Back
SUPREME COURT OF INDIA
C. Nagappan, R.F. Nariman, JJ.
Union of India & Anr. – Appellants
Versus
M/s Indusind Bank Ltd. & Anr. – Respondents
Civil Appeal Nos. 9087-9089 of 2016 (Arising out of SLP (Civil) Nos. 16166-16168 of 2011)
Decided On : 15-09-2016
(b) Indian Contract Act, 1872 – Section 28 – Instantly, agreement of bank guarantee dated 31.1.1996 – Amendment coming into force from 1.1.1997 – Clause (b) inserted by 1997 amendment a substantive provision seeking to take away rights already accrued – Held, cannot apply to agreement dated 31.1.1996 – Unamended Section 28 will apply. (Para 21, 25)
[1969] 3 S.C.R. 752; (1995) 2 SCC 630; (2012) 7 SCC 462 – Relied upon
(1989) 2 SCC 95 – Referred
(c) Indian Contract Act, 1872 – Section 28 (unamended) – Bank guarantee not purporting to limit the time within which rights are to be enforced – In other words, neither clause purports to curtail the period of limitation within which a suit may be brought to enforce the bank guarantee – Where the filing of the suit within limitation is made dependent on any condition precedent, then such condition precedent not curtailing the limitation period within which a suit could be filed, would be valid and not hit by Section 28. (Para 29, 32,)
(1994) 3 SCC 324; (1997) 4 SCC 366; (2009) 2 SCC 252 – Relied upon
(d) Indian Contract Act, 1872 – Section 28(b) – Amendment 2012 with effect from 18.1.2013 – Exception (iii) – Stipulations like the present – Would be valid after 2013 if the specified period is not less than one year from the date of occurring or non-occurring of a specified event for extinguishment or discharge of a party from liability. (Para 36)
Facts of the case:
The Textile Commissioner invited applications vide Press Note and Memorandum, both dated 9.1.1996, for export of 10,000 bales of extra long staple cotton.
Four sale contracts were executed between M/s Indocomex Fibres Pvt. Ltd., Singapore and the four exporters, all in January, 1996. On 31.1.1996, the four exporters made an application together with a bank guarantee of even date. In February, the exporters were permitted to export the total quantity of 9175 bales vide an Allocation-cum-Registration Certificate dated 6.2.1996 within a validity period of shipment up to 31.7.1996. This date was extended as many as three times, the third extension being notified as upto 28.2.1997.
As the four exporters failed and neglected to furnish supporting documents regarding export of goods allocated to them within the stipulated period, the Textile Commissioner called upon the exporters to submit the necessary documents within 15 days. failing which the bank guarantees would be enforced. As the exporters failed and neglected to furnish these documents, the Textile Commissioner, vide letters dated 15.5.1997, invoked the bank guarantees. The Respondent Bank refused to pay under the said guarantees, stating that the same could be invoked only within the extended period of three months i.e. up to 30.4.1997, and not later.
Three summary suits being 2959/1999, 2963/1999 and 2996/1999 were filed on 8.4.1999 by the Union of India and the Textile Commissioner against the exporters and the Bank in the High Court of Bombay. By order dated 4.12.2001, as amended on 22.1.2002, unconditional leave to defend the suits was granted to the Bank, and conditional leave to so defend the suits to the exporters upon depositing the amount of Rs.3,82,59,450/- in the Court within 12 weeks from the date of the said order. On 20.1.2003/27.2.2003, the Division Bench dismissed the appeal filed by the Union of India. An SLP filed by the Union of India met with the same fate.
All four exporters remained ex parte, as a result of which the suits came to be decreed ex parte against the said exporters on 29.11.2004.
On contest with the Bank, a Single Judge of the Bombay High Court held that the invocation of the aforesaid bank guarantees was valid, and the said suits were, therefore, decreed in favour of the Union of India and against the bank.
A Division Bench of the Bombay High Court, while holding that the amended Section 28 would apply to the facts of these cases, came to the opposite conclusion by following certain judgments of this Court, and therefore, reversed the learned Single Judge, holding that since the bank guarantees were not invoked within the time prescribed, the suits would have to be dismissed.
Finding of the Court:
Both the Single Judge and Division Bench were in error in holding that the amended Section 28 would apply.
Result: Appeals dismissed.
