The State of Commercial Laws – FIDIC, 1999 versus Section 28 of the Indian Contract Act

Adopting an international contract into the Indian context without making necessary adaptations carries with it numerous problems. A perfect case study to establish the same is Clause 20.1 contained in Part 1 of the Conditions of Contract for Design-Build and Turnkey (First Ed., 1999) published by FIDIC which reads as follows:.“Procedure for Claims:If the Contractor considers himself to be entitled to any extension of the Time for Completion and/or any additional payment, under any Clause of these Conditions or otherwise in connection with the Contract, the Contractor shall give notice to the Engineer, describing the event or circumstance giving rise to the claim. The notice shall be given as soon as practicable, and not later than 28 days after the Contractor became aware, or should have become aware, of the event or circumstance. If the Contractor falls to give notice of a claim within such period of 28 days, the Time for Completion shall not be extended, the Contractor shall not be entitled to additional payment, and the Employer shall be discharged from all liability in connection with the claim. Otherwise, the following provisions of this Sub-Clause shall apply.The Contractor shall also submit any other notices which are required by the Contract, and supporting particulars for the claim, all as relevant to such event or circumstance.The Contractor shall keep such contemporary records as may be necessary to substantiate any claim, either on the Site or at another location acceptable to the Engineer…”.It follows from the above clauses that:.– In order to claim compensation/ extension of time, it is mandatory for the Contractor to provide the Engineer a Notice within 28 days of the event which entitles it to such compensation/ extension of time, requesting for the same. If the above procedure is not followed, the Contractor will not be entitled to any such compensation..- The above provisions are meant to ensure that disputes are resolved as and when they arise as dispute resolution would be far more efficient when the adjudicator will have the benefit of a contemporaneous inspection which would greatly assist in the decision making..In the Indian context, such Clauses have proved to be problematic as most Employers (most often Government bodies) react adversely when the dispute resolution mechanism is triggered during the execution of the project. As a result of these power dynamics which are often in play, many Contractors face a difficulty in adhering to the requirement of having to raise a claim within the stipulated 28 day period. Does this mean that the Contractors are deemed to have waived these claims? Indian law appears to offer a solution by way of Section 28 of the Indian Contract Act, 1872 (the “Act”) which states:.“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 that extent”.This article analyzes whether clauses such as Clause 20.1 of FIDIC would be void by virtue of Section 28 of the Act..The Section 28(b) Test.Legislative History.Section 28 of the Indian Contract Act, 1872 originally read as follows:.”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.”.Interpreting the above provision, the Supreme Court, in Food Corporation of India v. New India Assurance Company: (1994) 3 SCC 324 and National Insurance Co. Ltd. v. Sujir Ganesh Nayak and Co. Ltd.: [1997]3 SCR 202 (“Sujir Ganesh”) (See also Wild Life Institute of India, Dehradun v. Vijay Kumar Garg : (1997) 10 SCC 528 and Vulcan Insurance Co. Ltd. v. Maharaj Singh: 1976 (1) SCC 943), drew a distinction between curtailment of the limitation period and extinguishment of a right. The Supreme Court held that Section 28, as it stood then, only prohibited the former; the latter was permissible..Seeking to do away with this distinction, the Parliament, on 08.01.1997 amended Section 28 and Section 28(b) was introduced to include within the ambit of Section 28 clauses which result in the extinguishment of rights as well..The Statements of Objects and Reasons[1] for the above provision clearly enunciate that the amendment was being carried out to reverse the decisions of the Supreme Court referred to above..The post-amendment position of law.Relying on the above Statement of Objects and Reasons, the Bombay High Court, in Union of India v. Bhagwati Cotton Ltd: 2008(5) Bom CR 909 held:.“On comparison of the two provisions, it is obvious that Clause (a) has been adopted as it is from the original Section 28. What has been added by way of amendment, is Clause (b). The reason to bring about the said change has been spelt out in the statement of objects and reasons as referred to earlier. The law which was prevailing when the amending Act 1 of 1997 was introduced is that, the Judicial pronouncements had made distinction between remedy and right. It was held that what was hit by Section 28 as it then prevailed, was taking away only the remedy of any party to the Agreement. The said Section did not deal with situation where the rights of party to the Agreement were to be affected in any manner. That void has now been plugged by introducing Clause (b) to Section 28.”.A similar line of reasoning has been adopted by numerous Courts[2].Thus, the position of law post-amendment is drastically different from the pre-amendment position. The essential requirements under the amended Section 28 are:.– Extinguishment of rights of any party or discharge of any party from any liability under or in respect of any contract.– On the expiry of a specified period.