Is there a need to interpret the acknowledgement of debts which have exceeded the period of limitation, because the creditor or the promisee is unaware of his or her right against the debtor or promisor with respect to a time barred acknowledgement of debt. Read on to know more.
There have been certain judgments of different jurisdictions which have made contrary observations while interpreting the Section 25(3), therefore, there is an uncertainty in determining what constitutes promise in accordance with section 25(3). The courts have also made contrary observations in interpreting the section in its literal or liberal sense. But before directly jumping on the relevant sections of the Contract Act, for the purpose of this article, let’s first discuss the Sections 18 and 19 of the Limitation Act.
In the matter of J.C. Budhraja vs. Chairman, Orissa Mining Corporation Ltd. and Another, a three-judge bench of the Hon’ble Supreme Court while interpreting Sections 18 and 19 of the Limitation Act, observed that Sub-section (1) of Section 18 provides that where, before the expiration of the prescribed period for a suit or application in respect of any right, an acknowledgement of liability in respect of such right has been made in writing signed by the party against whom such right is claimed, a fresh period of limitation shall be computed from the time when the acknowledgement was so signed. The explanation to the section provides that an acknowledgement may be sufficient though it omits to specify the exact nature of the right or avers that the time for payment has not yet come or is accompanied by a refusal to pay, or is coupled with a claim to set off, or is addressed to a person other than a person entitled to the right.
While interpreting Section 19 of the Limitation Act, 1908, the Hon’ble Bench relied on the finding of the Hon’ble Supreme Court in the case of Shapur Freedom Mazda v. Durga Prosad Chamaria wherein it was held that acknowledgement as prescribed by Section 19 merely renews debt. It does not create a new right of action. It is a mere acknowledgement of the liability in respect of the right in question. It need not be accompanied by a promise to pay either expressly or even by implication. The statement on which a plea of acknowledgement is based must relate to a present subsisting liability though the exact nature or the specific character of the said liability may not be indicated in words. The words used in the acknowledgement must, however, indicate the existence of jural relationship between the parties such as that of debtor and creditor, and it must appear that the statement is made with the intention to admit such jural relationship.
In the matter of Nepal Airlines Corporation vs. Girish Kumar Singh, the Hon’ble Delhi High Court interpreted the Section 25(3) of the Contract Act and listed certain pertinent conditions to be satisfied in order to invoke the proviso:
Under Section 25(3), a debtor can enter into an agreement in writing to pay the whole or part of a debt, which the creditor might have enforced but for the law of limitation. Such a promise constitutes novation and can form a basis of a suit independently of the original debt. A promise to pay the time barred debt is a valid contract. For application of Section 25(3) of Contract Act, the promise must be express and unequivocal. Moreover, in the matter of Unitel Technology (India) Pvt. Ltd. vs. SMP International, the Hon’ble Delhi High Court, while dealing with the scope of Section 25(3), held that under this section, a debtor can enter into an agreement in writing to pay the whole or part of a debt, which the creditor might have enforced but for the law of limitation. Such a promise constitutes novation and can form a basis of a suit independently of the original debt. A promise to pay the time barred debt is a valid contract. For application of Section 25(3) of Contract Act, the promise must be express and unequivocal. In the instant case, no such promise to pay the time barred debt was made by any of the defendants.
There is a clear distinction between an acknowledgement under Section 18 and 19 of the Limitation Act and a promise under Section 25 (3) of the Indian Contract Act inasmuch as both have the effect of giving a fresh life to the creditor to sue the debtor, but, for an acknowledgement under Section 18 and 19 of the Limitation Act to be applicable, the same must be made on or before the date of expiry of the period of limitation whereas such a condition is nonexistent so far as the promise under Section 25 (3) of the Indian Contract Act is concerned.
A promise under Clause 3 of Section 25 of the Indian Contract Act, even made after the expiry of the period of limitation would be applicable and would cause revival of the claim, notwithstanding the limitation. Under Section 25(3) of the Indian Contract Act, a promise in writing to pay in whole or in part, a time barred debt is not void (State Bank of India vs. Kanahiya Lal and Ors). An acknowledgement of debt implies a promise to pay though acknowledgement is required under section 19, a promise under section 25(3) can be made after the period. A promise under Section 25 of the Contract Act is made after the period of limitation. It can be inferred that Section 25 is an exception to the general rule of the limitation. When a promise falls within the ambit of Section 25(3) it constitutes a valid agreement for the purpose of suing and it would be immaterial whether a debt would be covered within limitation period.
