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REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOS.9087-9089 of 2016 (ARISING OUT OF SLP (CIVIL) NOS.16166-16168 OF 2011)

UNION OF INDIA & ANR. …APPELLANTS

VERSUS

M/S INDUSIND BANK LTD. & ANR. …RESPONDENTS

J  U  D  G  M  E  N  T

R.F. Nariman, J.

1. Leave granted.

2. The  present  appeals  by  the  Union  of  India  raise  an

interesting  question  as  to  the  applicability  of  the  1997

Amendment to Section 28 of the Contract Act, 1872. The facts

of the three appeals are similar inasmuch as they concern four

exporters who belong to what is known as the GPB Group of

Companies.

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3. By a Memorandum dated 6.11.1995, issued by the Textile

Commissioner  under  the  Imports  and  Exports  (Control)  Act,

1947, terms and conditions for export of raw cotton and cotton

waste for September, 1995 - August, 1996 were laid down.  The

shipment  was permitted  only  against  an  irrevocable  letter  of

credit.  The exporters were required to furnish a bank guarantee

in the prescribed form at the rate of 10% of the contract price.

The  bank  guarantee  was  required  to  be  kept  valid  up  to  6

months  with  a  provision  for  claims  for  an  additional  three

months, after the last date of shipment. The allocation of quota

was on the basis of the highest unit value realization.  

4. The Textile Commissioner invited applications vide Press

Note  and  Memorandum,  both  dated  9.1.1996,  for  export  of

10,000 bales of extra long staple cotton.  It was mentioned in

the Press Note and the Memorandum that the shipment period

will be 180 days from the date of registration of quota or up to

31.8.1996, whichever is earlier.  

5. Pursuant to this Press Note and Memorandum, four sale

contracts were executed between M/s Indocomex Fibres Pvt.

Ltd., Singapore and the four exporters, all in January, 1996.  On 2

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31.1.1996, the four exporters made an application together with

a bank guarantee of even date. In February, the exporters were

permitted  to  export  the  total  quantity  of  9175 bales  vide  an

Allocation-cum-Registration Certificate dated 6.2.1996 within a

validity  period  of  shipment  up  to  31.7.1996.   It  may  be

mentioned in passing that this date was extended as many as

three  times,  the  third  extension  being  notified  as  upto

28.2.1997.  

6. As  the  four  exporters  failed  and  neglected  to  furnish

supporting documents regarding export  of  goods allocated to

them within the stipulated period, the Textile Commissioner, by

a letter dated 3.1.1997, called upon the exporters to submit the

necessary documents within 15 days from the date of issue of

this letter but not later than 20.1.1997, failing which the bank

guarantees would  be enforced.   As  the  exporters  failed  and

neglected  to  furnish  these  documents,  the  Textile

Commissioner,  vide letters dated 15.5.1997, invoked the bank

guarantees.  Vide letters of even date, the Respondent Bank

refused to pay under the said guarantees, stating that the same

could  be  invoked  only  within  the  extended  period  of  three

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months i.e.  up to 30.4.1997, and not later. By a letter  dated

27/28.8.1997,  the  Textile  Commissioner  informed  the

Respondent Bank that in light of the amendment to Section 28

of the Indian Contract Act, which came into force on 8.1.1997,

the Bank was not absolved of its obligation to make payment

under the bank guarantee.  To this, the Bank vide letter dated

19.9.1997, reiterated its earlier stand and stated that it was not

liable  to  make  payment  under  the  bank  guarantee  after

30.4.1997.   It  may be  mentioned in  passing  that  two  of  the

aforesaid group companies, namely GPB Fibres Ltd. and M/s

Bhagwati Cotton Ltd. were amalgamated on 12.9.1997.  

