  valid.
This approach may be sound in theory but, in  practice,  it  causes  serious
hardship and might even be abused.

2.    It is felt that Section 28 of the Indian Contract Act, 1872 should  be
amended as  it  harms  the  interests  of  the  consumer  dealing  with  big
corporations and causes serious  hardship  to  those  who  are  economically
disadvantaged.

3.    The Bill seeks to achieve the above objects.



19.   What emerges on a reading of the Law Commission Report  together  with
the Statement  of  Objects  and  Reasons  for  the  Amendment  is  that  the
Amendment does not purport to be either declaratory  or  clarificatory.   It
seeks to bring about a substantive change in the law  by  stating,  for  the
first time,  that  even  where  an  agreement  extinguishes  the  rights  or
discharges the liability of any party to an agreement,  so  as  to  restrict
such party from enforcing his rights on the expiry of  a  specified  period,
such agreement would become void to that extent.   The  Amendment  therefore
seeks to set aside the distinction made in the case law up to  date  between
agreements which limit the time within which remedies  can  be  availed  and
agreements which do away with the right altogether in so limiting the  time.
These are obviously substantive changes in the law  which  are  remedial  in
nature and cannot have retrospective effect.

20.   In Sukhram v. Harbheji, [1969] 3 S.C.R. 752, this Court held:-

“Now a law is undoubtedly retrospective if the law says so expressly but  it
is not always necessary to say so expressly to make the  law  retrospective.
There are  occasions  when  a  law  may  be  held  to  be  retrospective  in
operation.  Retrospection is not to be presumed for the presumption  is  the
other way but many statutes have been regarded as  retrospective  without  a
declaration.  Thus it is that  remedial  statutes  are  always  regarded  as
prospective  but  declaratory   statutes   are   considered   retrospective.
Similarly sometimes statutes have a retrospective effect when  the  declared
intention is clearly and unequivocally manifest from the  language  employed
in the particular law or in the context  of  connected  provisions.   It  is
always  a  question  whether  the  legislature  has  sufficiently  expressed
itself.  To find this one must look at the general scope and purview of  the
Act and the remedy the legislature intends to apply in the former  state  of
the law and then determine what the legislature intended to do.   This  line
of investigation is, of course, only open if it is necessary.  In the  words
of Lord Selborne in Main v. Stark [1890] 15 A.C. 384 at 388, there might  be
something in the context of an Act or collected  from  its  language,  which
might give to  words  prima  facie  prospective  a  large  operation.   More
retrospectivity is not to be given than what can be gathered from  expressed
or clearly implied intention of the legislature.” (pp. 758-759)



21.   Considering that the subject matter of  Section  28  is  “agreements”,
the unamended Section 28 would be the law applicable as on 31.1.1996,  which
is the date of the agreement of bank guarantee.  It now remains  for  us  to
deal with the case law cited by both sides.

22.   In R. Rajagopal Reddy v. Padmini Chandrasekharan, (1995)  2  SCC  630,
this  Court  was  called  upon  to   interpret   the   Benami   Transactions
(Prohibition) Act, 1988.  A 3-Judge Bench of this Court overruled  Mithilesh
Kumari v. Prem Behari Khare, (1989) 2 SCC 95, in arriving at the  conclusion
that the 1988 Act was prospective and not retrospective.  In  so  overruling
the Division Bench judgment, this Court held that the Act is  not  expressly
retrospective, so that an enquiry would lie as to whether it could  be  said
to be clarificatory or declaratory.  The language of  Section  4(1)  of  the
statute made it clear that it would apply to  suits  filed  only  after  the
1988 Act came into force  Further, the Bench went on  to  quote  Maxwell  on
Interpretation as follows:
 “Perhaps no rule of construction is more firmly  established  than  this  —
that a retrospective operation is not to be given to  a  statute  so  as  to
impair an existing right or obligation, otherwise than  as  regards  matters
of procedure, unless that effect cannot be avoided  without  doing  violence
to the language of the enactment. If the enactment is expressed in  language
which is fairly capable of either interpretation, it ought to  be  construed
as prospective only.’ The rule has, in fact, two aspects, for it,  ‘involves
another and subordinate rule, to the effect that a  statute  is  not  to  be
construed so as to have a greater retrospective operation than its  language
renders necessary.” [para 14]

