TaxTMI 
TaxTMI 
TaxTMI 
2021 (7) TMI 1474
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....rari 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 3 of 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 ....
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....ng or non-occurring of a specified event for extinguishment or discharge of such party from the said liability. Explanation.-- (i) In Exception 3, the expression "bank" means-- (a) a "banking company" as defined in clause (c) of Section 5 of the Banking Regulation Act, 1949 (10 of 1949); (b) "a corresponding new bank" as defined in clause (da) of Section 5 of the Banking Regulation Act, 1949 (10 of 1949); (c) "State Bank of India" constituted under Section 3 of the State Bank of India Act, 1955 (23 of 1955); (d) "a subsidiary bank" as defined in clause (k) of Section 2 of the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959); (e) "a Regional Rural Bank" established under Section 3 of the Regional Rural Bank Act, 1976 (21 of 1976); (f) "a Co-operative Bank" as defined in clause (cci) of Section 5 of the Banking Regulation Act, 1949 (10 of 1949); (g) "a multi-State co-operative bank" as defined in clause (cciiia) of Section 5 of the Banking Regulation Act, 1949 (10 of 1949); and (ii) In Exception 3, the expression "a financial institution" means any public financial institution within the meaning of Section 4-A of the Companies Act, 1956 (1 of 1956)." ....
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....re. This is a time determined by the Principal Debtor and the Creditor. The right to invoke the bank guarantee is only for a default of the Principal Debtor which occurs during the validity period of the bank guarantee. b) Claim Period: This is a time period contractually agreed between the Creditor and the Principal Debtor which provides a grace period beyond the validity period to make a demand on the bank for a default which has occurred during the validity period. A claim period may or may not exist in the bank guarantee. The guarantor again has no role to play. c) Enforcement Period: The Enforcement period is a time period within which the Creditor can enforce his accrued rights pursuant to a demand made by him within the validity period or the claim period before a competent court of law. This period, it is stated, is statutorily governed by section 28(b) read with Exception 3 to section 28 of the Contract Act. In the absence of any such clause in the guarantee, the said period would be determined by the Limitation Act, 1963. 7. It is pleaded that on a complete misinterpretation of section 28 of the Contract Act, respondent No. 1 bank insists that the claim period should....
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....and cannot be a subject matter of the present writ petition. Reliance is also placed on the judgment of the Supreme Court in the case of Union of India & Anr. v. Indusind Bank Ltd. & Anr., 2016(9) SCC 720 to plead that the issue raised by the petitioners in the present writ petition is squarely covered by the aforesaid judgment. The pleas and contentions of the petitioners have been denied. 12. Respondent No. 2 in their counter affidavit have reiterated the preliminary objection, namely, that this court has no territorial jurisdiction to adjudicate the present petition. It is further pleaded that respondent No. 2 is not a regulator, authority or government or instrumentality of the State and hence it would not fall under writ jurisdiction of this court. It is further pleaded that the requirement of minimum claim period of one year has been endorsed by the Ministry of Finance, Department of Financial Services in consultation with RBI as conveyed in letters dated 23.04.2019 and 21.05.2019 addressed to respondent No. 2. It is further stated that the issue as to whether the petitioner can charge commission or retain margin money beyond the period of the bank guarantee including the ....
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....n section 28 of the Contract Act. It is pleaded that Exception 3 was introduced on the request of the banks and by virtue of the same, the banks and financial institutions could curtail the period of limitation to institute proceedings before a court of law to a period of 12 months rather than the mandatory period of 3 years or 30 years as stipulated in the Limitation Act. Hence, it is pleaded that Exception 3 to section 28 of the Contract Act has nothing to do with the claim period to be stipulated in the bank guarantee. Exception 3 relates only to the period available to institute proceedings before a court of law. iii) Reliance is also placed on the RBI Circulars dated 01.07.2013 and 01.07.2015 where a model guarantee bond is prescribed which does not give any claim period in the model form. It is reiterated that Exception 3 to section 28 of the Contract Act does not deal with the claim period at all. iv) Reliance is placed upon para 14 of the counter affidavit of respondent No. 1 to state that respondent No. 1 admits that Exception 3 to section 28 of the Contract Act only governs the limitation period for filing of a suit before a court of law. Reliance is also placed on th....