7. On 23.7.1998, the Textile Commissioner called upon both

the  exporters  and  the  Respondent  Bank  to  pay  the  sums

covered  by  the  bank  guarantee.   As  this  letter  evoked  no

response, three summary suits - being 2959/1999, 2963/1999

and 2996/1999 - were filed on 8.4.1999 by the Union of India

and the  Textile  Commissioner  against  the  exporters  and  the

Bank in the High Court of Bombay. By order dated 4.12.2001,

as amended on 22.1.2002, unconditional leave to defend the

suits  was  granted  to  the  Bank,  and  conditional  leave  to  so

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defend the suits to the exporters upon depositing the amount of

Rs.3,82,59,450/- in the Court within 12 weeks from the date of

the  said  order.  On  20.1.2003/27.2.2003,  the  Division  Bench

dismissed the appeal filed by the Union of India on the ground

that  it  was  not  maintainable  under  Clause  15  of  the  Letters

Patent of the High Court.  On 14.8.2003, an SLP filed by the

Union of India met with the same fate.  

8. All four exporters remained ex parte, as a result of which

the  suits  came  to  be  decreed  ex  parte against  the  said

exporters on 29.11.2004.  

9. On contest with the Bank, a learned Single Judge of the

Bombay High Court on 22.2.2008, was of the view that as the

bank guarantees in question were in force on 8.1.1997, when

the amendment to Section 28 of the Contract Act took place,

the  amended  Section  28  would  apply  to  the  facts  of  these

cases. This being the case, the clause in the bank guarantees

extinguishing rights and discharging the liability of the Bank if a

claim were not to be made within three months of the date of

expiry  of  the  bank  guarantee,  was  held  to  be  void.

Consequently, it was held that the invocation of the aforesaid 5

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bank guarantees, being without the aforesaid time constraint,

was valid, and the said suits were, therefore, decreed in favour

of the Union of India and against the bank.

10.     In an appeal against this judgment, by the impugned

judgment  dated  20.4.2011,  a  Division  Bench of  the  Bombay

High Court, while holding that the amended Section 28 would

apply  to  the  facts  of  these  cases,  came  to  the  opposite

conclusion  by  following  certain  judgments  of  this  Court,  and

therefore, reversed the learned Single Judge, holding that since

the  bank  guarantees  were  not  invoked  within  the  time

prescribed, the suits would have to be dismissed.  The Union of

India has filed the present appeals before us.  

11. Shri  A.K. Panda, learned senior advocate appearing on

behalf of the Union of India, has stated that the Single Judge

was correct in applying Section 28(b) as amended in 1997, and

that  the  condition  contained  in  the  bank  guarantee  which

restricted  the  period  within  which  it  could  be  invoked  is,

therefore, void.  To buttress his submission, he cited (1995) 2

SCC  630,  R.  Rajagopal  Reddy  v.  Padmini

Chandrasekharan. According to learned counsel, the Division 6

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Bench, having reiterated that the amended Section 28(b) would

apply, was not correct in its conclusion that such clause in the

bank  guarantees  would  not  be  void.   According  to  learned

counsel,  the  Supreme Court  judgments  relied  upon  were  all

pre-amendment,  and  could  not  therefore  be  relied  upon  to

arrive at the opposite result from the learned Single Judge.  

12. On  the  other  hand,  Dr.  A.M.  Singhvi,  learned  senior

advocate,  and  Shri  Krishnan  Venugopal  learned  senior

advocate,  contended  that  both  the  Single  Judge  and  the

Division Bench were not correct in applying the amendment to

Section 28.  According to both the learned counsel,  the bank

guarantees themselves being dated 31.1.1996,  would not  be

affected  by  an  amendment  made  one  year  later  i.e.  on

8.1.1997.  The relevant date and the relevant law applicable

would  be  as  on  31.1.1996,  which  would  be  the  unamended

Section 28.  This being the case, according to them, a catena of

judgments  has  held  that  if  a  clause  in  a  contract  does  not

restrict the limitation period within which one can approach a

Court,  then  it  is  perfectly  valid  and  not  hit  by  Section  28

(unamended).  For this purpose, they cited several judgments

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before us.  An alternative plea was also raised by them that, on

the assumption that the amended Section 28 would apply, even

then,  regard  being  had  to  the  limited  object  sought  to  be

achieved  by  the  amendment,  which  followed  a  Law

Commission Report, it would be clear that even on application

of Section 28(b), the aforesaid clause in the bank guarantees

would not  be hit.   In particular, they argued that  the revised

Section 28 suggested by the Law Commission was not in fact

enacted verbatim in Section 28(b), and that the crucial words

“or  on failure to  make a claim” are  missing in  the amended

Section 28.  They also referred to a subsequent amendment of

Section 28 in 2012, specifically dealing with bank guarantees,

in the course of their arguments.  

