Clause In Insurance Policy Shortening Limitation Period Is Void U/S 28 Contract Act: Delhi High Court

The Delhi High Court restored an arbitral award in favor of M/s H.P. Spinning Mills Pvt. Ltd.(Appellant) which was set aside 16 years ago holding that clause of the insurance policy which required claims to be made within 12 months from the date of loss was void and unforceable under section 28 of the Indian Contract Act. The court held that the Single Judge erred in relying on section 28 pre-amendment precedents which allowed limitation clauses that extinguished rights. A bench comprising Justice Anil Kshetrapal and Justice Harish Vaidyanathan Shankar held that “Any contractual stipulation that either shortens the statutory limitation period prescribed by law, or extinguishes substantive rights and discharges liabilities upon the expiry of a period shorter than the statutory limitation, is rendered void. Viewed against this statutory framework, Clause 6(b)(ii) of the Policy is manifestly void and unenforceable. By stipulating that the insurer shall not be liable if arbitration or legal proceedings are not initiated within twelve months, the clause seeks to extinguish the insured‟s rights prematurely, irrespective of the limitation periods prescribed under the Limitation Act, 1963, or the A&C Act”. Background: The Appellant had purchased all assets of M/s Goel Spinning & Weaving Mills which held three fire insurance policies from United India Insurance. On 13.04.2001, a major fire broke out in the insured factory which caused substantial damage to machinery and stock. The insurer's surveyor assessed the loss at Rs. 52.55 lakh against the appellant's claim of Rs. 1.21 crore. Thereafter, the appellant executed a discharge voucher which was alleged to be executed under coercion and underpayment. The Arbitral Tribunal awarded the insured the amount of ₹40,84,716.25 with 9% interest till actual payment. The insurer challenged the award under section 34 of the Arbitration Act stating that clause 6 of the policy barred any action or claim after 12 months from the date of loss. The Single Judge while relying on H.P. State Forest Co. Ltd. v. United India Insurance Co. Ltd. accepted the insurer's plea and set aside the award. The present appeal had been filed under section 37 of the Arbitration Act. Findings: The court at the outset observed that the jurisdiction of the court under section 37 is very limited. Citing Punjab State Civil Supplies Corpn. Ltd, it held that “The appellate power under Section 37 is confined to examining whether the court under Section 34 acted within its limits or exceeded its jurisdiction. The appellate court has no authority to reappraise evidence as if sitting in a regular appeal.” The court further observed that the Single Judge in the impugned order had relied on H.P. State Forest Co. Ltd. and Sujir Ganesh Nayak both which were decided before section 28 of the Contract Act was amended. It held that “The reliance placed by the learned Single Judge on Himachal Pradesh State Forest Co. Ltd. and National Insurance Co. Ltd. was misplaced, since both decisions were rendered in the context of Section 28 of the Indian Contract Act as it stood prior to its amendment in 1997.” The court observed that section 28 of the Contract Act after the amendment in 1997 voided any contractual clause that reduces the limitation for enforcing legal rights or extinguishes rights after a specified period except in limited cases given under the section. The court held that “any contractual stipulation that extinguishes rights or discharges liabilities upon the expiry of a contractually fixed period is void. Clause 6(b)(ii) of the Policy seeks to extinguish the insured's rights prematurely, contrary to statutory limitation periods and the legislative intent to ensure fair access to legal remedies.” The court held clause 6 of the policy to be manifestly arbitrary and unforceable under section 28 of the Indian Contract Act. Relying on Indusind Bank, the court observed that the objective of 1997 amendment was to protect a weaker party from oppressive take it or leave it clauses in standard form contracts. It held that “The amendment was meant to prevent big corporations from forcing economically weaker parties into contracts that unreasonably curtail access to justice. It was a substantive and remedial change, not a mere clarification.” Similarly, the court cited the Supreme Court's judgment in Oriental Insurance Co. Ltd. v. Sanjesh where the Apex Court had held that clause requiring the claim to be lodged within one month after the loss extendable by another one month was declared violative of section 28 of the Contract Act. Accordingly, the present appeal was allowed and the impugned order was set aside. Case Title: M/S H P SPINNING MILLS PVT. LTD. versus UNITED INDIA INSURANCE CO. LTD. Citation: 2025 LiveLaw (Del) 1331 Case Number: FAO(OS) 426/2009, CM APPL. 13498/2009 and CM APPL. 2498/2020 Judgment ...

Clause In Insurance Policy Shortening Limitation Period Is Void U/S 28 Contract Act: Delhi High Court

Mohd Malik Chauhan

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