The Section 18 and 19 of the Limitation Act is applicable on the event of the acknowledgement made within the period of limitation which shall lead to a fresh period of limitation from the date of the acknowledgement of debt. Whereas, when the period of limitation expires, the acknowledgement of debt which was made within the period of limitation shall be treated as a promise to pay and can be invoked by the application of Section 25 (3) of the Contract Act.
In the matter of M.S.N. Charities vs. Pilla Ramarao and Ors., the Hon’ble Andhra Pradesh High Court gave a very categorical differentiation on the incidence of invoking Section 18, 19 and 25(3) of the respective Acts. The Hon’ble Court observed that a debt might have become time-barred on the date a debtor entered into a fresh obligation with the creditor to pay the liability, the said obligation, if it satisfies the conditions laid down in Section 25(3) of the Indian Contract Act, will amount to a fresh contract in the eye of law and can certainly be made the basis of an action for recovering the amount promised and acknowledged therein by the debtor. Differentiating Section 25(3) from Section 18 and 19 of the Limitation Act, the Hon’ble Court further observed that while Section 18 of the Limitation Act deals with an acknowledgment made by a debtor within the period of limitation, the contractual obligation which a debtor enters into under the terms of Section 25(3) has ‘no reference whatsoever to the acknowledged debt being within time or not’.
Therefore, one can say that the provision contained in Section 25(3) is far wider in scope than the acknowledgment contemplated in Section 18 of the Limitation Act. The contract entered into under Section 25(3) is an independent and enforceable contract and has no reference to the debt acknowledged under the contract being a live one in the sense that it had not become barred under the law of limitation.
As for acknowledgement of debt under Section 18 of Limitation Act, if such acknowledgement is before expiration of prescribed period of limitation, a fresh period of limitation shall be computed from the time of acceptance when part payment was made. This is adumbrated in Section 19 of Limitation Act. In the case of Section 25(3), a contract of debt, which was rendered void by reason of expiry of period of limitation, revives by reason of acknowledgement and promise made by promissor. In either case promissee gets a right to enforce the contract of debt.
After comparing Sections 18 and 19 of the Limitation Act with Section 25 (3) of the Contract Act and establishing the fact that even if the acknowledgement goes outside the ambit of the limitation, it can be comfortably put within the umbrella of Section 25 (3), the question which crops up is that whether there should be a strict interpretation of section 25(3), or, in other words, whether the promise made under the section 25(3) is express or implied. As mentioned above, section 25(3) has 3 limbs, firstly, it must refer to a debt which the creditor but for the period of limitation, might have enforced; secondly, there must be a distinct promise to pay wholly or in part such debt; and thirdly, the promise must be in ‘writing’ signed by the person or by his duly appointed agent. From the third ingredient it appears that the legislature intended to restrict the promise to be expressed in writing only. If we read this section in isolation, it would appear that there is no scope for implied promise. In the matter M.S.N. Charities vs. Pilla Ramarao and Others, the Andhra Pradesh High Court held that the basic requisite of the Section 25(3) should be satisfied in order to invoke it. Therefore, the Court was of firm opinion that the promise has to be in ‘writing’ and any other mean of expressing a promise shall not allow the section to be applicable.
This observation was also given by the Hon’ble Delhi High Court in the matter of M/s. Gupta Engineering Works vs. M/s. Arihant Chini Udyog Pvt. Ltd. & Others, wherein, the Hon’ble Court strictly interpreted the Section 25(3) and stated that the promise has to be in writing in order to put the acknowledgement within the ambit of this section. The Hon’ble Court went on to state that promise to pay must be in writing signed by the person to be charged with or by his agent generally or specially authorized in that behalf. This is an essential ingredient; it is a condition precedent to the applicability of this section. This is clear and explicit in the language of Section 25(3) itself. They relied on the case of Daulat Ram vs. Som Nath and Others which gave the same observation and interpretation of Section 25(3).
