[This is a guest post by Mr. Vigneshwar Ramasubramanian on the validity of standstill/ tolling agreements that seek to contractually deal with the law on limitation. Mr. Vigneshwar Ramasubramanian is an advocate of the Madras High Court]
Are Standstill / Tolling Agreements recognised in India?
Earlier, the moderator of the blog argued here that parties to a dispute can be allowed to contractually agree to extend, freeze or otherwise alter the law of limitation mutually in India. In commercial law, these contracts, which intend to freeze/extend limitation periods are referred to as ‘Standstill Agreements’. The author eloquently argues through a host of foreign jurisprudence that the Limitation law is not something sacred or sacrosanct that parties should not be allowed to contract around. The author also relies on Section 25(3) of the Indian Contract to buttress his argument.
Below, I will make an attempt to first, argue that the treatment of Limitation Act by courts in India are substantially different from the treatment of the law of Limitation in foreign jurisprudence. Secondly, I will try to put forth an alternate interpretation to learned author’s reading of Section 25(3) and Section 28 of the Contract Act.
International Practice v. India
It is a common practice in Arbitrations for both parties to mutually give up their plea of limitation.But, in India, courts are bound to give effect to the provisions of the Limitation Act of its own motion. The judgment recognising ‘Standstill Agreement’ cited by the Ld. Author cannot be applied in our context. The author relies on the judgment of the England and Wales High Court (Technology and Construction Court), decision in Oxford Architects Partnership v Cheltenham Ladies College, wherein it was held:
“The Limitation Act 1980 provides a statutory defence which a party may rely on. A party is not obliged to rely on a statutory limitation defence but is generally entitled to do so. It is possible for a party to agree that it will not rely on a statutory limitation defence or for the parties to agree that a statutory limitation defence will apply from an agreed date, for instance in a standstill agreement. In certain circumstances a party may be precluded from relying on a statutory defence because of an estoppel. However, absent such an agreement or an estoppel a party is entitled to rely on a statutory limitation defence. In common with all other such rights any provision which seeks to exclude a party's right to rely on a statutory limitation defence must do so in clear terms.”
The above interpretation would fall foul of the Indian Limitation Act on two fronts. Firstly, under the Indian Limitation Act, plea of limitation is mandatory. Even if the parties are not obliged to rely on the plea, it is the duty of the court to give effect to the Limitation Act.
Section 3(1) of the Limitation Act, 1963 reads:
“3. Bar of limitation—(1) Subject to the provisions contained in sections 4 to 24 (inclusive), every suit instituted, appeal preferred, and application made after the prescribed period shall be dismissed, although limitation has not been set up as a defence.”
Explaining the above provision, the Supreme Court in Manindra Land & Building Corporation Ltd. v. Bhutnath Banerjee held:
"Section 3 of the Limitation Act enjoins a Court to dismiss any suit instituted, appeal preferred and application made, after the period of limitation prescribed therefore by Schedule I irrespective of the fact whether the opponent had set up the plea of limitation or not. It is the duty of the Court not to proceed with the application if it is made beyond the period of limitation prescribed."
Therefore, there is no way a party can mutually agree to not raise a plea of limitation. Second, the parties cannot mutually agree a date from which a limitation period shall begin. The Limitation Act, 1963 itself sets the period from which the limitation period will begin in the Schedule to the Act. The only exceptions are laid down in Part III of the Limitation Act, 1963. Therefore, when there are extensive, comprehensive provisions detailing the period from which period of limitation shall run, in India, the parties cannot contract around it. Internationally though, the Limitation statutes are directive. For instance, the Singapore statute of limitation permits their court to discuss the issue of limitation only if it is expressly raised by the parties. Section 4 of the Singapore Limitation Act, 1959 reads:
“Limitation not to operate as a bar unless specially pleaded:
4. Nothing in this Act shall operate as a bar to an action unless this Act has been expressly pleaded as a defence thereto in any case where under any written law relating to civil procedure for the time being in force such a defence is required to be so pleaded.”
Similarly, the statute of Limitation in Australia has an expression provision which recognises the right of the parties to extend or shorten a limitation period. Section 5 of the Australian Limitation Act, 2005 reads:
“45 (1) Nothing in this Act prevents a person from agreeing to extend or shorten a limitation period provided for under this Act.”