13. The  primary  contention  with  which  we  are  faced  is

whether  Section 28 applies  in  its  original  form or  whether  it

applies  after  amendment  in  1997.   In  order  to  answer  this

question, it is first necessary to set out Section 28 in its original

form and Section 28 after amendment.  The Section reads as

under:-

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Original Section 28. 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.

Amendment w.e.f. 08.01.1997

28. Agreements in restraint of legal proceeding, 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, is void to that extent;

(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 by usual legal proceedings, is void to that extent.”

14. In order to answer this primary question, we have first to

see whether the change made in Section 28 could be said to be

clarificatory or declaratory of the law, and hence retrospective. It

is common ground that the statute has not made the aforesaid

amendment retrospective as it is to come into force only with

effect from 8.1.1997.  

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15. The original Section is of 1872 vintage.  It remained in this

incarnation for over 100 years and was the subject matter of

two Law Commission  Reports.   The  13th Report  of  the  Law

Commission of India, September, 1958 examined the Section

and ultimately decided that it was not necessary to amend it,

given the fact  that  there is  a  well-known distinction between

agreements  providing  for  relinquishment  of  rights  as  well  as

remedies  as  against  agreements  for  relinquishing  remedies

only.  This was reflected in para 57 of the Report as follows:-

“57. Decided cases reveal a divergence of opinion in relation to certain clauses of  insurance policies with reference to the applicability of this Section. On examination,  it  would appear  that  these cases do not really turn on the interpretation of the Section, but  hinge  on  the  construction  of  the  insurance policies  in  question.   The  principle  itself  is  well recognized  that  an  agreement  providing  for  the relinquishment of rights and remedies is valid, but an agreement for relinquishment of remedies only falls within the mischief of Section 28.  Thus, in our opinion,  no change is called for  by reason of  the aforesaid conflict of judicial authority.”

16. Several decades passed, until the Law Commission in its

97th Report of March, 1984 suo motu decided that the Section

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required amendment.  An introduction to the Report stated the

point for consideration thus:-

“1.2 Under Section 28 of the Indian Contract Act, 1872 – to state the point in brief – an agreement which  limits  the  time  within  which  a  party  to  an agreement  may  enforce  his  rights  under  any contract by proceedings in a court of law is void to that extent.  But the Section does not invalidate an agreement in the nature of  prescription,  that  is to say, an agreement which provides that, at the end of a specified period.  If  the rights thereunder are not enforced, the rights shall cease to exist. As will be explained in greater detail  in later Chapters of this Report, this position creates serious anomalies and  hardship,  apart  from  leading  to  unnecessary litigation.  Prima  facie,  it  appeared  to  the Commission  that  the  Section  stood  in  need  of reform on this point.  The arguments for and against amendment of the section will be set out later.  For the present, it is sufficient to state that the problem is one of considerable practical importance as such stipulations  are  frequently  found  in  agreements entered into in the course of business.”

17. After going through the existing case law and finding that

the existing case law resulted in economic injustice because of

unequal  bargaining  power,  the  Law  Commission  decided  to

recommend  a  change  in  the  Section.   This  was  done  as

follows:-

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“5.1 We now come to the changes that are needed in the present law.  In our opinion, the present legal position  as  to  prescriptive  clauses  in  contracts cannot  be defended as  a  matter  of  justice,  logic, commonsense  or  convenience.  When  accepting such clauses, consumers either do not realize the possible  adverse  impact  of  such  clauses,  or  are forced to  agree because big corporations are not prepared  to  enter  into  contracts  except  on  these onerous  terms.   “Take  it  or  leave  it  all”,  is  their general  attitude,  and  because  of  their  superior bargaining  power,  they  naturally  have  the  upper hand.   We  are  not,  at  present,  dealing  with  the much  wider  field  of  “standard  form  contracts”  or “standard”  terms.   But  confining  ourselves  to  the narrow issue under discussion, it would appear that the  present  legal  position  is  open  to  serious objection  from  the  common  man’s  point  of  view. Further,  such  clauses  introduce  an  element  of uncertainty  in  transactions  which  are  entered into daily by hundreds of persons.