It then went on to hold as follows:

 “As regards, reason 3, we are of the considered view that  the  Act  cannot
be treated to be declaratory in nature. Declaratory enactment  declares  and
clarifies the real intention  of  the  legislature  in  connection  with  an
earlier existing transaction or enactment, it does not create new rights  or
obligations. On the express language of Section 3, the Act  cannot  be  said
to be declaratory but in substance it is prohibitory in nature and seeks  to
destroy the rights of the real owner qua properties held benami and in  this
connection it has taken away the right of the real owner both for  filing  a
suit or for taking such a defence in a suit by benamidar. Such an Act  which
prohibits  benami  transactions  and  destroys  rights  flowing  from   such
transactions as existing earlier is  really  not  a  declaratory  enactment.
With respect, we disagree with the line of reasoning which commanded to  the
Division  Bench.  In  this  connection,  we  may  refer  to  the   following
observations in Principles of Statutory Interpretation, 5th Edn.,  1992,  by
Shri G.P. Singh, at page 315 under the caption ‘Declaratory statutes’:
“The presumption  against  retrospective  operation  is  not  applicable  to
declaratory statutes. As  stated  in Craies  and  approved  by  the  Supreme
Court:
‘For modern purposes a declaratory Act may be defined as an  Act  to  remove
doubts existing as to the common law,  or  the  meaning  or  effect  of  any
statute. Such Acts are usually held to be retrospective.  The  usual  reason
for passing a declaratory Act is to set aside what Parliament deems to  have
been a judicial error whether in the statement of the common law or  in  the
interpretation  of  statutes.  Usually,  if  not  invariably,  such  an  Act
contains a preamble, and also the  word  “declared”  as  well  as  the  word
enacted.’

But the use of the words ‘it is declared’ is not conclusive that the Act  is
declaratory for these words may, at times be used to introduce new rules  of
law and the Act in the latter case will only be amending the  law  and  will
not necessarily be retrospective. In determining, therefore, the  nature  of
the Act, regard must be had to the substance rather than to the form.  If  a
new Act is to explain an earlier Act, it  would  be  without  object  unless
construed retrospective. An explanatory Act is generally  passed  to  supply
an obvious omission or to clear up doubts as to the meaning of the  previous
Act. It is well settled that if a statute is curative or merely  declaratory
of the previous law  retrospective  operation  is  generally  intended.  The
language ‘shall be deemed always to have meant’ is declaratory,  and  is  in
plain terms retrospective. In the absence of  clear  words  indicating  that
the amending Act is declaratory, it would not be so construed when the  pre-
amended provision was clear and unambiguous. An amending Act may  be  purely
clarificatory to clear a meaning of a provision of the principal  Act  which
was already implicit. A clarificatory amendment of  this  nature  will  have
retrospective effect and, therefore, if the principal Act was  existing  law
when the Constitution came into force the amending Act also will be part  of
the existing law.

In Mithilesh Kumari v. Prem Behari Khare [(1989) 2 SCC 95  :  (1989)  1  SCR
621] Section 4 of the Benami Transactions (Prohibition) Act,  1988  was,  it
is submitted, wrongly held to be an Act declaratory in  nature  for  it  was
not passed to clear any doubt existing as to the common law or  the  meaning
or effect of any statute. The conclusion however,  that  Section  4  applied
also to past benami transactions may be supportable on the language used  in
the section.” [para 17]


23.   Similarly, in  Purbanchal Cables & Conductors (P) Ltd. v.  Assam  SEB,
(2012) 7 SCC 462, this Court had to decide whether the Interest  on  Delayed
Payments to Small Scale and  Ancillary  Industrial  Undertakings  Act,  1993
could be said to be retrospective.  After a review of various  judgments  of
this Court, this Court held:-

“There is no doubt about the fact that the  Act  is  a  substantive  law  as
vested rights of entitlement to  a  higher  rate  of  interest  in  case  of
delayed payment accrues in  favour  of  the  supplier  and  a  corresponding
liability is imposed on the buyer. This Court, time and again, has  observed
that any substantive law shall operate  prospectively  unless  retrospective
operation is clearly made out  in  the  language  of  the  statute.  Only  a
procedural or declaratory  law  operates  retrospectively  as  there  is  no
vested right in procedure.