Practices of other countries, including the USA, have been laid down by the author in his article. But, their interpretations cannot be applied for the two reasons laid above. When the parties can neither mutually agree to drop the plea of limitation, nor agree a date from which a limitation period shall begin, the very purpose of a Standstill Agreement itself is extinguished.
Whether the Indian Contract Act permits circumventing the law of limitation?
The second major argument of the author is through an interpretation of Section 28 and Section 25(3) of the Indian Contract Act, 1872. Section 28 of the Indian Contract Act reads:
“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;”
The argument is that this provision merely precludes parties from limiting the time within which a claim must be made. In other words, this provision only precludes the ‘shortening’ of limitation period. If the intention of the legislature was to prevent parties to contract around or extend the limitation periods as well, it would have been manifest in this provision.
There is no doubt that an agreement for a longer period of limitation than the law allows, does not lie within the scope of this section. In fact, seeking a longer period of limitation keeps the right to sue subsisting even after the period of limitation. There is absolutely no restriction imposed on the right to sue. However, such an agreement will be void under Section 23 of the Indian Contract Act as tending to defeat the provisions of the Limitation Act. The devil, i.e., Section 3 of the Limitation Act, clearly provides that every suit instituted after the period of limitation prescribed (by the Act) shall be dismissed, although limitation has not been set up as a defence. Therefore, a Tolling or a Standstill agreement cannot escape the clutches of Section 23 of the Indian Contract Act. The Ld. Author’s stand that the intention of the legislature is to merely preclude parties from limiting the period of limitation alone stands on feeble ground. Section 45 of the Australian Limitation Act seen above clearly permits parties to agree & shorten the period of limitation. Similar position is manifest in other jurisprudences as well. Therefore, a stand that parties cannot limit the time, but may be permitted to extend the period of limitation, does not seem accurate. Especially in light of Section 3 and the Schedule attached to the Limitation Act, 1963.
The author goes on to say that Section 25(3) of the Indian Contract Act, 1872 is an important example of a provision by which parties can agree that one of them would pay a time-barred debt. In other words, Section 25(3) allows parties to contract around the law of limitation. Section 25(3) of the Limitation Act reads as:
“25. Agreement without consideration, void, unless it is in writing and registered or is a promise to compensate for something done or is a promise to pay a debt barred by limitation law. An agreement made without consideration is void, unless;
(3) It is a promise, made in writing and signed by the person to be charged therewith, or by his agent generally or specially authorized in that behalf, to pay wholly or in part a debt of which the creditor might have enforced payment but for the law for the limitation of suits.”
To invoke the provisions of Section 25(3), the most important condition is that there has to be a debt expressly acknowledged which the creditor but for the period of limitation, might have enforced. The key herein is existence of a debt and express acknowledgement of the same. The concept of a Standstill Agreement though, stands on an entirely different footing.
Standstill Agreements enable the parties to focus on the pre-action protocol requirements without worrying about limitation. Parties to a dispute may choose to enter into a standstill agreement where they are approaching the expiry of the limitation period, but the claimant is not yet ready to issue its claim (because, for example, the parties are in negotiations which, if successful, would prevent a claim from needing to be issued at all). Parties usually quantify the debt through evidences etc., and ascertain the liability of the debtor in this period. When the debt is ascertained and acknowledged, there is no question of limitation at all. Section 18 of the Limitation Act expressly provides that the period of limitation begins from acknowledgment of such liability in writing. But, a standstill agreement, is entered into to prevent the claimant’s expiry of the right to sue. Therefore, one cannot interpret Section 25(3) to contract around the law of limitation either.
Shortening the period of limitation is expressly barred under Section 28 of the Contract Act and extending limitation is impermissible upon an interpretation of the Indian Limitation Act. Most advanced jurisdictions have a limitation period of Six (6) years whereas here, for most claims, the period is Three (3) years only. Over this, we have not recognised Standstill/Tolling agreements as well which, as seen earlier, is an internationally recognised practice. This has led to considerable scepticism for parties, especially those across the border to negotiate in good faith with their Indian counterparts, reducing the scope for out of court settlements in International Disputes. In this context, it is paramount that the legislature carves out an exception for Standstill Agreements under the Limitation Act, or, we receive some judicial guidance on the validity of such agreements.