5.2 It  is  hardly  necessary  to  repeat  all  that  we have  said  in  the  preceding  Chapters  about  the demerits of the present law.  Briefly, one can say that  the  present  law,  which  regards  prescriptive clauses as valid while invalidating time limit clauses which  merely  bar  the  remedy,  suffers  from  the following principal defects:

(a) It  causes serious hardship to those who are economically disadvantaged and is violative of economic justice.

(b) In  particular,  it  harms  the  interests  of  the consumer, dealing with big corporations.

(c) It  is  illogical,  being  based  on  a  distinction which  treats  the  more  severe  flaw as  valid, while invalidating a lesser one.

(d) It rests on a distinction too subtle and refined to  admit  of  easy  application  in  practice.   It thus, throws a cloud on the rights of parties,

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who do  not  know with  certainty  where  they stand,  ultimately  leading  to  avoidable litigation.

5.3 On  a  consideration  of  all  aspects  of  the matter, we recommend that Section 28 of the Indian Contract Act, 1872 should be suitably amended so as to amend to render invalid contractual  clauses which  purport  to  extinguish,  on  the  expiry  of  a specified  term,  right  accruing  from  the  contract. Here  is  a  suggestion  for  re-drafting  the  main paragraph of Section 28.

Revised Section 28, main paragraph, Contract Act as recommended

28. 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

(b) which limits the time within which he may thus enforce his rights, or

(c) which  extinguishes  the  rights  of  any  party thereto under or in respect of any contract on the expiry of a specified period (or on failure to make a claim) or  to  institute a suit  or  other legal proceeding within a specified period, or

(d) which discharges any party thereto from any liability under or in respect of any contract in the circumstances specified in  clause (c),  is void to that extent.”

18. A period of 13 years passed after which this Report was

implemented.  The Statement of Objects and Reasons of the

Amendment reads as follows:-

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   “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.   This approach may be sound in theory but, in practice, it causes serious hardship and might even be abused.

2. 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.  

19. What  emerges  on  a  reading  of  the  Law  Commission

Report together with the Statement of Objects and Reasons for

the Amendment is that the Amendment does not purport to be

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either  declaratory  or  clarificatory.  It  seeks  to  bring  about  a

substantive change in the law by stating, for the first time, that

even where an agreement extinguishes the rights or discharges

the liability of any party to an agreement, so as to restrict such

party  from  enforcing  his  rights  on  the  expiry  of  a  specified

period, such agreement would become void to that extent.  The

Amendment therefore seeks to set aside the distinction made in

the case law up to date between agreements which limit the

time  within  which  remedies  can  be  availed  and  agreements

which do away with the right altogether in so limiting the time.

These are obviously substantive changes in the law which are

remedial in nature and cannot have retrospective effect.   

20. In Sukhram v. Harbheji,  [1969] 3 S.C.R. 752, this Court

held:-

“Now a law is undoubtedly retrospective if the law says so expressly but it is not always necessary to say  so  expressly  to  make  the  law  retrospective. There are occasions when a law may be held to be retrospective in operation.  Retrospection is not to be presumed for the presumption is the other way but  many  statutes  have  been  regarded  as retrospective without a declaration.  Thus it is that remedial  statutes  are  always  regarded  as prospective but declaratory statutes are considered retrospective.  Similarly sometimes statutes have a

