25 Jan 2010

Limitation Act can be subverted by contract ...

The law of limitation is a conscious attempt on the part of the law-makers to put an end to stale claims is based on the equitable principle that ‘delay defeats equity'. For each of the different types of claims available under law, the law of limitation provides a time-frame within which such claims are to be preferred or else they become unenforceable. The parties, it seems, are however even wiser. Contractual drafting has identified a lacunae whereby these limitation hurdles can be crossed and private parties determine the law. The law to this regard, particularly to the advantage of insurance companies, is highly skewed. 

Standard form contracts and even tailor made contracts these days provide that a party shall not be liable if a claim is not raised within a period of time, say twelve months, which often is less than the period prescribed by Limitation Act for such suits and such clauses has been upheld by the courts in India even though they go, in principle, against the law of limitation. We had written an article a few years back on the issue entitled 'Is Limitation Act subject to Contract?' and pointed out the shortfalls of such attempts by the parties to supplant the law. However the judicial opinion has remained trite in favour of such attempts and the recent decision of the Delhi High Court is indicative of the fact that such manipulations are now an accepted proposition under Indian law. The High Court in its decision observed as under;

8. The issue raised by the petitioner regarding clause 6(b)(ii) and the plea taken by the respondent about the clause being hit by Section 28 has been set at rest by the Supreme Court in National Insurance Company Ltd. vs. Sujir Ganesh Nayak & Company AIR 1997 SC 2049. The Supreme Court has reiterated this legal position Himachal Pradesh State Conference Company Ltd. vs. Union of India Insurance Company Ltd. (2009) 2 SCC 252 wherein it was pleaded before the Supreme Court that the law laid down in AIR 1997 SC 2049 (supra) Supreme Court was not a good law and the Court should re-consider the position. The Supreme Court observed as under:
“11. We see from the order of the Commission that it has relied upon Sujir Ganesh Nayak case to hold that the complaint could not be entertained as being time-barred. The counsel for the appellant had, however, argued before the Commission as also before us, that as Section 28 of the Contract Act had undergone significant amendments, the aforesaid judgment required a reappraisal. This submission had been rejected by the Commission by observing that it was bound by the judgment in Sujir Ganesh Nayak case and that the appellant could agitate the question as to its correctness before the Supreme Court. The matter was, accordingly, adjourned by us to enable the parties to find out if the amendment had, indeed, been made and, if so, to what effect. During the resumed hearing, the learned counsel for the appellant candidly admitted that the amendment had been made but had thereafter been repealed and the matter would, thus, have to be examined under Section 28 of the Contract Act, as originally placed. We have, accordingly, chosen to deal with this matter under that provision.
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13. In Sujir Ganesh Nayak case to which primary reference has been made by the learned counsel for the parties, while dealing with an identical situation where a contract contained a provision prescribing a period of limitation shorter than that prescribed by the Limitation Act, it was held that the contractual provisions was not hit by Section 28 as the right itself had been extinguished.
14. Mr. Sharma has, however, submitted that in view of the observations in some paragraphs in Food Corpn. Of India case, the observations in Sujir Ganesh Nayak case were liable to reconsideration. We, however, find no merit in this plea for the reason that in Sujir Ganesh Nayak case, Food Corpn, of India case has been specifically considered and Vulcan Insurance Co. case too had been relied upon.
15. In Sujir Ganesh Nayak case the Court was called upon to consider Condition 19 of the policy which was in the following terms: (SCC p.370, para 5) “5. …. "Condition 19. – In no case whatever shall the company be liable for any loss or damage after the expiration of 12 months from the happening of loss or the damage unless the claim is the subject of pending action or arbitration.‟ “ While constraining this provision vis-à-vis Section 28 of Contract Act and the cases cited above and several other cases, in addition, this is what the Court ultimately concluded: (Sujir Ganesh Nayak case, SC pp.375-77, paras 16, 19 & 21)
