Delhi High Court: Jayant Nath, J., held that,
Exception 3 to Section 28 of the Contract Act deals with curtailment of the period for the creditor to approach the court/tribunal to enforce his rights. It does not in any manner deal with the claim period within which the beneficiary is entitled to lodge his claim with the bank/guarantor.
In the present petition, the dispute centred around the interpretation of Section 28 of the Indian Contract Act, 1872.
Petitioner submitted that based on an erroneous interpretation of Section 28 of the Indian Contract Act, 1872 respondent bank forced a mandatory and unalterable claim period of a minimum of 12 months for the bank guarantee.
Further, it was stated that the claim period is a time period contractually agreed upon between the creditor and principal debtor, which provided a grace period beyond the validity period of the guarantee to make a demand on the bank for a default, which occurred during the validity period. Adding to the said, it was stated that the said claim period may or may not even exist in a bank guarantee.
As per respondent PNB, a claim period in a bank guarantee which was less than 12 months would render the claim period void and would effectively increase the claim period under the bank guarantee to 3 years under the Limitation Act, 1963.
Respondent 2 stated that it would be open for the banks to stipulate as a condition precedent that if the claim was not lodged before a stipulated time, the bank guarantee shall be revoked or terminated but the stipulated date cannot be less than one year in any event.
Petitioner 1’s case was that it had a number of contracts with Government Bodies and Public Sector Undertakings. Petitioner used to normally issue ‘Performance Bank Guarantee’ or ‘Advance Bank Guarantee’ in the course of performance of the contract.
It was pleaded that on a complete misinterpretation of Section 28 of the Contract Act, respondent 1 bank insisted that the claim period should be 12 months. Adverse fallout for the petitioner of such interpretation was that the petitioner was unnecessarily made liable to pay commission charges for such extended bank guarantee when as per the contract between the principal debtor and the creditor, the claim period would be much shorter.
The extended claim period affected the petitioners’ capability to do business by entering into new contracts and affected the fundamental rights of the petitioners under Article 19(1)(g) of the Constitution of India.
Analysis, Law and Decision
Bench stated that under Article 226 (2) of the Constitution of India, order or writ can be issued by a High Court in relation to territories within which the cause of action wholly or in part arises.
Whether a high court has territorial jurisdiction to entertain a writ petition?
Court stated that while entertaining a writ petition, the doctrine of forum convenience and nature of the cause of action are also required to be scrutinized by the High Court.
Since the part of the cause of action arose within the territory of this Court, it would have territorial jurisdiction to adjudicate the instant petition.
High Court held that limiting the time within which the rights are to be enforced is void provided the rights to be enforced under the Contract continue to exist even beyond the shorter agreed period for enforcing the rights.
Further, the Court added that, if beyond the shorter period agreed between the parties, the rights under the contract are not kept alive, no limiting of the time to enforce the rights under the contract arises and such an agreement putting a time limit to sue will not be hit by Section 28 of the Act.
Section 28 prior to the amendment
Bench noted that Section 28 of the Contract Act prior to the amendment provided that a clause limiting the time within which the rights are to be enforced, is void, if the right to be enforced under the Contract continued to exist even beyond the shorter period agreed for enforcing the rights.
If beyond the shorter period agreed between the parties for enforcing the rights, the rights under the contract are not kept alive, then such an agreement putting a time limit to sue was not hit by Section 28 of the Contract Act.
Why was the newly added Section 28 of the Contract Act enacted?
The said was enacted to do away with the earlier distinction between remedy and rights i.e., a clause barring the remedy only was void but a clause extinguishing a right was valid.
Adding to the above, Bench stated that the said clause now provides that the beneficiary of the bank guarantee i.e. creditor would have time to approach the appropriate court for enforcement of his rights under the bank guarantee in terms of the provision of the Limitation Act i.e. 3 years for private parties and 30 years for government parties.
Later, the T.R. Andhyarujina Committee recommended that the said period be reduced to one year for enforcing the rights under the bank guarantee. Thereafter, Exception 3 to Section 28 of the Contract was added in 2013.
Exception 3 to section 28 of the Contact Act deals with the rights of a creditor to enforce his rights under the bank guarantee after happening of a specified event.
Respondent in its counter-affidavit admitted that, Exception 3 to section 28 of the Contract Act deals with a clause in a bank guarantee to the effect that in case no claim is filed before the court of law within a period which is not less than 12 months from the date of occurring or non- occurring of the specified event, the liability of the bank shall get extinguished. Such a term is not contrary to law.
While concluding the matter, the Court stated that respondent 1 erred in taking the view that they were in law mandated to stipulate a claim period of 12 months in the bank guarantee failing which the clause shall be void under Section 28 of the Contract Act.
Section 28 deals with right of the creditor to enforce his rights under the bank guarantee in case of refusal by the guarantor to pay before an appropriate court or tribunal.
Therefore, all the communications issued by respondent 1 reproduced erroneous interpretation of Exception 3 to Section 28 of the Contract Act and were clearly vitiated.
Issue of prescribing the bank charges and the period for retention of security
Court held that the above-stated issue were matters of contract and this Court cannot interfere in such contractual matters.
In view of the above discussion, petition was disposed of. [Larsen & Toubro Limited v. Punjab and National Bank, 2021 SCC OnLine Del 3827, decided on 28-07-2021]
Advocates before the Court:
For the Petitioners: Mr Neeraj Kishan Kaul, Sr. Adv. with Mr Rishi Agrawala, Mr Karan Luthra, Ms Megha Bengani, Mr Deepak Joshi and Mr Aakash Lamba, Advs.
For the Respondents: Mr Dhruv Mehta, Sr. Adv. with Mr Rajesh Gautam, Mr Anant Gautam and Mr Nipun Sharma, Advs. for R-1/PNB.
Dr Lalit Bhasin, Ms Nina Gupta, Ms Ananya Marwah, Ms Ruchika Joshi and Mr Ajay Pratap Singh, Advs. for R- 2/IBA.
Mr Ramesh Babu, Ms Nisha Sharma and Ms Tanya Chowdhary, Advocates for RBI/R-3