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retrospective effect  when the declared intention is clearly  and  unequivocally  manifest  from  the language employed in the particular  law or in the context  of  connected  provisions.   It  is  always   a question  whether  the  legislature  has  sufficiently expressed itself.  To find this one must look at the general  scope  and  purview  of  the  Act  and  the remedy the legislature intends to apply in the former state  of  the  law  and  then  determine  what  the legislature intended to do.  This line of investigation is,  of  course,  only open if  it  is  necessary.  In the words of Lord Selborne in Main v. Stark [1890] 15 A.C. 384 at 388, there might be something in the context  of  an  Act  or  collected  from its  language, which might give to words prima facie prospective a large operation.   More retrospectivity  is  not  to  be given than what can be gathered from expressed or clearly  implied  intention  of  the  legislature.”  (pp. 758-759)

21. Considering  that  the  subject  matter  of  Section  28  is

“agreements”,  the  unamended  Section  28  would  be  the  law

applicable as on 31.1.1996, which is the date of the agreement

of bank guarantee.  It now remains for us to deal with the case

law cited by both sides.  

22. In  R. Rajagopal Reddy v. Padmini Chandrasekharan,

(1995) 2 SCC 630, this Court was called upon to interpret the

Benami Transactions (Prohibition) Act, 1988.  A 3-Judge Bench

of  this  Court  overruled  Mithilesh  Kumari  v.  Prem  Behari

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Khare, (1989) 2 SCC 95, in arriving at the conclusion that the

1988  Act  was  prospective  and  not  retrospective.   In  so

overruling the Division Bench judgment, this Court held that the

Act is not expressly retrospective, so that an enquiry would lie

as to whether it could be said to be clarificatory or declaratory.

The language of Section 4(1) of the statute made it clear that it

would apply to suits filed only after the 1988 Act came into force

Further, the Bench went on to quote Maxwell on Interpretation

as follows:  “Perhaps  no  rule  of  construction  is  more  firmly established  than  this  —  that  a  retrospective operation is not  to be given to a statute so as to impair an existing right or obligation, otherwise than as regards matters of procedure, unless that effect cannot  be  avoided  without  doing  violence  to  the language  of  the  enactment.  If  the  enactment  is expressed  in  language  which  is  fairly  capable  of either  interpretation,  it  ought  to  be  construed  as prospective only.’ The rule has, in fact, two aspects, for it, ‘involves another and subordinate rule, to the effect that a statute is not to be construed so as to have  a  greater  retrospective  operation  than  its language renders necessary.” [para 14]

It then went on to hold as follows:

“As regards, reason 3,  we are of the considered view that the Act cannot be treated to be declaratory in  nature.  Declaratory  enactment  declares  and clarifies  the  real  intention  of  the  legislature  in

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connection  with  an  earlier  existing  transaction  or enactment,  it  does  not  create  new  rights  or obligations. On the express language of Section 3, the  Act  cannot  be  said  to  be  declaratory  but  in substance it  is  prohibitory in  nature and seeks to destroy the rights of the real owner qua properties held  benami  and  in  this  connection  it  has  taken away the right of the real owner both for filing a suit or for taking such a defence in a suit by benamidar. Such  an  Act  which  prohibits  benami  transactions and destroys rights flowing from such transactions as  existing  earlier  is  really  not  a  declaratory enactment. With respect, we disagree with the line of  reasoning  which  commanded  to  the  Division Bench.  In  this  connection,  we  may  refer  to  the following  observations  in Principles  of  Statutory Interpretation, 5th Edn., 1992, by Shri G.P. Singh, at page 315 under the caption ‘Declaratory statutes’:

“The presumption against retrospective operation is not applicable to declaratory statutes. As stated in Craies and approved by the Supreme Court:

‘For modern purposes a declaratory Act may be defined as an Act to remove doubts existing as to the common law, or  the meaning or effect  of  any statute.  Such  Acts  are  usually  held  to  be retrospective.  The  usual  reason  for  passing  a declaratory  Act  is  to  set  aside  what  Parliament deems to have been a judicial error whether in the statement of the common law or in the interpretation of  statutes.  Usually, if  not  invariably, such an  Act contains a preamble, and also the word “declared” as well as the word enacted.’