In the absence of any express legislative intendment  of  the  retrospective
application of the Act, and by virtue of the fact that  the  Act  creates  a
new liability of a high rate of interest against the buyer, the  Act  cannot
be construed to have retrospective effect. Since the Act envisages that  the
supplier has an accrued right to claim a higher rate of  interest  in  terms
of the Act, the same can only be said to accrue for  sale  agreements  after
the date of commencement of the Act i.e. 23-9-1992 and not any time  prior.”
[paras 51 and 52]


24.   Similarly, in CIT v. Vatika Township (P) Ltd., (2015) 1  SCC  1,  this
Court held that the proviso to Section 113 of the  Indian  Income  Tax  Act,
1961  was  prospective  and  not  retrospective.    In   so   holding,   the
Constitution Bench adverted to certain general principles as under:-

“Of the various rules guiding how a legislation has to be  interpreted,  one
established rule is that unless a contrary intention appears, a  legislation
is presumed not to be intended to have a retrospective operation.  The  idea
behind the rule is that a current law should govern current activities.  Law
passed today cannot apply to the events of the  past.  If  we  do  something
today, we do it keeping in view the law  of  today  and  in  force  and  not
tomorrow's backward adjustment of it. Our belief in the nature  of  the  law
is founded on the bedrock that every human being is entitled to arrange  his
affairs by relying on the existing law and should not find  that  his  plans
have been retrospectively upset. This  principle  of  law  is  known  as lex
prospicit non respicit: law looks forward not backward. As was  observed  in
Phillips  v. Eyre [(1870)  LR  6  QB  1],  a  retrospective  legislation  is
contrary to the general principle that legislation by which the  conduct  of
mankind is to be regulated when introduced for the first time to  deal  with
future acts ought not to change the character of past  transactions  carried
on upon the faith of the then existing law.

The obvious basis of the principle against retrospectivity is the  principle
of “fairness”, which must be the basis of every legal rule as  was  observed
in L'Office Cherifien des  Phosphates v. Yamashita-Shinnihon  Steamship  Co.
Ltd. [(1994) 1 AC 486 : (1994) 2 WLR 39 : (1994) 1 All  ER  20  (HL)]  Thus,
legislations which modified accrued rights or which  impose  obligations  or
impose new duties  or  attach  a  new  disability  have  to  be  treated  as
prospective unless the legislative intent is clearly to give  the  enactment
a retrospective effect; unless the legislation is for purpose  of  supplying
an obvious  omission  in  a  former  legislation  or  to  explain  a  former
legislation. We need not note the cornucopia of case law  available  on  the
subject because aforesaid legal position clearly emerges  from  the  various
decisions and this legal position  was  conceded  by  the  counsel  for  the
parties. In any case, we  shall  refer  to  few  judgments  containing  this
dicta, a little later.” [paras 28 and 29]


25.   On a conspectus of the aforesaid  decisions,  it  becomes  clear  that
Section   28,   being   substantive   law,   operates    prospectively    as
retrospectivity is not clearly made out by its language.  Being remedial  in
nature, and not clarificatory or declaratory of the law, by  making  certain
agreements covered by Section 28(b) void for the first  time,  it  is  clear
that rights and liabilities  that  have  already  accrued  as  a  result  of
agreements entered into between parties are sought to be taken  away.   This
being the case, we are of the view that both the Single Judge  and  Division
Bench were in error in holding that the amended Section 28 would apply.

26.   Considering that  the  un-amended  Section  28  is  to  apply,  it  is
important to advert to the said Section  and  see  what  are  its  essential
ingredients. First, a party should be restricted absolutely  from  enforcing
his rights under or in respect of any  contract.   Secondly,  such  absolute
restriction should be to approach, by way of a usual legal  proceeding,  the
ordinary Tribunals set up by the State.  Thirdly, such absolute  restriction
may also relate to the limiting of time within  which  the  party  may  thus
enforce its rights.

