TaxTMI 
TaxTMI 
2021 (7) TMI 1474
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.... 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 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 petitio....
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....y under or in respect of such guarantee or 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. 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 Regulatio....
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.... 6. It is further stated that the Standard Bank Guarantee would usually contain the following terms: a) Expiry Period/Validity Period: A bank guarantee would prescribe a specific date by which a bank guarantee would expire. 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....
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.... court. 11. It is also pleaded that respondent No. 1 bank can charge commission or retain the margin money beyond the period of the bank guarantee, including the claim period. It is pleaded that such terms are a matter of contract between the parties 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....
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....mended on 08.01.1997. ii) Reliance is also placed upon the report of the Expert Committee headed by Sh. T.R. Andhyarujina, Senior Advocate and Former Solicitor General of India. It is pleaded that based on the above report, on 18.01.2013 Exception 3 was also introduced in 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 a....
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....d by respondent No. 1. This is a purely contractual issue and the petitioner has no legal remedy in such matters as claimed. It is stressed that no prayer for issuance of a writ of mandamus can be entertained to include or exclude a clause in the contract. (iii) It is further strongly urged that no fundamental or 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 sai....
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....matters. 18. Learned counsel for RBI has essentially reiterated the pleas given in the counter-affidavit. 19. Learned senior counsel for the petitioners in his rejoinder arguments has pleaded as follows:- (i) He has stressed that the claim period is a contractual issue between parties and is not governed by Exception 3 to Section 28 of the Contract Act. The respondents 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 actio....
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....efore this Court, however, the cause of action has to be understood as per the ratio laid down in the case of Alchemist Ltd. (supra). (c) An order of the appellate authority constitutes a part of cause of action to make the writ petition maintainable in the High Court within whose jurisdiction the appellate authority is situated. Yet, the same may not be the singular factor to compel the High Court to decide the matter 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 ....
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....ant, this Court noticed decisions of this Court in Nasiruddin v. STAT [(1975) 2 SCC 671] and U.P. Rashtriya Chini Mill Adhikari Parishad v. State of U.P. [(1995) 4 SCC 738] to hold: (Kusum Ingots case, SCC p. 263, paras 26-27) "26. The view taken by this Court in U.P. Rashtriya Chini Mill Adhikari Parishad [(1995) 4 SCC 738] that the situs of issue of an order or notification by the Government would come within the meaning of the expression 'cases arising' in Clause 14 of the (Amalgamation) 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 consti....
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....cutta High Court, particularly when the head office had nothing to do with the order of punishment passed against the respondent." 23. What follows from the above is that under Article 226 (2), an 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. The question as to whether a high court has territorial jurisdiction to entertain a writ petition must be answered on the basis of the averments made in the petition. While entertaining a writ petition, the doctrine of forum 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 28.03.201....
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.... "4. S. 28 makes two kinds of agreements void. What we are concerned in this case is the second of the two kinds, namely, an agreement which limits the time within which a party thereto may enforce his rights under or in respect of a contract by the usual legal proceedings in the ordinary tribunals. It is the limiting of the time within which the rights are to be enforced that is made void. So, it goes without saying that rights to be enforced under the contract should continue to exist even beyond the shorter period agreed for enforcing those rights, to make such an agreement 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 ....
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.... for enforcing the rights. 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. 30. The Law Commission of India in his Ninety-Seventh Report dated 31.03.1984 dealt with the aforesaid interpretation of section 28 of the Contract Act. The Law Commission took up the matter suo moto. The Commission noted the then position regarding section 28 of the Contract Act as follows:- "2.4. 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 w....
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....an agreement that shape and character of a provision extinguishing the right (and not merely affecting the remedy), a party standing in a superior bargaining position can achieve something which could not have been achieved by merely barring the remedy. In other words, under the present law, a more radical and serious consequence--the abrogation of rights--becomes permissible, while a less serious device-the extinction of the mere remedy-- becomes impermissible. Prima facie, such a position appears to be highly anomalous. By providing 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. 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, com....
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.... (b) which limits the time within which he may thus enforce his rights, or (c) which extinguishes the rights of any party thereto under or in respect of any contract on the expiry of a specified period or on failure to make, a claim or to institute a suit or other legal proceeding within a specified period, or (d) which discharges any party thereto from any liability under or in respect of any contract in the circumstances specified in clause (c), is void to that extent." 31. The Commission noted the settled legal position about old Section 28 of the Contract Act including the aforesaid judgment of the Kerala High Court in Kerala Electrical & Allied Engineering Co. Ltd. v. Canara Bank & Others (supra). The Commission concluded that by providing 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 ....