– So as to restrict that party from enforcing his rights..The above provision would therefore cover cases where a right has arisen (such as the right to claim damages on the basis of delay) and that right is extinguished on the expiry of a specified period (such as within 28 days from the date of the cause of action) and such extinguishment prevents that party from enforcing its right. On the above basis, Clauses 20.1 of FIDIC would be squarely covered by Section 28(b) and are consequently void..Decisions to the Contrary are distinguishable.On the face of it, there appear to exists numerous authorities to the contrary; however all such authorities are distinguishable. Each of these authorities are considered below:.Mahesh Chand v. Union of India: 2005 (1) Arb. LR 153 (Rajasthan High Court)-.While this case arose post-amendment, the Rajasthan High Court, placed reliance upon the pre-amendment decisions referred to above. This decision can therefore not be treated to be an authority to support the position of law post-amendment..H.P. State Forest Company Ltd. v. United India Insurance Co. Ltd: AIR 2009 SC 1407-.In this case, the Supreme Court, under the mistaken belief (based on the submission of the Counsel) that Section 28(b) of the Indian Contract Act was no longer in force, followed Sujir Ganesh and applied the pre-amendment law. High Courts (in Sunil Goyal v. Haryana State Agriculture Marketing Board: 2011 (2) Arb.LR 251 (P&H) and Central Ware Housing Corporation v. M/s Ravi Constructions: AIR 2013 Kant 18) have considered this decision and have taken the view that they are not bound by the same as the decision of the Supreme Court is not an authority in relation to amended Section 28(b) of the Indian Contract Act..Axios Navigation Co. Ltd. v. Indian Oil Corporation Ltd. : 2012 (2) Bom CR 271 (“Axios”)-.The Bombay High Court relies on the decision of the Division Bench of the Bombay High Court in M/S Indusind Bank Ltd. v. Union of India: Appeal No. 258/2008 (“Indusind”), which in turn ignores the import of the amendment to Section 28 and relies on the pre-amendment law..Further, the clause for consideration in this case read as follows:.“Clause 24- Charterers shall in no event be liable for demurrage unless the demurrage claim including in responsible detail, the specific facts upon which the claim is based provided available to owners, has been presented to charterers in writing within forty five (45) days upon completion of discharge.”.While interpreting the above Clause, the Bombay High Court, goes on the basis that assertion of the right within the stipulated period is necessary to perfect the right and consequently, the right to claim damages/ compensation was not restricted in any manner but only that such right itself was “perfected” only following the assertion of the right within a stipulated period. The Learned Judge, in Axios, held:.”The Division Bench of this Court (M/s. Indusind Bank Ltd) (Supra) has set aside the judgment and decree by the learned Single Judge, whereby such restrictive clause was declared to be void. We have held that such clause is not void as by such clauses right to claim damages or compensation in regular Court is not restricted. What is restricted is their claim or demand and/or assertion of their right, as agreed, within the period mentioned in such document. Therefore, we have also observed that such clause does not affect the right of the parties to enforce their rights by approaching the Court of law within normal period of limitation, but it should be subject to the assertion of their right within agreed period. It is also observed that the provisions of Section 28 of the Contract Act and the terms in the agreement is relatable to the assertion of right so as to perfect that right and not in relation to enforcement of that right in the Court of laws.“.Therefore the case revolves around the fact that the right to claim demurrage accrues and is perfected only upon assertion of the same within the stipulated period. Consequently, in the above case there existed no right to be extinguished and as a result Section 28(b) was of no relevance. Such a case is different from what would apply to Clause 20.1 of FIDIC where it is evident that upon there being a delay for which the Employer is responsible a right to damages automatically accrues to the Contractor pursuant to Section 73 of the Indian Contract Act..Sanjay Dubey v. State of MP: 2012(5) MPHT 97 (“Dubey”)-.The Madhya Pradesh High Court was faced with the interpretation of the following clause:.“Arbitration Clause 29:- Except as otherwise provided in this contract all question and dispute relating to the meaning of the specifications, designs, drawings and instructions herein before mentioned and as to thing whatsoever, in any way arising out of or relating to the contract, designs, drawings, specifications, estimates, concerning the works, or the execution or failure to executive the same whether arising during the progress of the work or after the completion or abandonment thereof shall be referred to the Superintending Engineer in writing for his decision, within a period of 30 days of such occurrence. Thereupon the Superintending Engineer shall give his written instructions and/or decisions within a period of 60 days of such request. This period can be extended by mutual consent of the parties.Upon receipt of written instructions or decisions, the parties shall promptly proceed without delay to comply such instructions or decisions. If the Superintending Engineer fails to give his instructions or decisions in writing within a period of 60 days or mutually agreed time after being requested if the parties are aggrieved against the decision of S.E. the parties may within 30 days prefer from appeal to the Chief Engineer who shall afford an opportunity to the parties of being heard and to offer evidence in support of his appeal. The chief Engineer will give his decision within 90 days. If any party is not satisfied with the decisions of the Chief Engineer, he can refer such disputes for arbitration by an Arbitration Board to be constituted by the State Government which shall consist of three members of whom one shall be chosen from among the officers belonging to the department not below the rank of S.E. one retired Chief Engineer of any Technical Department, and one serving officer not below the rank of S.E. belonging to another Technical Department.”