[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.
Conclusion
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.