But  the  use  of  the  words  ‘it  is  declared’  is  not conclusive  that  the  Act  is  declaratory  for  these words may, at times be used to introduce new rules of  law and the Act  in  the latter  case will  only  be amending  the  law  and  will  not  necessarily  be retrospective. In determining, therefore, the nature of  the Act,  regard  must  be  had to  the substance

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rather than to the form. If a new Act is to explain an earlier  Act,  it  would  be  without  object  unless construed  retrospective.  An  explanatory  Act  is generally passed to supply an obvious omission or to clear up doubts as to the meaning of the previous Act. It is well settled that if a statute is curative or merely declaratory of the previous law retrospective operation is generally intended. The language ‘shall be deemed always to have meant’  is  declaratory, and is in plain terms retrospective. In the absence of clear  words  indicating  that  the  amending  Act  is declaratory, it would not be so construed when the pre-amended  provision  was  clear  and unambiguous.  An  amending  Act  may  be  purely clarificatory to clear a meaning of a provision of the principal  Act  which  was  already  implicit.  A clarificatory  amendment  of  this  nature  will  have retrospective  effect  and,  therefore,  if  the  principal Act  was existing law when the Constitution came into force the amending Act also will be part of the existing law.

In Mithilesh Kumari v. Prem Behari Khare [(1989) 2 SCC  95  :  (1989)  1  SCR  621]  Section  4  of  the Benami Transactions (Prohibition) Act, 1988 was, it is submitted, wrongly held to be an Act declaratory in nature for it was not passed to clear any doubt existing as to the common law or the meaning or effect of any statute. The conclusion however, that Section 4 applied also to past benami transactions may be supportable on the language used in  the section.” [para 17]

23. Similarly, in  Purbanchal Cables & Conductors (P) Ltd.

v. Assam SEB,  (2012) 7 SCC 462, this Court had to decide

whether the Interest on Delayed Payments to Small Scale and

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Ancillary Industrial Undertakings Act, 1993 could be said to be

retrospective.  After a review of various judgments of this Court,

this Court held:-

“There is no doubt about the fact that the Act is a substantive law as vested rights of entitlement to a higher rate of interest in case of delayed payment accrues  in  favour  of  the  supplier  and  a corresponding liability is imposed on the buyer. This Court,  time  and  again,  has  observed  that  any substantive law shall  operate prospectively unless retrospective  operation is  clearly  made out  in  the language  of  the  statute.  Only  a  procedural  or declaratory law operates retrospectively as there is no vested right in procedure.  

In  the  absence  of  any  express  legislative intendment  of  the  retrospective  application  of  the Act, and by virtue of the fact that the Act creates a new liability  of  a high rate  of  interest  against  the buyer,  the  Act  cannot  be  construed  to  have retrospective  effect.  Since  the  Act  envisages  that the supplier has an accrued right to claim a higher rate of interest in terms of the Act,  the same can only be said to accrue for sale agreements after the date  of  commencement  of  the  Act  i.e.  23-9-1992 and not any time prior.” [paras 51 and 52]

24. Similarly, in  CIT v. Vatika Township (P) Ltd.,  (2015) 1

SCC 1, this Court held that the proviso to Section 113 of the

Indian  Income  Tax  Act,  1961  was  prospective  and  not

retrospective.  In so holding, the Constitution Bench adverted to

certain general principles as under:- 20

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“Of the various rules guiding how a legislation has to be interpreted, one established rule is that unless a contrary intention appears, a legislation is presumed not to be intended to have a retrospective operation. The idea behind the rule is that a current law should govern current activities. Law passed today cannot apply to the events of the past. If we do something today, we do it keeping in view the law of today and in force and not tomorrow's backward adjustment of it. Our belief in the nature of the law is founded on the bedrock that  every  human being  is  entitled  to arrange his affairs by relying on the existing law and should  not  find  that  his  plans  have  been retrospectively upset. This principle of law is known as lex prospicit  non respicit:  law looks forward not backward.  As  was  observed  in  Phillips v. Eyre [(1870)  LR  6  QB  1],  a  retrospective legislation  is  contrary  to  the  general  principle  that legislation by which the conduct of mankind is to be regulated when introduced for the first time to deal with future acts ought not to change the character of past  transactions  carried  on  upon  the  faith  of  the then existing law.