27.   At this point, it is necessary to set out  the  exact  clause  in  the
bank guarantees in the facts of the present cases.  One  such  clause  reads
as under:

“…. Unless a demand or claim under this guarantee is made against us  within
three months from the above date (i.e.  On  or  before  30.4.97),  all  your
rights under the said guarantee shall be forfeited and we shall be  relieved
and discharged from all liabilities hereunder.”



28.   A similar clause contained in another bank guarantee reads thus:-

“….Provided however, unless a demand or claim under this guarantee  is  made
on us in writing within 3 months from the date of expiry of  this  guarantee
in respect of export of 416.500 M.T. 2450 Bales OF Raw Cotton, we  shall  be
discharged from all liability under this guarantee thereafter.”



29.   A reading of the aforesaid clauses makes it clear that neither  clause
purports to limit the time within which  rights  are  to  be  enforced.   In
other words, neither clause purports to curtail  the  period  of  limitation
within which a suit may be brought  to  enforce  the  bank  guarantee.  This
being the case, it is clear that this Court’s judgment  in  Food  Corpn.  of
India v. New India Assurance Co. Ltd., (1994) 3 SCC 324, would apply on  all
fours to the facts of the present case.

30.   The judgment of Venkatachala,J. and Bharucha,J. set out  the  relevant
clause in a fidelity insurance guarantee as follows:-

“…however, that the Corporation shall have no rights under this  bond  after
the expiry of (period) six months  from  the  date  of  termination  of  the
contract.”



31.   On the facts in that case, the High Court had allowed the  appeals  of
the Insurance Companies stating that the said clause  did  not  entitle  the
Corporation to file suits against Insurance companies after  the  expiry  of
the six months period  from  the  date  of  termination  of  the  respective
contracts entered into.  In setting aside  the  High  Court  judgment,  this
Court held that none of the clauses in the bond required that a suit  should
be instituted by the Corporation for enforcing its  rights  under  the  bond
within a period of six months from the date of termination of the  contract.
 The restriction adverted to in the clauses of the bond envisaged  the  need
for the Corporation to lodge a claim based on the bond,  and  that  if  this
was done, a suit to invoke rights under the bond could be filed  within  the
limitation period set out in the Limitation Act.

32.   In a separate concurring judgment R.M. Sahai, J. after going into  the
case law in paragraph 3  of  his  judgment,  made  an  extremely  perceptive
observation. He stated that where the filing of the suit  within  limitation
is made dependent on any condition precedent, then such condition  precedent
not curtailing the limitation period within which a  suit  could  be  filed,
would be valid and not hit by Section 28.  In paragraph 8 of  the  judgment,
the learned Judge put it thus:-

“It does not directly or indirectly curtail the  period  of  limitation  nor
does it anywhere provide  that  the  Corporation  shall  be  precluded  from
filing suit after expiry of six months. It can  utmost  be  construed  as  a
condition precedent for filing of the suit that the  appellant  should  have
exercised the right within the period agreed to  between  the  parties.  The
right was enforced under the  agreement  when  notice  was  issued  and  the
company was required to pay the amount. Assertion  of  right  is  one  thing
than enforcing it in a court of law. The agreement does  not  anywhere  deal
with enforcement of right in a court of law. It only  deals  with  assertion
of right. The assertion of right, therefore, was governed by  the  agreement
and it is imperative as well that the party concerned  must  put  the  other
side on notice by asserting the right within a particular time  as  provided
in the agreement to enable the other  side  not  only  to  comply  with  the
demand but also to put on guard that in case it is not complied it may  have
to face proceedings in the court of law. Since  admittedly  the  Corporation
did issue notice prior to expiry of  six  months  from  the  termination  of
contract, it was in accordance  with  the  Fidelity  Insurance  clause  and,
therefore, the suit filed by the appellant was within time.” [para 8]


33.   In National Insurance Co. Ltd. v. Sujir Ganesh Nayak & Co.,  (1997)  4
SCC 366, this Court had to decide  whether  condition  19  of  an  insurance
policy was hit by the unamended Section 28.  Condition 19 reads as follows:-


“Condition 19.—In no case whatever shall the company be liable for any  loss
or damage after the expiration of 12 months from the happening  of  loss  or
the  damage  unless  the  claim  is  the  subject  of  pending   action   or
arbitration.”


