Limitation Of Rights vs. Limitation Of Claims: Enforceability Of Time Caps In M&A Transaction Documents

In M&A transaction documents such as share purchase agreements (“SPAs”), the parties generally allocate transactional risk by negotiating differentiated indemnity survival periods or time caps for various categories of claims. Breaches of fundamental warranties and claims arising from fraud or wilful misconduct are often carved out from any contractual time limitation, while claims arising from gross negligence, or specific indemnities may be subject to shorter indemnity survival periods or time caps. Tax claims are generally aligned with the applicable statute of limitation.

While these constructs are commercially driven and widely accepted in M&A documentation, including cross-border M&As, they raise an important question under Indian law: to what extent can parties contractually restrict the time within which claims may be notified or enforced without violating the statutory limitation framework? The answer lies in understanding the distinction between contractual limitation on raising claims and statutory limitation on enforcing rights, and the interplay between the Limitation Act, 1963 (“Limitation Act”) and Section 28 of the Indian Contract Act, 1872 (“Contract Act”).

Limitation Act, 1963: Statutory Timeframe for Legal Enforcement

The Limitation Act prescribes definitive time limits for instituting suits, filing appeals, and making applications before courts and tribunals. For claims arising out of contracts, the limitation period is generally 3 (three) years from the date on which the cause of action arises.

The Limitation Act is considered an exhaustive code and does not allow to extend or restrict the limitation period beyond what has been specified under the Limitation Act except in certain cases. Accordingly, the aforementioned time-period of 3 (three) years is a statutory limit provided by law, which has to be adhered to by the parties to a contract and the judicial authorities. Any contractual clause attempting to alter the statutory limitation period for initiating legal proceedings is generally unenforceable.

1. Section 28 of the Indian Contract Act: Statutory Prohibition

Section 28 of the Indian Contract Act renders void any agreement that either:

• restricts a party absolutely from enforcing their rights under or in respect of any contract through usual legal proceedings in ordinary tribunals, or limits the time within which they may enforce their rights in a manner that is less than the limitation period prescribed by law;

OR

• 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.

1. Judicial Precedents

In the case of National Insurance Co. Ltd v. Sujir Ganesh Nayak & Co. and Anr., the Supreme Court noted that “legal position that emerges is that an agreement which in effect seeks to curtail the (1997) 2 CPJ 1. period of limitation and prescribes a shorter period than that prescribed by law would be void as offending section 28 of the Contract Act. That is because such an agreement would seek to restrict the party from enforcing his right in Court after the period prescribed under the agreement expires even though the period prescribed by law for the enforcement of his right has yet not expired…….”.

Recently, relying upon this Supreme Court judgement, the High Court of Delhi has also affirmed the said principle in the case of Municipal Corporation of Delhi v. Natraj Construction Company. The High Court of Delhi, relying on Section 28 of the Indian Contract Act, held that parties to an arbitration agreement cannot restrict the period to less than the statutory period of 3 (three) years for invoking arbitration in contravention to the limitation period provided by law under the Limitation Act.

1. Limitation of Claims vs. Limitation of Rights: The Critical Distinction

A plain reading of Section 28 of the Contract Act demonstrates that the statutory prohibition is directed at restriction of “legal remedies” or “legal proceedings”, not at contractual mechanisms governing internal claim administration or procedures.

Section 28 bars agreements that: (i) restrict access to courts or arbitral tribunals within the statutory limitation period; or (ii) extinguish substantive rights in a manner that effectively defeats legal enforcement. However, it does not prohibit parties from mutually agreeing to procedural timelines for notifying claims to the counterparty under a contract.

In the context of SPAs, this distinction becomes crucial. Clauses requiring indemnity claims to be notified within a defined period are contractual conditions. Such provisions regulate the manner and timing in which claims are to be asserted between the parties and do not, in themselves, restrict the statutory right to seek legal remedies.

1. Enforceability of Claim Notification Periods in SPAs

The parties may validly agree in the SPAs that the indemnifying person shall not be liable to indemnify an indemnified person in respect of any losses unless an indemnification notice in relation to such losses has been delivered by the indemnified person to the indemnifying person at any time prior to the expiry of shorter time periods (such as 12 (twelve) or 24 (twenty four) months) than that prescribed under the Limitation Act, provided that:

1. the clause does not prohibit initiation of legal proceedings within the statutory limitation period; and
2. the clause does not extinguish substantive rights in a manner that bars judicial enforcement.

For instance, a clause requiring indemnity claims to be notified within 24 (twenty four) months of closing would generally be enforceable. However, a clause providing that no legal proceedings may be initiated after 24 (twenty four) months from closing, irrespective of when the cause of action arises, would be void under Section 28 of the Contract Act.

Conclusion

Indian law draws a clear line between contractual limitation on raising claims and statutory limitation on enforcing rights. While parties are free to agree on internal timelines for notifying claims under SPAs or other commercial agreements, they cannot contractually curtail or extinguish the statutory right to seek legal remedies within the limitation period prescribed under Limitation Act.
 2023 SCC Online Del 1709.

Accordingly, there exists a difference between the 2 (two) forms of limitation discussed herein, wherein one is a contractual limitation ‘to raise a claim before a party' while the other is a legal limitation ‘to seek remedy before the court' once the defaulting party fails to fulfil the claim enabling the non-defaulting party to sue the defaulting party within the limitation period prescribed under Limitation Act.

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