The  obvious  basis  of  the  principle  against retrospectivity  is  the  principle  of  “fairness”,  which must  be  the  basis  of  every  legal  rule  as  was observed  in L'Office  Cherifien  des Phosphates v. Yamashita-Shinnihon  Steamship  Co. Ltd. [(1994) 1 AC 486 : (1994) 2 WLR 39 : (1994) 1 All  ER  20  (HL)]  Thus,  legislations  which  modified accrued  rights  or  which  impose  obligations  or impose new duties or attach a new disability have to be treated as prospective unless the legislative intent is  clearly  to  give  the  enactment  a  retrospective effect;  unless  the  legislation  is  for  purpose  of supplying an obvious omission in a former legislation or to explain a former legislation. We need not note the cornucopia of case law available on the subject because  aforesaid  legal  position  clearly  emerges

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from  the  various  decisions  and  this  legal  position was conceded by the counsel for the parties. In any case, we shall refer to few judgments containing this dicta, a little later.” [paras 28 and 29]

25. On a conspectus of the aforesaid decisions, it becomes

clear  that  Section  28,  being  substantive  law,  operates

prospectively as retrospectivity is not clearly made out by its

language.   Being remedial  in  nature,  and not  clarificatory  or

declaratory of the law, by making certain agreements covered

by Section 28(b) void for the first time, it is clear that rights and

liabilities that have already accrued as a result of agreements

entered into between parties are sought to be taken away.  This

being the case, we are of the view that both the Single Judge

and Division Bench were in error in holding that the amended

Section 28 would apply.  

26. Considering that the un-amended Section 28 is to apply, it

is important to advert to the said Section and see what are its

essential  ingredients.  First,  a  party  should  be  restricted

absolutely from enforcing his rights under or in respect of any

contract.   Secondly,  such  absolute  restriction  should  be  to

approach,  by  way  of  a  usual  legal  proceeding,  the  ordinary

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Tribunals set up by the State.  Thirdly, such absolute restriction

may also relate to the limiting of time within which the party may

thus enforce its rights.  

27. At this point, it is necessary to set out the exact clause in

the bank guarantees in the facts of the present cases.  One

such clause reads as under:

“…. Unless a demand or claim under this guarantee is  made against  us  within  three months from the above  date  (i.e.  On  or  before  30.4.97),  all  your rights  under  the said  guarantee shall  be  forfeited and we shall  be relieved and discharged from all liabilities hereunder.”

28. A  similar  clause  contained  in  another  bank  guarantee

reads thus:-

“….Provided  however,  unless  a  demand  or  claim under this guarantee is made on us in writing within 3 months from the date of expiry of this guarantee in respect of  export of  416.500 M.T. 2450 Bales OF Raw Cotton, we shall be discharged from all liability under this guarantee thereafter.”

29. A reading  of  the  aforesaid  clauses  makes  it  clear  that

neither clause purports to limit the time within which rights are

to  be  enforced.   In  other  words,  neither  clause  purports  to

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curtail  the  period  of  limitation  within  which  a  suit  may  be

brought to enforce the bank guarantee. This being the case, it is

clear that this Court’s judgment in Food Corpn. of India v. New

India Assurance Co. Ltd., (1994) 3 SCC 324, would apply on

all fours to the facts of the present case.  

30. The judgment of Venkatachala,J. and Bharucha,J. set out

the relevant clause in a fidelity insurance guarantee as follows:-

“…however,  that  the  Corporation  shall  have  no rights under this bond after the expiry of (period) six months from the date of termination of the contract.”

31. On the facts in that case, the High Court had allowed the

appeals  of  the  Insurance  Companies  stating  that  the  said

clause  did  not  entitle  the  Corporation  to  file  suits  against

Insurance companies after the expiry of the six months period

from the date of termination of the respective contracts entered

into.  In setting aside the High Court judgment, this Court held

that none of the clauses in the bond required that a suit should

be instituted by the Corporation for enforcing its rights under the

bond within a period of six months from the date of termination

of the contract.  The restriction adverted to in the clauses of the

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bond envisaged the need for the Corporation to lodge a claim

based on the bond, and that if this was done, a suit to invoke

rights under the bond could be filed within the limitation period

set out in the Limitation Act.  