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....legal right of the petitioner stands infringed by the said act of respondent No. 1. (iv) On merits, it has been stressed that Exception 3 to Section 28 of the Contract Act entitles respondent No. 1 in law to stipulate a term in the bank guarantee making provisions for extinguishment of the right or discharge of any party thereto from any liability under or in respect of the guarantee on expiry of a specified period which is not less than one year from the date of occurring or non-occurring of a specified event for extinguishment or discharge of such party from the said liability. Hence, respondent No. 1 is entitled to insist on a claim period of one year. (v) It is also pleaded that respondent No. 1 Bank is entitled to retain/claim margin money and charge commission from a party on whose behalf the bank guarantee was issued for the period the said respondent Bank remains financially exposed. It is pleaded that the said stand of respondent No. 1 bank is purely a commercial decision of the bank. Any party including the petitioner, if it finds the said stand of respondent No. 1 unacceptable can always decline to accept insertion of any such term in the bank guarantee and approach ....
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.... should refrain from issuing circulars to the contrary. (ii) On the issue of territorial jurisdiction of this court, it has been reiterated that the head office and registered office of respondent No. 1 is in Delhi. Further, it is pleaded that a perusal of the impugned communications dated 18.08.2018 and 28.03.2019 of respondent No. 1 would show that these letters have been issued at the instance and on the decision of the Headquarter, Law Division of respondent No. 1 which is situated in Delhi. Hence, the decision is taken in Delhi which is only sought to be communicated by the impugned documents. Reliance is also placed on internal circulars dated 29.04.2017 and 09.08.2017 of respondent No. 1 to show that the decision in question has been taken by respondent No. 1 in Delhi. The cause of action, it is stated, has clearly arisen in Delhi. Further, the erroneous interpretation of Section 28(b) of the Contract Act is being implemented by the banks across the country including in Delhi. The petitioner is executing several contracts in Delhi and the impact of the impugned communications is being felt in Delhi. 20. I may first deal with the preliminary objection raised by learned se....
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....tter on merits. The High Court may refuse to exercise its discretionary jurisdiction by invoking the doctrine of forum conveniens. (d) The conclusion that where the appellate or revisional authority is located constitutes the place of forum conveniens as stated in absolute terms by the Full Bench is not correct as it will vary from case to case and depend upon the lis in question. (e) The finding that the court may refuse to exercise jurisdiction under Article 226 if only the jurisdiction is invoked in a malafide manner is too restricted/constricted as the exercise of power under Article 226 being discretionary cannot be limited or restricted to the ground of malafide alone. (f) While entertaining a writ petition, the doctrine of forum conveniens and the nature of cause of action are required to be scrutinized by the High Court depending upon the factual matrix of each case in view of what has been stated in Ambica Industries (supra) and Adani Exports Ltd. (supra). (g) The conclusion of the earlier decision of the Full Bench in New India Assurance Company Limited (supra) "that since the original order merges into the appellate order, the place where the appellate authority ....
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....ation) Order is not a correct view of law for the reason hereafter stated and to that extent the said decision is overruled. In fact, a legislation, it is trite, is not confined to a statute enacted by Parliament or the legislature of a State, which would include delegated legislation and subordinate legislation or an executive order made by the Union of India, State or any other statutory authority. In a case where the field is not covered by any statutory rule, executive instructions issued in this behalf shall also come within the purview thereof. Situs of office of Parliament, legislature of a State or authorities empowered to make subordinate legislation would not by itself constitute any cause of action or cases arising. In other words, framing of a statute, statutory rule or issue of an executive order or instruction would not confer jurisdiction upon a court only because of the situs of the office of the maker thereof. 27. When an order, however, is passed by a court or tribunal or an executive authority whether under provisions of a statute or otherwise, a part of cause of action arises at that place. Even in a given case, when the original authority is constituted at on....