34.   After referring to the relevant case law and a detailed  reference  to
the Food Corporation judgment, this Court held:-

“Clause 19 in terms said that in no case would the  insurer  be  liable  for
any loss or damage after the expiration of twelve months from the  happening
of loss or damage unless the claim is  subject  of  any  pending  action  or
arbitration. Here the claim was not subject to  any  action  or  arbitration
proceedings. The clause says that if the claim is not pressed within  twelve
months from the happening of any  loss  or  damage,  the  Insurance  Company
shall cease to be liable. There is no dispute that no  claim  was  made  nor
was any arbitration proceeding pending during  the  said  period  of  twelve
months. The clause therefore has  the  effect  of  extinguishing  the  right
itself and consequently the liability also. Notice the facts of the  present
case. The Insurance Company was informed about the strike by the  letter  of
28-4-1977 and by letter dated  10-5-1977.  The  insured  was  informed  that
under the policy it had no liability. This was reiterated  by  letter  dated
22-9-1977. Even so more than twelve  months  thereafter  on  25-10-1978  the
notice of demand was issued and the  suit  was  filed  on  2-6-1980.  It  is
precisely to avoid such delays and to discourage such  belated  claims  that
such insurance policies contain a clause like clause 19.  That  is  for  the
reason that if the claims are preferred with promptitude they can be  easily
verified and settled but if it is the other way round, we do  not  think  it
would be possible for the insurer to verify the same since evidence may  not
be  fully  and  completely  available  and  memories  may  have  faded.  The
forfeiture clause 12 also provides that if the claim is made  but  rejected,
an action  or  suit  must  be  commenced  within  three  months  after  such
rejection;  failing  which  all  benefits  under  the  policy  would   stand
forfeited. So, looked at from any point of view,  the  suit  appears  to  be
filed after the right stood extinguished. That is the reason  why  in Vulcan
Insurance case [(1976) 1 SCC 943] while interpreting  a  clause  couched  in
similar terms this Court said: (SCC p. 952, para 23)
“It has been repeatedly held that such a clause is not hit by Section 28  of
the Contract Act.”
Even if the observations made are in the  nature  of obiter  dicta we  think
they proceed on a correct reading of the clause.” [para 21]


35.   In H.P. State Forest Co. Ltd. v.  United  India  Insurance  Co.  Ltd.,
(2009) 2 SCC 252, this Court had  to  decide  whether  clause  6(ii)  of  an
insurance policy was hit by the unamended Section 28.  This clause reads  as
follows:-

“6(ii) In no case whatsoever shall the Company be liable  for  any  loss  or
damage after the expiration of 12 months from the happening of the  loss  or
damage unless the claim is the subject of pending action or arbitration:  it
being expressly agreed and  declared  that  if  the  Company  shall  declaim
liability for any claim  hereunder  and  such  claim  shall  not  within  12
calendar months from the date of the disclaimer have been made the  subject-
matter of a suit in a court of law then the claim shall for all purposes  be
deemed to have been  abandoned  and  shall  not  thereafter  be  recoverable
hereunder.”


After a copious reference to Food Corporation and S.G.  Nayak’s  case,  this
Court held that such clauses would not be hit by Section 28.

36.   Considering that the respondents’ first argument has been accepted  by
us, we do not think it necessary to go into the finer details of the  second
argument and as to whether the  aforesaid  clauses  in  the  bank  guarantee
would be hit by Section 28(b) after the 1997  amendment.   It  may  only  be
noticed, in passing, that Parliament has to a  large  extent  redressed  any
grievance that may arise qua bank guarantees in  particular,  by  adding  an
exception (iii) by an amendment made to Section 28 in 2012 with effect  from
18.1.2013.  Since  we  are  not  directly  concerned  with  this  amendment,
suffice it to say that stipulations  like  the  present  would  pass  muster
after 2013 if the specified period is not less than one year from  the  date
of occurring or non-occurring of a specified  event  for  extinguishment  or
discharge of a party from liability. The appeals are,  therefore,  dismissed
with no order as to costs.



                                        ……………………J.

                                        (C. Nagappan)





                                        ……………………J.

New Delhi;                              (R.F. Nariman)

September 15, 2016

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