Point of Law : Contract and Specific Reliefs - Bank Guarantee - Validity of - A claim period of 12 months in the bank guarantee failing which clause shall be void under Section 28 of Contract Act.

JUDGMENT :

JAYANT NATH, J.

1. This writ petition is filed by the petitioners seeking the following reliefs:

“(a) Issue a Writ, Order or Direction in the nature of Certiorari or any other Writ, Order or Direction of like nature quashing and setting aside the letters dated 18.08.2018 and 28.03.2019 both issued by Respondent No.1 to Petitioner No.1 directing the Petitioners that the Claim period in the Bank Guarantee must be for at least 12 months;

(b) Issue a Writ, Order or Direction in the nature of Certiorari or any other Writ, Order or Direction of like nature quashing and setting aside the letter dated 10.02.2017 bearing reference No. Legal/Cir2102/BG Opinion and letter dated 05.12.2018 issued by Respondent No.2 to all Member Banks in relation to the minimum period for lodging a claim with the Bank under the Bank Guarantee;

(c) Issue a Writ, Order or Direction in the nature of Mandamus or any other Writ, Order or Direction of like nature directing the Respondents to discard any interpretation of Section 28(b) read with Exception 3of the ICA which prescribes a minimum period of 12 months of validity, for making a demand by a Creditor of a Contract of Guarantee under Section 126 of the ICA issued upon a Bank or a Financial Institution as a "surety", where such Bank Guarantee has been issued at the instance of the Petitioner No.1 as a Principal Debtor or issued for the benefit of the Petitioner No.1.”

2. Essentially the dispute in the present petition centers around interpretation of section 28 of the Indian Contract Act, 1872 (hereinafter referred to as the ‘Contract Act’). The grievance of the petitioner is that based on an erroneous interpretation of section 28 of the Contract Act, respondent bank forces a mandatory and an unalterable claim period of a minimum 12 months for the bank guarantee. It is stated that the claim period is a time period contractually agreed upon between the creditor and principal debtor, which provides 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. This claim period may or may not even exist in a bank guarantee.

3. Section 28 of the Indian Contract Act, 1972 reads as follows:

“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.

Exception 2.—Saving of contract to refer questions that have already arisen.

Nor shall this section render illegal any contract in writing, by which two or more persons agree to refer to arbitration any question between them which has already arisen, or affect any provision of any law in force for the time being as to references to arbitration.

Exception 3.—Saving of a guarantee agreement of a bank or a financial institution.

This section shall not render illegal a contract writing by which any bank or financial institution stipulate a term in a guarantee or any agreement making a provision for guarantee for extinguishment of the rights or discharge of any party thereto from any liability under or in respect of such guarantee or agreement on the expiry of a specified period which