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....orum convenience and the nature of cause of action are also required to be scrutinized by the high court. 24. I may now look at the facts of this case. Respondent No. 1 has issued two impugned communications dated 18.08.2018 and 28.03.2019. Both the communications are merely communicating the views of HO-Law Division of respondent No. 1 which is based in Delhi. Essentially, the decision which is impugned in the said communication has been taken in Delhi and merely communicated by the Mumbai office of respondent No. 1. Further, as rightly stated by the petitioner, the decisions as communicated by respondent No. 1 on 18.08.2018 and 28.03.2019 have an effect on the operations of petitioner No. 1 throughout India including its operations in Delhi. 25. Similar is the position regarding the communications issued by respondent No. 2 dated 10.02.2017 and 05.12.2018. Both the communications have been circulated to all the members of respondent No. 2, some of them are also based in Delhi. 26. The decision taken by respondent No. 1 in Delhi allegedly causes infraction of rights of the petitioner. The infraction of the rights of the petitioner also occurs in Delhi. In view of the above fact....
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.... void under the section. If, for example, beyond the shorter period agreed upon the rights under the contract cannot be kept alive, no limiting of the time to enforce the rights under the contract arises and hence the agreement putting a time limit to sue will not be hit by S. 28. So, a condition in a contract that the rights thereunder accruing to a party will be forfeited or released if he does not sue within a time limit specified therein will not offend S. 28. This is because, as per the contract itself, the rights accrued to the party cease to exist by the expiry of the limited period provided for in the contract. In such a case, in effect, there is no limiting of the time to sue. So, an agreement which provides for a simultaneous relinquishment of rights accrued and the remedy to sue for them will not be hit by S. 28. But, at the same time, an agreement relinquishing the remedy only, by providing that if a suit is to be filed that should be filed within a time limit-- the time limit being shorter than the period of limitation under Limitation Act--will be hit by S. 28. This is because the rights accrued continue even beyond the time limit as the same is not extinguished. In s....
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..... We may, in the first place, refer to a few cases illustrating the operation of the present position. In a case which went up to the Supreme Court, a clause in an insurance policy provided that all benefits under the insurance policy shall be forfeited if a suit was not brought within a specified period. The clause was held to be valid. The judgment expressly approves High Court decisions which had taken a similar view, including the oft cited Bombay case on the subject. There are decisions of many High Courts taking a similar view. These cases hold that it is only when a period of limitation is curtailed that section 28 of the Contract Act comes into operation. As was observed in a Bombay case "It [section 28] does not come into operation when the (contractual) term spells out an extinction of the right of the plaintiff to sue or spells out the discharge of the defendants from all liability in respect of the claim." 2.5. The reasoning underlying these decisions is that section 28 is aimed at prohibiting agreements which could operate only so long as the rights were in existence. The section is aimed only at-- (a) covenants not to sue at any time; and (b) covenants not t....
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....portant matter than merely creating a law of limitation of their own. If the law does not allow the latter consequence to be imposed by agreement, a fortiori, the law should not allow the former consequence also to be imposed by agreement." The Commission recommended as follows: "RECOMMENDATION 5.1. We now come to the changes that are needed in the present law. In our opinion, the present legal position as to prescriptive clauses in contracts cannot be-defended as a matter of justice, logic, commonsense or convenience. When accepting such clauses, consumers either do not realise the possible adverse impact of such clauses, or are forced to agree because big corporations are not prepared to enter into contracts except on these onerous terms. "Take it or leave it all", is their general attitude, and because of their superior bargaining power, they naturally have the upper hand. We are not at present, dealing with the much wider field of "standard form contracts" or "standard" terms. But confining ourselves to the narrow issue under discussion, it would appear that the present legal position is open to serious objection from the common man's point of view. Further, such cl....
