To arise a right under the Bank Guarantee Agreement, a demand has to be made within the validity period and not during the claim period: Kerala High Court
It is settled law that invocation of the Bank Guarantee after the validity period but within the claim period, is perfectly lawful and ought to be respected. But the HC cleared that the petitioner cannot have any advantage by the incorporation of a clause in terms of the said Exception 3 to Section 28 of the Indian Contract Act, in the Bank Guarantee since the right of the petitioner to have the Bank Guarantee invoked, is only during the currency of the Bank Guarantee and not during the extended claim period of one year. This remarkable judgment was passed by the Kerala High Court in the matter of COCHIN PORT TRUST V BANK OF INDIA &amp; ANR. [WP (C) NO.22760 OF 2019(T)] by Honourable Justice N.Nagaresh. The petitioner, Cochin Port Trust is aggrieved by the refusal of the 1st respondent to encash Bank Guarantee and transfer the same to the petitioner. The petitioner sought to declare that invocation of the Bank Guarantee during the claim period is a valid invocation and is binding on the Bank. The petitioner in this writ petition stated that a tender was floated by them for awarding the work of providing consultancy services for design and supervision of flyover and ROB at ICTT area in Vallarpadam. The 2nd respondent emerged as a successful bidder and therefore they executed the agreement. Thence, 2nd respondent was required to provide performance security in the form of a Bank Guarantee which he furnished on 21.07.2014. Later, the 1st respondent bank agreed to pay the petitioner on demand all money payable by the 2nd respondent. The Bank Guarantee was valid up to 30.09.2015 but was extended by a year and it was stipulated that though the period of Bank Guarantee is extended, the claim period is up to one year after the expiry of the validity of the Bank Guarantee. The Bank Guarantee was extended from time to time on the same conditions and the final extension was up to 31.03.2019 with a claim period up to 31.03.2020. Later, certain defects were noticed and Bank was informed to return the Bank Guarantee amount but they did not initiate remedial measures even within a period of one month. The petitioner contended that the Bank Guarantee cannot be paid as the guarantee period has lapsed and only claim period is remaining. The claim period of one year over and above the validity period is incorporated as per Exception 3 to Section 28 of the Contract Act, by the Banking Laws Amendment Act, 2012. Whereas the respondents contended that the right of the petitioner to have the Bank Guarantee invoked, is only during the currency of the Bank Guarantee and not during the extended claim period of one year. The HC after considering the facts of the case asserted that “The extended period of claim provided for under Exception 3 to Section 28 of the Contract Act is therefore intended for extinguishment of the rights or discharge of any party from any liability under a Bank Guarantee/agreement. To arise a right under the Bank Guarantee Agreement, demand has to be made within the period of validity of the Agreement. Having not made any demand within the validity period of the Bank Guarantee, the petitioner is not entitled to invoke the Guarantee during the claim period after the expiry of the validity period of the Bank Guarantee.”
IN THE HIGH COURT OF KERALA AT ERNAKULAM THE HONOURABLE MR.JUSTICE N.NAGARESH MONDAY THE 26TH DAY OF APRIL 2021 6TH VAISAKHA 1943 WP(C).No.22760 OF 2019(T COCHIN PORT TRUST REPRESENTED BY ITS CHIEF ENGINEER WILLINGTON ISLAND COCHIN ERNAKULAM 682 009 SRI.PAULOSE C. ABRAHAM BANK OF INDIA DADARBRANCH 294 S.K. BOLE RAOD NR.PROTUGESE CHURCH DADARMUMBAI M S. SHRIKHANDE CONSULTANTS PVT. LTD. 33 35 SHANTI CENTRE 3RD FLOOR PLOT NO.8 SECTOR 17 VASHI NAVI MUMBAI MUMBAI MAHARASTRA 400 705 R1 BY ADV. SRI.J.HARIKUMAR R2 BY ADV. SRI.K.K.VIJAYAN R2 BY ADV. SRI.G.RANJU MOHAN R2 BY ADV. SRI.K.R.RAJESHKUMAR R2 BY ADV. SRI.B.VINOTH THIS WRIT PETITIONHAVING BEEN FINALLY HEARD ON 26 04 2021 THE COURT ON THE SAME DAY DELIVERED THE WP(C) No.22760 2019 2 JUDGMENT ~ ~ ~ ~ ~ ~ ~ Dated this the 26th day of April 2021 The petitionerCochin Port Trust is aggrieved by the refusal of the 1st respondent to encash Bank Guarantee and transfer the same to the petitioner. The petitioner also seeks to declare that invocation of the Bank Guarantee during the claim period is valid invocation and binding on the Bank The petitioner states that a tender was floated by them for awarding the work of