However, the courts have devised another way to read Section 25 (3). To increase the scope or the umbrella of Section 25(3) and to minimize the grievances and concerns of the promise, the courts are reading this section along with Sections 2(b) and 9 of the Contract Act. Section 2(b) states “when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise”. Section 9 states the following “Promises, express and implied. In so far as the proposal or acceptance of any promise is made in words, the promise is said to be express. In so far as such proposal or acceptance is made otherwise than in words, the promise is said to be implied”. Therefore, the Courts, do not read the section 25(3) in isolation they read it with section 2(b) and 9 of the Contract Act. In one of the latest judgment of Hon’ble Delhi High Court, the promise to pay need not be always in writing and the court took the view that a promise for the purpose of section 25(3) has to be read with section 2(b) and section 9 of the Contract act. In the matter of Suresh Kumar Joon vs. Mool Chand Motors, the Delhi High Court had made the above mentioned analogy that the promise can be express or implied for the purpose of Section 25(3).
Black’s Law Dictionary defines acknowledgement as “a recognition of something has been factual; an acceptance of responsibility; the act of making it known that one has received something; a formal declaration made in the presence of an authorised officer, such as a Notary public, by someone who signs a document and confirms that the signature is authentic”. In most cases, what amounts to acknowledgement depends on the relationship between the parties and certain chain of events in which the parties converse in lieu of the unpaid debts. In the matter of State Bank of India vs. Kanhaiya lal and Others, the acknowledgement was determined by the letters which were circulated between the Bank and the Defendant. Delhi High Court observed that the letters clearly disclose the relationship between the parties of a debtor and a creditor and this itself proves that there is an implied promise to pay. While determining acknowledgement of debt one needs to understand the circumstances under which such an acknowledgement is made. In this matter there were reminders by the Bank for repayment of the loan amount, which further lends support to the hypothesis that the letters are in the nature of a promise to pay. In the matter of Suresh Kumar Joon vs. Mool Chand Motors, it was held by the Delhi High Court that issuance of cheque for a certain sum towards repayment of debt to the plaintiff and the plaintiff thereby accepting the cheque upon reconciliation of the account, amounts to acknowledgement and would come within the ambit of Section 25(3). In the matter of R. Sureshchandra & Co. vs. Vandnere Chemicals Works, it was held that balance sheet of the firm signed by the partner stating that the firm is liable to pay certain amount, amounts to promise. It shall attract the proviso of section 25(3). In the matter of Sudarshan Cargo Pvt. Ltd. vs. M/s. Techvac Engineering Pvt. Ltd., the Hon’ble Karnataka High Court held that an acknowledgement of debt by e-mail originating from a person who intends to send or transmit such electronic message to any other person who would be the ‘addressee’ would constitute a valid acknowledgement of debt and it would satisfy the requirement of Section 18 of the Limitation Act, 1963 when the originator disputes having sent the e-mail to the recipient.
The same analogy can also be drawn for Section 25(3), if the period of limitation is crossed and there is a conversation between the debtor and creditor in relation to the debt, then the conversation via email can be taken one step forward to constituting a promise to pay. The relationship between the parties and the conversations which take place in lieu of the outstanding amount can trigger a promise and can be an acknowledgement within the ambit of Section 18 and 19 of the Limitation Act, if not, then it can constitute a promise within the meaning and scope of Section 25(3) read with section 2(b) and section 9 of the Contract Act.
It can be drawn from the above discussions that Section 25(3) of the Contract Act is an exception to the proviso of Section 18 and 19 of the Limitation Act. When the limitation period is over then it must be understood that acknowledgement of debt expressly or impliedly infers promise to pay and the same can be invoked after the period of limitation. While invoking section 25(3), there should be a liberal interpretation of this particular section by reading it with section 2(b) and section 9 of the Contract Act. There are contrary judgments to this aspect, however, one cannot deny the fact that the promise for the purpose of Contract Act can be express or implied. Hence, section 25(3) has to be liberally interpreted and promise should be understood in accordance with section 9. To determine acknowledgement, one must look into the nature of relationship between the parties and the chain of events which take place between the debtor and the creditor or between the promise and the promisor. Depending on the facts and attitude of the parties, it can be determined what would amount to acknowledgement. In the cases mentioned above, letters, balance sheet or even a cheque can amount to an acknowledgement, provided that the same directly or indirectly relates to the debt
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