Contract Act, Section 28

Contract Act, Section 28: Agreements in Restraint of Legal Proceedings Are Void

Section 28 of the Indian Contract Act, 1872 protects the right of every person to enforce contractual rights through courts or other legally recognized forums, while declaring agreements that absolutely restrict such legal remedies to be void.

The section also invalidates agreements that unlawfully limit or extinguish legal rights within a specified period, while preserving valid arbitration agreements and certain guarantee contracts recognized by law.

1. Purpose of Section 28

The primary objective of Section 28 is to ensure that contractual parties are not deprived of their legal right to approach courts or other competent authorities for the enforcement of contractual rights.

Since access to justice is a matter of public policy, the provision prevents private agreements from restricting judicial remedies and protects the integrity of the legal system.

2. Right to Enforce Contractual Rights

Every valid contract creates corresponding legal rights and obligations, and an aggrieved party is ordinarily entitled to approach the appropriate court or tribunal for relief when those rights are violated.

Section 28 safeguards this principle by declaring void any contractual term that prevents or substantially restricts the enforcement of legally recognized contractual rights.

3. Absolute Restriction on Legal Proceedings

Clause (a) of Section 28 declares void any agreement that absolutely restricts a party from enforcing contractual rights through ordinary legal proceedings before competent courts.

A contractual term that completely prevents a party from approaching the courts is unenforceable because the law does not permit the surrender of the right to seek judicial remedies.

4. Restricting the Time for Legal Action

Section 28 invalidates agreements that unlawfully restrict the period for enforcing contractual rights, as parties cannot shorten statutory limitation periods and deprive a person of the opportunity to seek legal remedies.

5. Extinguishment of Rights or Liabilities

Clause (b) of Section 28 declares void contractual provisions that extinguish a party's rights or discharge another party from liability merely because a specified period has expired.

Where such clauses prevent the enforcement of contractual rights, they are unenforceable because parties cannot indirectly deprive others of legal remedies through contractual extinction clauses.

6. Meaning of Void to That Extent

Section 28 provides that only the contractual provision imposing an unlawful restraint on legal proceedings is void, while the remaining terms of the contract may continue to be valid and enforceable if they are severable.

7. Future Disputes Referred to Arbitration

The first exception to Section 28 recognizes agreements to refer future disputes to arbitration as valid, since arbitration is a legally recognized method of dispute resolution and does not amount to an unlawful restraint on legal proceedings.

8. Existing Disputes Referred to Arbitration

The second exception to Section 28 provides that parties may validly agree in writing to refer existing disputes to arbitration, promoting efficient dispute resolution without unlawfully restraining legal proceedings.

9. Importance of Arbitration

The arbitration exceptions under Section 28 reflect the legislative policy of encouraging efficient and legally recognized alternative dispute resolution, without depriving parties of their right to justice.

10. Guarantees Issued by Banks and Financial Institutions

Section 28 recognizes a special exception for written guarantee agreements of banks and financial institutions, permitting rights or liabilities to terminate after a specified period of not less than one year, in view of the commercial need for certainty in such transactions.