“16. From the case law referred to above the legal position that emerges is that an agreement which in effect seeks to curtail the period of limitation and prescribes a shorter period than that prescribed by law would be void as offending Section 28 of the Contract Act. That is because such an agreement would seek to restrict the party from enforcing his right in court after the period prescribed under the agreement expires even though the period prescribed by law for the enforcement of his right has yet not expired. But there could be agreements which do not seek to curtail the time for enforcement of the right but which provide for the forfeiture or waiver of the right itself if no action is commenced within the period stipulated by the agreement. Such a clause in the agreement would not fall within the mischief of Section 28 of the Contract Act. To put it differently, curtailment of the period of limitation is not permissible in view of Section 28 but extinction of the right itself unless exercised within a specified time is permissible and can be enforced. If the policy of insurance provides that if aclaim is made and rejected and no action is commenced within the time stated in the policy, the benefits flowing from the policy shall stand extinguished and any subsequent action would be time-barred. Such a clause would fall outside the scope of Section 28 of the Contract Act. This, in brief, seems to be the settled legal position. We may now apply it to the facts of this case.
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19. The clause before this Court in Food Corpn. Case extracted hereinbefore can instantly be compared with the clause in the present case. The contract in that case said that the right shall stand extinguished after six months from the termination of the contract. The clause was found valid because it did not proceed to say that to keep the right alive the suit was also required to be filed within six months. Accordingly, it was interpreted to mean that the right was required to be asserted during that period by making a claim to the Insurance Company. It was therefore held that the clause extinguished the right itself and was therefore not hit by Section 28 of the Contract Act. Such clauses are generally found in insurance contracts for the reason that undue delay in preferring a claim may open up possibilities of false claims which may be difficult of verification with reasonable exactitude since memories may have faded by then and even ground situation may have changed. Lapse of time in such cases may prove to be quite costly to the insurer and therefore it would not be surprising that the insurer would insist that if the claim is not made within a stipulated period, the right itself would stand extinguished. Such a clause would not be hit by Section 28 of the Contract Act.
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21. Clause 19 in terms said that in no case would the insurer be liable for any loss or damage after the expiration of twelve months from the happening of loss or damage unless the claim is subject of any pending action or arbitration. Here the claim was not subject to any action or arbitration proceedings. The clause says that if the claim is not pressed within twelve months from the happening of any loss or damage, the Insurance Company shall cease to be liable. There is no dispute that no claim was made nor was any arbitration proceeding pending during the said period of twelve months. The clause therefore has the effect of extinguishing the right itself and consequently the liability also. Notice the facts of the present case. The Insurance Company was informed about the strike by the letter of 28-4-1977 and by letter dated 10-5-1977. The insured was informed that under the policy it had no liability. This was reiterated by letter dated 22-9-1977. Even so more than twelve months thereafter on 25-10-1978 the notice of demand was issued and the suit was filed on 2-6-1980. It is precisely to avoid such delays and to discourage such belated claims that such insurance policies contain a clause like Clause 19. That is for the reason that if the claims are preferred with promptitude they can be easily verified and settled but if it is the other way round, we do not think it would be possible for the insurer to verify the same since evidence may not be fully and completely available and memories may have faded. The forfeiture Clause 12 also provides that if the claim is made but rejected, an action or suit must be commenced within three months after such rejection; failing which all benefits under the policy would stand forfeited. So, looked at from any point of view, the suit appears to be filed after the right stood extinguished. That is the reason why in Vulcan Insurance case while interpreting a clause couched in similar terms this Court said:(SCC p.952, para 23)
‟23. … It has been repeatedly held that such a clause is not hit by Section 28 of the Contract act…‟ Even if the observations made are in the nature of obiter dicta we think they proceed on a correct reading of the clause.”
In the light of the fact that Food Corpn. Case has been considered in Sujir Nayak case, no further argument remains in the present matter, as Clause 6(ii) and Condition 19 are, in their essence, pari material.”
9. In view of the above legal position upheld by Supreme Court recently, I consider that the Clause 6(b)(ii) was binding between the parties and the respondent’s claim raised after 12 months of the final amount he received under the settlement was not entertainable and could not have been considered by the Arbitrator. The award of the Arbitrator is liable to be set aside on this sole ground. I, therefore, hereby set aside the award.

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