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....viding for the extinction of a right, the parties are actually creating a law of prescription of their own, which is a far more important matter than merely creating a law of limitation of their own. The Commission recommended suitable amendment to Section 28 of the Contract Act to render invalid contractual clauses that extinguish on the expiry of a stated period the rights accruing from the contract. 32. It is in this background that on 08.01.1997 section 28 of the Contract Act was amended. The Statement of Objects and Reasons for such amendment reads as follows: "The Law Commission of India has recommended in its 97th Report that Section 28 of the Indian Contract Act, 1872 may be amended so that the anomalous situation created by the existing section may be rectified. It has been held by the courts that the said Section 28 shall invalidate only a clause in any agreement which restricts any party thereto from enforcing his rights absolutely or which limits the time within which he may enforce his rights. The courts have, however, held that this section shall not come into operation when the contractual term spells out an extinction of the right of a party to sue or spells out ....
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.... Legal Framework Concerning Banking System which was headed by Sh. T.R. Andhyarujina, Senior Advocate and Former Solicitor General of India on 15.02.1999. The Committee noted the effect of amended section 28 of the Contract Act as incorporated by amendment of 1997 as follows: "The amendment, therefore, cuts at the root of the problem of making fine distinctions between the extinguishment of a right which does not cut down the statutory period of limitation and the extinguishment or a forfeiture of a remedy which does cut down the statutory period of limitation. The amendment equates extinguishing of a right with the extinguishing of the remedy if there is an agreement which extinguishes the right under the contract on the expiry of a specified period." 35. The Committee noted the apprehensions due to the amendment expressed by the banks and the financial institutions and quoted from the Second Narasimham Committee Report as follows: "8.10 Banks have expressed a fear that they can no longer limit their liabilities under the Bank Guarantees to a specified period and they will have to carry their Bank Guarantee commitments for long periods as outstanding obligations. Banks also a....
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.....g. Food Corporation of India Vs. New India Assurance Co. Ltd. (1994) 3 SCC 324 prior to amendment would not be of any help since the amendment sets at naught the distinction made by these judgments. XXX ....... Accordingly, a reasonable period has to be provided to the creditor to enforce his rights under the guarantee after the happening of the specified event. The Committee believes that a period of one year would be reasonable for banks and financial institutions. The Committee is of the view that such an amendment may be made by incorporating a suitable proviso in Section 28 of the Contract Act itself, on the following lines:- "Provided that an agreement, being a guarantee issued by a banking company or a financial institution, shall not be deemed to be void by reason of the fact that such agreement contains a stipulation for extinguishment of the rights, or discharge of, any party thereto from any liability under or in respect of such agreement on the expiry of a specified period which is not less than one year from the date of occurring or non occurring of a specified event for extinguishment or discharge of such party from the said liability." 36. It is, thereafter....
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.... government parties. In this background, the T.R. Andhyarujina Committee recommended that the said period be reduced to one year for enforcing the rights under the bank guarantee after happening of a specified event. Thereafter, Exception 3 to section 28 of the Contract was added in 2013. The above narration of the historical facts leading to the present section 28 of the Contract Act clearly demonstrates that 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. 38. The above view is fortified by a judgment of a Co-ordinate Bench of this court in Explore Computers Pvt. Ltd. v. Cats Ltd. & Anr. (supra). Relevant part of the judgment reads as follows: "17. The plaintiff also seeks to challenge the last clause of the bank guarantee which limits the rights of the plaintiff to file a suit/claim only up to the claim period as the same is alleged to be void in view of the provisions of Section 28 of the Indian Contract Act, 1872. The plaintiff thus claims the right to file a suit in accordance with the Limitation Act, 1963 as the rights granted by the Limitation Act cannot....
