The original text of Section 28 of the Indian Contract Act, 1872, which nullifies agreements (or clauses) to restrict judicial proceedings, has been amended several times over the years. Indeed, in 1997, the original Section 28 was replaced by a new one after the recommendations of the 97th report of the Indian Legal Commission were taken into account. The amendments made by the 1997 amendment caused much discontent on the part of banks and financial institutions in that the amendment prevented them from including clauses, for example in a bank guarantee (or similar agreement) that destroys the rights of a party to sue it. An attempt to resolve this problem was made in 2013, when the Bank Act (amendment law) introduced in 2012, with exception 3 in Section 28, a savings clause for a guarantee agreement of a bank or financial institution. But a look at this 2013 change, while aimed at protecting banks and financial institutions, shows that instead of solving problems, it can add conditions that should worry many banks and financial institutions. The purpose of this article is to take a closer look at these issues and conditions. Prescription and Prescription Rules Under Section 28, agreements that severely limit the exercise of one`s rights from the exercise of one`s rights or to a contract [section 28 a]] or that expire the rights of a portion of any liability for a contract [Section 28 b)]. Prior to the 1997 amendment, Section 28 contained only one provision that considered agreements that restrict the statute of limitations [section 28 a]]. However, in 1997, the Section was amended to nullify these agreements, allowing the parties to invent their own rules of limitation [section 28 (b)]. This amendment was intended not only to null and void the effect of various decisions of the High Court and the Supreme Court (which validated the provisions), but also to banks and financial institutions which, in contracts such as bank guarantees, had conditions of order in which a party`s rights to assert a claim against the bank would expire at the end of a prescribed period. As a result, Section 28 Exemption 3 was introduced to protect banks and financial institutions. This exception provides that “this section shall not make illegal a written contract by which a bank or financial institution establishes a clause in a guarantee or agreement providing a guarantee for the imposition of duties or relief of such a guarantee or agreement after the expiry of a certain period which is at least one year from the date of the arrival or non-admission of an individual event for the removal or discharge of that responsibility. This exception has therefore allowed not only banks and financial institutions to invent their own rules of prescription, but also for banks to keep their guarantee instruments open and valid until the statute of limitations expires.
Thus, banks and financial institutions could introduce legal provisions in their collateral instruments if a party`s claims to the current debt against the bank were to expire at the end of a period, regardless of whether the removal of the right was before the statute of limitations.