The Court clarified that the 1997 amendment to Section 28 of the Indian Contract Act is substantive in nature and not declaratory or clarificatory. As a result, it is not retrospective and applies prospectively only from the date it came into force. The Court held that a clause in a bank guarantee (BG) which states that the bank's liability will be extinguished if no claim is made within a specified period (claim period) is valid, provided that such clause does not restrict the period within which rights can be enforced by legal proceedings.
The key principle established is that clauses in bank guarantees or similar contracts that explicitly set a time limit for making claims, which do not curtail the overall limitation period for enforcement of rights, are valid under the amended law. This means that if the clause merely specifies a claim period that is less than the statutory limitation period but does not prevent initiating legal proceedings after that period, it will be upheld as valid.
JUDGMENT :
R.F. Nariman, J.
1. Leave granted.
2. The present appeals by the Union of India raise an interesting question as to the applicability of the 1997 Amendment to Section 28 of the Contract Act, 1872. The facts of the three appeals are similar inasmuch as they concern four exporters who belong to what is known as the GPB Group of Companies.
3. By a Memorandum dated 6.11.1995, issued by the Textile Commissioner under the Imports and Exports (Control) Act, 1947, terms and conditions for export of raw cotton and cotton waste for September, 1995 -August, 1996 were laid down. The shipment was permitted only against an irrevocable letter of credit. The exporters were required to furnish a bank guarantee in the prescribed form at the rate of 10% of the contract price. The bank guarantee was required to be kept valid up to 6 months with a provision for claims for an additional three months, after the last date of shipment. The allocation of quota was on the basis of the highest unit value realization.
4. The Textile Commissioner invited applications vide Press Note and Memorandum, both dated 9.1.1996, for export of 10,000 bales of extra long staple cotton. It was mentioned in the Press Note and the Memorandum that the shipment period will be 180 days from the date of registration of quota or up to 31.8.1996, whichever is earlier.
5. Pursuant to this Press Note and Memorandum, four sale contracts were executed between M/s Indocomex Fibres Pvt. Ltd., Singapore and the four exporters, all in January, 1996. On 31.1.1996, the four exporters made an application together with a bank guarantee of even date. In February, the exporters were permitted to export the total quantity of 9175 bales vide an Allocation-cum-Registration Certificate dated 6.2.1996 within a validity period of shipment up to 31.7.1996. It may be mentioned in passing that this date was extended as many as three times, the third extension being notified as upto 28.2.1997.
6. As the four exporters failed and neglected to furnish supporting documents regarding export of goods allocated to them within the stipulated period, the Textile Commissioner, by a letter dated 3.1.1997, called upon the exporters to submit the necessary documents within 15 days from the date of issue of this letter but not later than 20.1.1997, failing which the bank guarantees would be enforced. As the exporters failed and neglected to furnish these documents, the Textile Commissioner, vide letters dated 15.5.1997, invoked the bank guarantees. Vide letters of even date, the Respondent Bank refused to pay under the said guarantees, stating that the same could be invoked only within the extended period of three months i.e. up to 30.4.1997, and not later. By a letter dated 27/28.8.1997, the Textile Commissioner informed the Respondent Bank that in light of the amendment to Section 28 of the Indian Contract Act, which came into force on 8.1.1997, the Bank was not absolved of its obligation to make payment under the bank guarantee. To this, the Bank vide letter dated 19.9.1997, reiterated its earlier stand and stated that it was not liable to make payment under the bank guarantee after 30.4.1997. It may be mentioned in passing that two of the aforesaid group companies, namely GPB Fibres Ltd. and M/s Bhagwati Cotton Ltd. were amalgamated on 12.9.1997.
7. On 23.7.1998, the Textile Commissioner called upon both the exporters and the Respondent Bank to pay the sums covered by the bank guarantee. As this letter evoked no response, three summary suits being 2959/1999, 2963/1999 and 2996/1999 were filed on 8.4.1999 by the Union of India and the Textile Commissioner against the exporters and the Bank in the High Court of Bombay. By order dated 4.12.2001, as amended on 22.1.2002, unconditional leave to defend the suits was granted to the Bank, and conditional leave to so defend the suits to the exporters upon depositing the amount of Rs.3,82,59,450/- in the Court within 12 weeks from the date of the said order. On 20.1
An indispensable Tool for Legal Professionals, Endorsed by Various High Court and Judicial Officers
Please visit our Training & Support
Center or Contact Us for assistance
Scan Me!
India’s Legal research and Law Firm App, Download now!
For Daily Legal Updates, Join us on :
Back to top
