Validity of contract mandating that only amount awarded in arbitration be recoverable

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Question: A contract has a condition that if any dispute arises between two parties, then such dispute shall be referred to arbitration and the amount awarded in such arbitration only can be recovered and no other amount can be recovered. It also says that no other legal proceedings can be filed (i.e., other than the arbitration) in respect of such dispute. My question is whether such contract is valid which does not allow any other legal proceedings, other than the arbitration? Is it not like taking the rights of the party under contract?

Answer: The answer to your question is provided by Exception 1 to Section 28 of the Contract Act, 1872, which is reproduced below:

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, or

(b) which extinguishes the rights of any party thereto, or discharges any party thereto from any liability, under or in respect of any contract on the expiry of a specified period so as to restrict any party from enforcing his rights,

is void to that extent.

Exception 1.—Saving of contract to refer to arbitration dispute that may arise.—This section shall not render illegal a contract, by which two or more persons agree that any dispute which may arise between them in respect of any subject or class of subjects shall be referred to arbitration, and that only the amount awarded in such arbitration shall be recoverable in respect of the dispute so referred.

***  ***.”

Section 28, thus, lays down that agreements or contracts in restraint of legal proceedings are void, or not permissible under law.

However, this general rule has some exceptions. The first exception is that if the parties to a contract agree that the dispute which may arise between them shall be referred to arbitration and that only the amount awarded in such arbitration shall be recoverable in respect of such dispute, and if the parties in such contract put restraint over other legal proceedings in respect of such dispute, then such contract is valid. Such contract providing only for arbitration as a mechanism for resolutions of dispute, to the exclusion of other legal proceedings, is not illegal.

So, the answer to your question is “yes”. Such contract providing only for arbitration as a method for resolution of disputes is valid.

About Dr. Ashok Dhamija

Dr. Ashok DhamijaDr. Ashok Dhamija is a New Delhi based Supreme Court Advocate, holds Ph.D. in Constitutional Law, is author of 3 law books, and is an ex-IPS officer. He is the founder of this law portal. Read more by clicking here. List of his articles. List of his Forum Replies. List of his Quora Answers.

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