1997 Amendment to Section 28 of Contract Act, 1872 applicable prospectively

Supreme Court: Dealing with an interesting question as to the retrospective applicability of the 1997 Amendment to Section 28 of the Contract Act, 1872, the Bench of C. Nagappan and R.F. Nariman, JJ, answered in the negative and said that Section 28 of the Contract Act, being substantive law, operates prospectively as retrospectivity is not clearly made out by its language as the Amendment does not purport to be either declaratory or clarificatory.

In the present case, the bank guarantees dated 31.1.1996 which restricted the period within which they could be invoked were in question and it was contended by the Union of India that such Bank Guarantees would not be affected by an amendment made one year later i.e. on 8.1.1997 and the relevant date and the relevant law applicable would be as on 31.1.1996, which would be the unamended Section 28. Accepting the aforementioned contention, the Court said that the unamended Section 28 would be the law applicable as on 31.1.1996, which is the date of the agreement of bank guarantee.

The Court considered the Statements of Object and Reasons of the Amendment as stated in the 97th Law Commission Report where it was stated that the Amendment 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. The Court, hence, noticed that these are obviously substantive changes in the law which are remedial in nature and cannot have retrospective effect. [Union of India v. Indusind Bank Ltd.2016 SCC OnLine SC 944, decided on 15.09.2016]

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