providing consultancy services for design and supervision of flyover and ROB at ICTT area in Vallarpadam. The 2nd respondent being the successful bidder Ext.P1 agreement dated 20.08.2014 was executed with the 2nd respondent. The 2nd respondent was required to provide a performance security in the form of a Bank Guarantee. The 2nd respondent furnished Ext.P2 Bank Guarantee dated 21.07.2014 WP(C) No.22760 2019 3 By Ext.P2 the 1st respondent Bank agreed to pay the petitioner on demand any and all money payable by the 2nd respondent to the extent of `19 40 000 at any time up to 30.09.2015. The Bank Guarantee which was valid up to 30.09.2015 was extended as per Ext.P3 up to 30.09.2016. In Ext.P3 it was stipulated that though the period of Bank Guarantee is up to 30.09.2016 the claim period is up to one year after the expiry of the validity of the Bank Guarantee i.e. up to 30.09.2017. The Bank Guarantee was extended from time to time on same conditions. The final extension as per Ext.P8 was up to 31.03.2019 with claim period up to Certain defects were noticed in the work of the 2nd respondent and the 2nd respondent was instructed to inspect the site and suggest appropriate remedial measures. The 1 st respondent Bank was informed on 06.06.2019 to return the Bank Guarantee amount until further communication is received from the petitioner. As the 2nd respondent did not initiate remedial measures even within a period of one month WP(C) No.22760 2019 4 the petitioner invoked the Bank Guarantee on 28.06.2019 29.06.2019 and 01.07.2019 as per Exts.P10 to P12 By Ext.P13 dated 06.07.2019 the 1st respondent informed the petitioner that the Bank Guarantee cannot be paid as the guarantee period has lapsed and only claim period is remaining. The petitioner contends that refusal of the 1st respondent to honour the Bank Guarantee is illegal and in violation of the conditions of the Bank Guarantee. The petitioner therefore challenges the refusal of the 1st respondent Bank to realise the Bank Guarantee The 1st respondent filed a counter affidavit in the writ petition and contested the claim of the petitioner. The 1st respondent pointed out that it has been categorically stated in Ext.P3 that the Bank is liable to pay the guarantee amount only if the petitioner makes a written claim or demand on or before the expiry of the renewed guarantee. The claim period of one year over and above the validity period is incorporated as per Exception 3 to Section 28 of the Contract Act by the Banking Laws Amendment Act 2012 with effect from WP(C) No.22760 2019 5 The 1st respondent contended that the petitioner cannot have any advantage by the incorporation of a clause in terms of the said Exception 3 to Section 28 of the Indian Contract Act in the Bank Guarantee. The right of the petitioner to have the Bank Guarantee invoked is only during the currency of the Bank Guarantee and not during the extended claim period of one year. No relief can therefore be given to the petitioner in this writ petition The 2nd respondent also filed a counter affidavit According to the 2nd respondent the clause regarding arbitration in case of dispute is applicable to the contract The clause would take in dispute relating to encashment of Bank Guarantee also. The consultancy work was completed on 30.04.2018. A team of experts from the 2nd respondent Firm visited the site inspected the work and presented a report to the petitioner regarding the remedial measures to be taken. The 2nd respondent stated that despite the fact that the contract period and obligation are over the 2nd respondent is WP(C) No.22760 2019 6 ready to associate with the petitioner to address any issues related to structural safety The learned Standing Counsel for the petitioner argued that the invocation of the Bank Guarantee was done by the petitioner within the time period. According to the petitioner it is settled law that invocation of the Bank Guarantee after the validity period but within the claim period is perfectly lawful and ought to be respected. Exts.P2 to P8 Bank Guarantees are irrevocable and unconditional. The Bank Guarantee is an independent agreement between the petitionerbeneficiary and the Bank. The Bank Guarantee therefore can be invoked by the petitioner regardless of any dispute between the petitioner and the 2nd respondent contended the learned Standing Counsel for the petitioner. 