.The issue before the Madhya Pradesh High Court was whether the requirement that a claim first be made before the Superintending Engineer within a period of 30 days of the claim arising, was hit by Section 28(b). Holding that the said Clause was valid, the Full Bench of the Madhya Pradesh High Court held:.“Now we may advert to the impact of Section 28 of the Indian Contract Act, 1872 on clause 29 of the agreement. It is not open to the parties to reduce or enlarge the limitation prescribed by the statute for initiation of legal proceedings but it is open to the parties to agree that by some agreed act or omission by one party to an agreement within the time stipulated in the agreement, the rights of that party under the agreement shall stand extinguished. However, in view of sub-section (b) of Section 28 of the Indian Contract Act, 1872, as amended w.e.f. 8.1.1997 such extinguishment of right cannot be made dependent on mere lapse of a party by prescribing limitation lesser than the limitation prescribed by the statute for the simple reason that what cannot be done directly i.e. reduction of statutory period of limitation cannot be allowed to be done indirectly…. Clause 29 of the Agreement is not violative of Section 28(b) of the Indian Contract Act, 1872.”.While the words used suggest that an act (such as the issuance of a notice to a stipulated authority) which is a condition precedent for the exercise of a right is valid, the context in which these observations were made is apposite. The act of referring the matter to the Superintending Engineer was only a condition precedent to having the matter referred to arbitration, not following the said procedure only led to the extinguishment of the right to have the matter referred to arbitration and not an extinguishment of the underlying substantive right that is being enforced. It is trite that arbitration is a consensual remedy which can be made conditional upon any pre-arbitration procedures being followed. Similar to the previous case of Axios, the right to refer the matter to arbitration kicks in only after the fulfilment of the conditions precedent. Consequently, a provision which sets out such condition precedents which need to be satisfied in order to avail of the remedy of arbitration will not restrict any party from enforcing its rights in terms of Section 28(b) as it will always be open to such a party to enforce its rights in a Court of law in case the conditions precedent for invoking arbitration are not fulfilled..Conclusion.In light of the above discussion, Contractors can get over the obstacles caused by Clause 20.1 of the FIDIC by arguing that such a Clause is void by virtue of Section 28 of the Act. While this article focuses on the validity of Clause 20.1 of FIDIC, 1999 it must be pointed that similar Clauses exist in numerous other contracts including many insurance contracts and hence the case laws discussed in this piece would apply in such contexts as well. .Anirudh Krishnan is a graduate of NALSAR and completed his BCL at the University of Oxford. He is a qualified solicitor, England and Wales (after having worked at Clifford Chance, London) and specializes in commercial/ company litigation and arbitration. He handles matters in Tamil Nadu and Karnataka and is the Founder Partner of AK Law Chambers. He is also the Chief Editor of Justice R.S. Bachawat’s Law of Arbitration and Conciliation. He can be contacted at anirudh@aklawchambers.com..[1] “STATEMENT OF OBJECTS AND REASONS.1. 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..2. This approach may be sound in theory but, in practice, it caused serious hardship and might even be abused. 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.”.[2] The same approach was adopted by the Delhi High Court in Chander Kant and Co. v. The Vice Chairman, DDA: MANU/DE/2221/2009, Hindustan Construction Corporation v. Delhi Development Authority: 1999 (1) Arb. LR 272 (Delhi); Kalyan Chand Goyal v. Delhi Development Authority : 1999 (3) Arb. LR 79 (Delhi); Continental Construction Limited v. Food Corporation of India: AIR 2003 Delhi 32; Explore Computers Pvt. Ltd. v. Cals Ltd.: 131 (2006) DLT 477; Pandit Construction Co. v. Delhi Development Authority 2007 (3) Arb. LR 205 (Delhi); D.Pal and Co. v. MCD: ILR (2007)Supp.(6) Delhi175; J.K. Anand v. DDA: 2001 (59) DRJ 380, Union of India v. Simplex Concrete Piles India (P) Ltd: 2003 (3) Arb. LR 536 (Delhi), Union of India v. Pt. Munshi Ram & Associates Pvt. Ltd. : 2013 AD (Delhi) 801, Municipal Corporation of Delhi v. Sukumar Chandra Jain: 191 (2012) DLT 394 and by the National Consumer Disputes Redressal Forum in New India Assurance Co. Ltd. v. K.A. Abdul Hameed: II (2005) CPJ54(NC) (See also the decision of the Delhi High Court in Union of India (UOI) v. Simplex Concrete Piles India (P) Ltd. : 2003(3)ARBLR 536(Delhi) and the Competition Appellate Tribunal in M/S Rangi International v. Bank of India: [2013] 118 SCL 343)