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
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