10. Heard the learned Standing Counsel for the petitioner the learned Standing Counsel for the 1st respondent and the learned counsel for the 2nd respondent 11. Ext.P8 Bank Guarantee Extension reads as WP(C) No.22760 2019 7 “Extension of BG No.00151PEBG140103 dated 21.07.2014 from 01.11.2018 to 31.03.2019 for 19 40 000 on behalf of Shrikhande Consultant Pvt At the request of M s. Shrikhande Consultants Pvt Ltd. we the Bank of India Dadar Branch Mumbai 400 028 extend the validity of captioned Bank Guarantees upto 31.03.2019. All the other terms and conditions shall remain unchanged We are liable to pay the guarantee amount or any part thereof under this Bank Guarantee only if you serve upon us a written claimer demand on or before expiry of this renewed gauarantee All other terms & condition mentioned in the guarantee as originally issued renewed earlier The Bank Guarantee shall be valid upto 31.03.2019 with one year claim period i.e. upto 31.03.2019 Notwithstanding anything contained here above our liability under the Guarantee is restricted to 19 40 000 and this guarantee is valid upto 31.03.2019 We shall be released and discharged from all liabilities hereunder unless a written claim for payment under this guarantee is lodged claimed on or before 31.03.2020 irrespective of whether or not the original guarantee is returned to us.” It is evident that the validity of the said guarantee is only up to 31.03.2019. Even according to the petitioner demands were made only on 28.06.2019 29.06.2019 and 01.07.2019 which dates are subsequent to the period of validity of Bank WP(C) No.22760 2019 8 12. The petitioner has a case that they have informed the 1st respondent on 06.06.2019 to retain the Bank Guarantee amount until further communication is received from the petitioner. But Ext.P8 specifically provides that the 1st respondent shall be released and discharged from all liabilities unless a written claim is lodged on or before 31.03.2019. The written demand of the petitioner is admittedly after the said date 13. The Standing Counsel for the petitioner strongly urged that the claim period of Ext.P8 extends up to 30.03.2020 and before the said date written demand was made to the 1st respondent Bank. The extended claim period is in terms of Exception 3 to Section 28 of the Contract Act Exception 3 to Section 28 of the Contract Act reads as “Exception 3 Saving of a guarantee agreement of a bank or a financial institution This section shall not render illegal a contract in writing by which any bank or financial institution stipulate a term in a guarantee or any agreement WP(C) No.22760 2019 9 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 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.” 14. The extended period of claim provided for under Exception 3 to Section 28 of the Contract Act is therefore intended for extinguishment of the rights or discharge of any party from any liability under a Bank Guarantee agreement To arise a right under the Bank Guarantee Agreement a demand has to be made within the period of validity of the Agreement. Having not made any demand within the validity period of the Bank Guarantee the petitioner is not entitled to invoke the Guarantee during the claim period after the expiry of the validity period of the Bank Guarantee The writ petition is therefore without any legal merit and is hence dismissed. Sd N. NAGARESH JUDGE WP(C) No.22760 2019 10 PETITIONER S EXHIBITS TRUE COPY OF THE RELEVANT PAGES OF THE AGREEMENT FOR THE WORK OF PROVIDING CONSULTANCY SERVICES FOR DESIGN AND SUPERVISION OF FLYOVER AND ROB AT ICTT AREA IN VALLARPADAM TRUE COPY OF THE BANK GUARANTEE OF THE 1ST RESPONDENT DATED 21.07.2014 ISSUED TO THE PETITIONER TRUE COPY OF THE BANK GUARANTEE EXTENSION DATED 16.10.2015 ISSUED TO TRUE COPY OF THE BANK GUARANTEE EXTENSION DATED 28.09.2016 ISSUED TO TRUE COPY OF BANK GUARANTEE EXTENSION DATED 01.03.2017 ISSUED TO THE TRUE COPY OF BANK GUARANTEE EXTENSION DATED 15.01.2018 ISSUED TO THE TRUE COPY OF BANK GUARANTEE EXTENSION DATED 13.08.2018 ISSUED TO THE TRUE COPY OF BANK GUARANTEE EXTENSION TRUE COPY OF THE LETTER DATED 06.06.2019 ISSUED BY THE PETITIONER TO THE 1ST RESPONDENT TRUE COPY OF THE LETTER OF INVOCATION DATED 28.06.2019 No.22760 2019 11 TRUE COPY OF THE LETTER OF INVOCATION DATED 29.06.2019 (WITHOUT ENCLOSURES ISSUED BY THE PETITIONER TO THE 1ST TRUE COPY OF THE LETTER OF INVOCATION DATED 01.07.2019 (WITHOUT ENCLOSURES ISSUED BY THE PETITIONER TO THE 1ST TRUE COPY OF THE EMAIL DATED 06.07.2019 ISSUED BY THE 1ST RESPONDENT TO THE PETITIONER RESPONDENTS EXHIBITS TRUE COPY OF THE INSPECTION REPORT PRESENTED BY THE RESPONDENT TRUE COPY OF THE LETTER DATED 20.8.2019 ISSUED BY THE PETITIONER TO THE 2ND RESPONDENT TRUE COPY OF THE LETTER DATED 10.9.2019 ISSUED BY THIS RESPONDENT TO