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....f 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." 34. Union of India, thereafter, constituted an Expert Committee for Recommending Changes in the 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 ....
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....t with attendant implications for the economy as a whole. It would appear that the whole issue needs to be re-examined and bank guarantees exempted from the purview of the above amendment." The Committee further held:- "This Committee is of the view that in the face of the amended provision of Section 28, it would be now difficult to sustain a prescriptive clause, howsoever worded, in a bank guarantee which limits the period of banks and financial institutions liability to a period lesser than the normal period of limitation. In case of guarantees to Government this period is as large as 30 years. The distinction between extinguishment of right and of remedy would no longer be available to banks and financial institutions since the amendment has been made with the declared objective of doing away with that distinction. Reliance on Court judgments e.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 th....
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....a facie such a position as noted above appears to be highly anomalous. By providing for 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. Hence, the Law Commission recommended amendments to section 28 of the Contract Act. The amendment was accordingly carried out on 08.01.1997. The newly added section 28 of the Contract Act was enacted to do away with the earlier distinction between remedy and right i.e. a clause barring the remedy only was void but a clause extinguishing a right was valid. 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. 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 ....
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....n such a case where matter is only relating to the terms of the guarantee to the extent it requires a party to invoke the guarantee during the life time of the guarantee. The sequitur to this would be to consider whether the plaintiff did invoke the bank guarantee within this period specified. The answer to this question depends on the interpretation of the terms of the bank guarantee in view of the two dates stipulated and the different phraseologies used for the same. The observations of the Supreme Court in State of Maharashtra v. Dr. M.N. Kaul case (supra) do make it clear that it is the terms under which the guarantor has bound himself which have to be seen and in case of ambiguity when all other rules of construction fail, the guarantee must be interpreted contra proferentem. On a reading of the bank guarantee, in my considered view, there is really no ambiguity if the guarantee is read as a whole. The last paragraph of the bank guarantee 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 ....
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....ilment 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. 41. The above interpretation is also accepted by respondent No. 1 in the counter-affidavit. Reference may be made to para 14 of the Counter affidavit of respondent No. 1/PNB, which reads as follows: "14. That the contents of Para 14 are not denied. It is submitted that averment made by the petitioner in para 13 is itself in contradiction to Para 14. It is further submitted that the beneficiary can raise claim under the Bank Guarantee, for any default occurred during its currency, within the validity period of Bank Guarantee or claim period and in the event the same is not paid or honored by the Promisor (Bank), inter- alia, for the reason that the Bank Guarantee has not been invoked as per the terms and conditions of the Bank Guarantee 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 (....
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....that the Amendment does not purport to be either declaratory or clarificatory. It seeks to bring about a substantive change in the law by stating, for the first time, that even where an agreement extinguishes the rights or discharges the liability of any party to an agreement, so as to restrict such party from enforcing his rights on the expiry of a specified period, such agreement would become void to that extent. The amendment therefore seeks to set aside the distinction made in the case law up to date between agreements which limit the time within which remedies can be availed and agreements which do away with the right altogether in so limiting the time. These are obviously substantive changes in the law which are remedial in nature and cannot have retrospective effect. xxx 24. On a conspectus of the aforesaid decisions, it becomes clear that Section 28, being substantive law, operates prospectively, as retrospectivity is not clearly made out by its language. Being remedial 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 ....
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.... year from the date of occurring or non-occurring of a specified event for extinguishment or discharge of a party from liability. The appeals are, therefore, dismissed with no order as to costs." 44. Much reliance was placed on para 34 of the aforesaid judgment by learned senior counsel for respondent No. 1 to justify the stand taken in the impugned circulars. It was strongly urged that the said observation of the Supreme Court was binding on this court. A perusal of para 28 of the judgment clearly shows that the court interpreted the relevant clauses of the bank guarantee holding that neither of the clauses seeks to limit the time within which the right is to be enforced, namely, in other words neither of the clauses purports to curtail the period of limitation within which a suit may be brought to enforce the bank guarantee. The said clauses were not dealing with the claim period i.e. the grace period beyond the validity of the bank guarantee to make a demand on the bank for a default which had occurred during the validity period. The above judgment 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 iss....