32. In a separate concurring judgment  R.M. Sahai,  J.  after

going into the case law in paragraph 3 of his judgment, made

an extremely perceptive observation. He stated that where the

filing  of  the  suit  within  limitation  is  made dependent  on  any

condition  precedent,  then  such  condition  precedent  not

curtailing the limitation period within which a suit could be filed,

would be valid and not hit by Section 28.  In paragraph 8 of the

judgment, the learned Judge put it thus:-

“It does not directly or indirectly curtail the period of limitation  nor  does  it  anywhere  provide  that  the Corporation shall be precluded from filing suit after expiry of six months. It can utmost be construed as a condition precedent for filing of the suit that the appellant should have exercised the right within the period agreed to between the parties. The right was enforced  under  the  agreement  when  notice  was issued and the company was required to pay the amount.  Assertion  of  right  is  one  thing  than enforcing it in a court of law. The agreement does not  anywhere deal  with  enforcement  of  right  in  a court of law. It only deals with assertion of right. The assertion of  right,  therefore,  was governed by the agreement and it is imperative as well that the party

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concerned  must  put  the  other  side  on  notice  by asserting  the  right  within  a  particular  time  as provided in the agreement to enable the other side not only to comply with the demand but also to put on guard that in case it is not complied it may have to  face  proceedings  in  the  court  of  law.  Since admittedly the Corporation did issue notice prior to expiry  of  six  months  from  the  termination  of contract,  it  was  in  accordance  with  the  Fidelity Insurance clause and, therefore, the suit filed by the appellant was within time.” [para 8]

33. In  National Insurance Co. Ltd. v. Sujir Ganesh Nayak

& Co.,  (1997) 4 SCC 366, this Court had to decide whether

condition 19 of an insurance policy was hit by the unamended

Section 28.  Condition 19 reads as follows:-

“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.”

34. After  referring  to  the  relevant  case  law and a  detailed

reference to the Food Corporation judgment, this Court held:-

“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

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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 [(1976) 1 SCC 943] while interpreting a clause couched in similar terms this Court said: (SCC p. 952, para 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.” [para 21]

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35. In H.P. State Forest Co. Ltd. v. United India Insurance

Co. Ltd., (2009) 2 SCC 252, this Court had to decide whether

clause 6(ii) of an insurance policy was hit by the unamended

Section 28.  This clause reads as follows:-

“6(ii) In no case whatsoever shall the Company be liable for any loss or damage after the expiration of 12  months  from  the  happening  of  the  loss  or damage unless the claim is the subject of pending action or arbitration: it being expressly agreed and declared that if the Company shall declaim liability for  any claim hereunder  and such claim shall  not within  12  calendar  months  from  the  date  of  the disclaimer have been made the subject-matter of a suit  in  a  court  of  law  then  the  claim shall  for  all purposes be deemed to have been abandoned and shall not thereafter be recoverable hereunder.”

After a copious reference to Food Corporation and S.G.

Nayak’s case, this Court held that such clauses would not be

hit by Section 28.

36. Considering that the respondents’ first argument has been

accepted by us, we do not think it necessary to go into the finer

details of the second argument and as to whether the aforesaid

clauses in the bank guarantee would be hit by Section 28(b)

after the 1997 amendment.  It may only be noticed, in passing,

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that Parliament has to a large extent redressed any grievance

that may arise qua bank guarantees in particular, by adding an

exception (iii) by an amendment made to Section 28 in 2012

with effect from 18.1.2013.  Since we are not directly concerned

with this amendment, suffice it to say that stipulations like the

present would pass muster after 2013 if the specified period is

not  less  than  one  year  from  the  date  of  occurring  or

non-occurring  of  a  specified  event  for  extinguishment  or

discharge of a party from liability. The appeals are, therefore,

dismissed with no order as to costs.  

……………………J. (C. Nagappan)

……………………J. New Delhi; (R.F. Nariman) September 15, 2016

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