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Balaji Infraro Ltd V. Chanakya National Law University: A Detailed Analysis

Case Facts:
The Appellant and Respondents had entered into a contract to construct a Boy’s Hostel in the Chanakya National Law University. As the construction work got completed, the Respondents paid whatever amount was due by way of full and final settlement. However, the Petitioner Company demanded Rs 63,18,345.49 for the cost incurred in carriage of materials vide letter dated 12.10.2011. Registrar of the Respondent- Chanakya National Law University informed the Petitioner-company that a representation was referred to the consultant M/s Gherzi Eastern Ltd. Kolkata.

The consultation company had opined that the additional claim for carriage was not admissible, unless or otherwise, specially mentioned in the Bill of Quantity (BOQ) of civil work. The same was informed to the Petitioner vide letter dated 09.08.2012 and had further stated that the Respondents would no longer entertain any more correspondence in the above regard. Petitioner had demanded interest on the amount of security deposit vide letter dated 03.03.2012, to which the respondent stated that the same was absolutely illusionary and without any substance.

Finally, the Petitioner vide letter dated 07.05.2013 had requested the Respondents for the appointment of an Arbitrator as it was mentioned in the terms of the contract. However, the Respondent replied vide letter dated 18.05.2013 that clause-25 of the contract states that there is a 45 days’ time limit for appointment of an Arbitrator in respect of any claim from the date of intimation of final bill ready for payment.

The Respondent further stated that the right to appoint an Arbitrator under clause-25 of the Contract was extinguished because the final payment was made on 07.01.2012 and there was no demand for appointment of an Arbitrator within 45 days thereafter and hence the claim of the Petitioner shall be deemed to have been waived and absolutely barred and the Respondents would be treated to have been discharged of all the liabilities as per the terms mentioned in the agreement. In view of such matter where the Respondents had failed to respond positively, the Petitioner had filed an application in the Patna High Court claiming appointment of an Arbitrator.

Main Issue Raised:
Whether the time limit of 45 days for the appointment of arbitrator as mentioned in Clause-25 of the Contract renders the clause void according to the provisions of section 28 of the Indian Contract Act.

Rules:
Section 28 of Indian contract Act, 1872

Agreements in restraint of legal proceedings, void: Every agreement:
  1. 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
  2. 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.

Analysis:
Before I begin with the analysis of the case, it will be appropriate to quote a paragraph from Clause-25 of the Contract, which reads as follows:
It is also a term of this contract that if the contractor does not make any demand for appointment of arbitrator in respect of any claims in writing as aforesaid within 45 days of receiving the intimation from the Employer or his authorized representative that the final bill is ready for payment, the claim of the contractor shall be deemed to have been waived and absolutely barred and the Employer shall be discharged and released of all liabilities under the contract in respect of these claims.

Section 28 of the Indian Contract Act, 1872 states that agreements in restraint of legal proceedings is void. Further it clearly mentions that every agreement, which extinguishes the rights of any party or discharges any party from any liability under the contract on the expiry of a specified period so as to restrict any party from enforcing his rights, is to be rendered void to that extent.

To quote the words of CJ Garth, in the case of Koegler v Coringa Oil Co Ltd,This section applies to agreements which wholly or partially prohibit the parties from having a recourse to a court of law. If, for instance, a contract were to contain a stipulation that no action should be brought upon it, that stipulation would be void, because it would restrict both parties from enforcing their rights under the contract in the ordinary legal tribunals.

The petitioner-Company claimed that prior to amendment of Section 28 of the Contract Act, the clause in agreement stipulating extinguishment of remedy had been held by the Hon'ble Supreme Court to be void as it operated against the provisions of Section 28 of the Contract Act, which provides that any agreement, restricting absolutely from enforcing his right under or in respect of any contract by usual legal proceeding in the ordinary Tribunal or reducing the period of limitation other than the limitation provided under the statute to that extent is void, but there is no bar prohibiting the parties to enter into an agreement relating to extinguishment of the right if it is claimed within period mentioned in the agreement. The extinguishment of remedy is one thing and extinguishment of right is another thing.

Taking the example of Hirabhai Narotamdas v Manufacturers Life Insurance Co, the counsel for the Petitioner stated the decision of Bombay High Court which held that a clause in a policy of life insurance declaring that no suit to recover under the policy of life insurance shall be brought after one year from death of the assured was held void.

The counsel for the Respondents gave the example of the famous case of National Insurance Co Ltd v Sujir Ganesh Nayak & Co. The clause in question provided that:
In no case whatsoever shall the company be liable for any loss or damage after the expiration of 12 months from the happening of loss or damage unless the claim is the subject of pending action or arbitration.

The claimant notified the insurer regarding the strike which caused the loss but did not commence proceedings within the stipulated time. The court observed that such a clause is not hit by section 28 and is very much valid.

Conclusion:
A blatant violation of the section 28 of Indian Contracts Act, 1872 was observed in the given facts and hence the Court rightly ruled in favour of the petitioner-company. It is true that a party cannot enforce another party to maintain a time limit in order to seek a legal remedy purely on the basis that Insurance Companies do so. It would, otherwise, lead to the infringement of one’s rights to seek legal remedy being a party to a contract.

After listening to both the sides, the Patna High Court held that if parties in a contract are bound by a time limit to exercise their legal rights, then such an agreement is void. The Court held that since Clause-25 of the Contract between the parties was blatantly violating section 28 of Indian Contract Act in bright daylight, the same cannot be invoked to the prejudice of the petitioner-company. The Court further said that the issue of payment of interest on security deposits and payment of transportation of materials remains fit for an Arbitrator to decide and hence decided the favour against the Respondents.

References:
Sites Referred:
  1. SSC Online: https://www.scconline.com/WebEdition.aspx
  2. LexisNexis Advanced: http://www.lexisnexis.com/in/legal/auth/signonform.do?type=2
  3. IndianKanoon: https://indiankanoon.org/doc/65950772

Book Referred:
  • Avtar Singh, Contract and Specific Relief, Twelfth Edition

    Award Winning Article Is Written By: Mr.Ashish Dash - 1st year law student at Institute of law, Nirma University, Ahmedabad
    Awarded certificate of Excellence
    Authentication No: AP2204130fk8Hl-25-0421

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