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....ee is being once again re-produced for purposes of reference "Notwithstanding anything contained herein above, our liability under this guarantee shall be limited to an amount of Rs. 10.00 lacs (Rupees ten lacs only), and shall remain valid up to 12.01.1997 unless suit to enforce any claim under the guarantee is filed against us on or before 12.02.1997 all the rights of Explore Computers Private Limited shall be relieved and discharged from all liabilities there under." 57. The said clause, a 'notwithstanding' clause, makes it clear that irrespective of what had been stated prior to clause (a) in the bank guarantee, the liability of the bank under the guarantee was limited to the amount specified and was to remain valid only up to dates specified which was 22.02.1997 (extended up to 11.07.1997 by Ex D-3). The second qualification was that the suit to enforce any such claim under the guarantee was to be filed on or before 22.03.1997 (extended up to 11.08.1997 as per Ex. D-3). Thus two things had to be done: a) the claim under the bank guarantee had to be lodged prior to a particular date and b) the suit had to be filed before another date one month thereafter. It is only....
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....ntee or the Principal Debtor has obtained the stay from the Court, in such eventuality the beneficiary of a Bank Guarantee can raise claim against the Bank as well as the Principal Debtor within a period of 03 years (in case of Private Party) and within a period of 30 years (in case of Government Department). In such eventuality the Bank would also be required to make provision in its balance sheet towards contingent liability. It is to address one of such issue, the legislature have inserted Exception-3 to Section 28 of the Indian Contract Act, 1872, which inter alia, provides that in case a term is provided for in the Guarantee and Agreement by the Bank or Financial Institution 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 and the Bank shall stand discharge from its liability under the Bank Guarantee. Therefore, providing of such term cannot be alleged to be contrary to law. On the contrary providing of such term in the Contract would be in accordance with the provisions contained in Section 28 of the Contr....
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....al in nature, and not clarificatory or declaratory of the law, by making certain agreements covered by Section 28(b) void for the first time, it is clear that rights and liabilities that have already accrued as a result of agreements entered into between parties are sought to be taken away. This being the case, we are of the view that both the Single Judge [Union of India v. Bhagwati Cottons Ltd.] and the Division Bench [Indusind Bank Ltd. v. Union of India] were in error in holding that the amended Section 28 would apply. xxx 26. At this point, it is necessary to set out the exact clause in the bank guarantees in the facts of the present cases. One such clause reads as under: "... Unless a demand or claim under this guarantee is made against us within three months from the above date (i.e. on or before 30-4-1997), all your rights under the said guarantee shall be forfeited and we shall be relieved and discharged from all liabilities hereunder." 27. A similar clause contained in another bank guarantee reads thus: "... Provided however, unless a demand or claim under this guarantee is made on us in writing within 3 months from the date of expiry of this guarantee in respec....
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....ment is of no help to respondent No. 1. 45. I may now again look at the impugned communications dated 18.08.2018 and 28.03.2019 issued by respondent No. 1 Bank. Relevant portion of the communication dated 18.08.2018 reads as follows:- "... This has reference to your request for waiver of mandatory 1 year claim period in Bank Guarantee relying on opinion of M/s. Juris Corp, law firm, in this respect XXX Both M/s. Shardul Amarchand Mangaldas and Legal Retainer, after studying the matter in detail including the said opinion of M/s. Juris Corp, the aforesaid judgment of Hon'ble Supreme Court and the said legal opinion of Justice (Retd.) Shri B.N. Srikrishna, have in their considered opinion endorsed a standpoint that any stipulation in a BG limiting the claim period to less than 12 months shall be void under section 28 of the Indian Contract Act 1872. In order to avail the protection provided under Exception 3 to Section 28 of Contract Act, the claim period in BG must be for at least 12 months. As such, we reiterate our opinion in this matter that any period of claim in a BG which is less than 12 months shall be void in law. Also, in a legal dispute once such a clause in....