Government of India
Bare Act As Per The Government of India

Section 28 of Indian Contract Act

28. Agreements in restraint of legal proceedings, void.— Every agreement,—

(a) by which any party thereto is restricted absolutely from enforcing his rights under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals, or which limits the time within which he may thus enforce his rights; or
(b) which extinguishes the rights of any party thereto, or discharges any party thereto, from any liability, under or in respect of any contract on the expiry of a specified period so as to restrict any party from enforcing his rights, is void to the extent.

Exception 1.— Saving of contract to refer to arbitration dispute that may arise.— This section shall not render illegal a contract, by which two or more persons agree that any dispute which may arise between them in respect of any subject or class of subjects shall be referred to arbitration, and that only the amount awarded in such arbitration shall be recoverable in respect of the dispute so referred.

Exception 2.— Saving of contract to refer questions that have already arisen.— Nor shall this section render illegal any contract in writing, by which two or more persons agree to refer to arbitration any question between them which has already arisen, or affect any provision of any law in force for the time being as to references to arbitration.

Exception 3.— Saving of a guarantee agreement of a bank or a financial institution.— This section shall not render illegal a contract in writing by which any bank or financial institution stipulate a term in a guarantee or any agreement making a provision for guarantee for extinguishment of the rights or discharge of any party thereto from any liability under or in respect of such guarantee or agreement on the expiry of a specified period which is not less than one year from the date of occurring or non-occurring of a specified event for extinguishment or discharge of such party from the said liability.

Explanation.— (i) In Exception 3, the expression “bank” means—

(a) a “banking company” as defined in clause (c) of section 5 of the Banking Regulation Act, 1949(10 of 1949);
(b) “a corresponding new bank” as defined in clause (da) of section 5 of the Banking Regulation Act, 1949(10 of 1949);
(c) “State Bank of India” constituted under section 3 of the State Bank of India Act, 1955 (23 of 1955);
(d) “a subsidiary bank” as defined in clause (k) of section 2 of the State Bank of India (Subsidiary Banks) Act, 1959(38 of 1959);
(e) “a Regional Rural Bank” established under section 3 of the Regional Rural Banks Act, 1976(21 of 1976);
(f) “a Co-operative Bank” as defined in clause (cci) of section 5 of the Banking Regulation Act, 1949(10 of 1949);
(g) “a multi-State co-operative bank” as defined in clause (cciiia) of section 5 of the Banking Regulation Act, 1949(10 of 1949); and

(ii) In Exception 3, the expression “a financial institution” means any public financial institution within the meaning of section 4A of the Companies Act, 1956(1 of 1956).

Final Thoughts

Introduction

Section 28 of the Indian Contract Act is an important legal provision that deals with agreements restricting a party from taking legal action to enforce their contractual rights. It aims to protect the legal right of every party to approach courts or tribunals when a dispute arises, ensuring no unfair limitation or restriction is placed on the enforcement of rights.

Text of Section 28 Explained

Section 28 states that any agreement that restricts a party from enforcing their rights through usual legal proceedings, or limits the time period within which they may do so, is void.

In simpler words, you cannot make a contract that says, “You cannot sue me ever,” or “You can only sue me within 6 months,” because such conditions unfairly prevent justice.

Why Such Agreements Are Void

The rationale behind declaring these agreements void is to ensure access to justice. The law does not allow parties to stop themselves or others from seeking legal remedies. If such restrictions were allowed, it would defeat the purpose of having legal rights and protections under a contract.

Exceptions to Section 28

Section 28 also provides important exceptions where certain agreements restricting legal proceedings are valid:

Exception 1: Arbitration Agreement for Future Disputes

If two or more parties agree to resolve any future disputes through arbitration instead of courts, such agreement is not void. Only the award made by the arbitrator can be enforced. This promotes alternative dispute resolution.

Exception 2: Arbitration Agreement for Existing Disputes

Even if the dispute already exists, parties can agree in writing to refer that dispute to arbitration. This agreement is also valid and not void.

Exception 3: Guarantee Agreements by Banks and Financial Institutions

Banks or financial institutions can enter into contracts that limit the period (not less than one year) within which a party is liable under a guarantee. This means they can specify a reasonable time after which the guarantor’s liability ends. This is not void.

Explanation of Key Terms in Exception 3

Definition of “Bank”. The term “bank” includes:

Definition of “Financial Institution”: A financial institution means any public financial institution as defined under section 4A of the Companies Act, 1956.