2021 (7) TMI 1474 - HC - Indian Laws

Interpretation of section 28 of the Indian Contract Act 1872 - 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 - Lack of territorial jurisdiction of this court to deal with the present writ petition. HELD THAT - Reference may be had to the judgment of the Supreme Court in the case of Eastern Coalfields Ltd. and Ors. vs. Kalyan Banerjee 2008 (3) TMI 480 - SUPREME COURT . The facts of that case were that the respondent therein was an employee of the petitioner in Jharkhand. The services of the respondent were terminated in Jharkhand. A writ petition was filed in the Calcutta High Court - The Court held that only because the head office of the appellant Company was situated in the State of West Bengal the same by itself will not confer any jurisdiction upon the Calcutta High Court particularly when the head office had nothing to do with the order of punishment passed against the respondent. 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. What follows from the historical narration pertaining to section 28 of the Contract Act is that the said provision i.e. section 28 of the Contract Act prior to the amendment provided that a clause limiting the time within which the rights are to be enforced is void if the rights to be enforced under the contract continued to exist even beyond the shorter period agreed for enforcing the rights. If beyond the shorter period agreed between the parties for enforcing the rights the rights under the contract are not kept alive then such an agreement putting a time limit to sue was not hit by section 28 of the Contract Act. Hence the court held that any restriction on any suit or claim to be filed by the plaintiff beyond a specified period where such a provision prohibits the plaintiff from filing a suit contrary to the Limitation Act would be barred under section 28 of the Contract Act. (This judgment was passed before insertion of Exception 3 of Section 28 of the Contract Act.) - t is clear that Exception 3 to Section 28 of the Contract Act deals with curtailment 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. It is clear that respondent No. 1 is erroneously of the view that they are in law mandated to stipulate a claim period of 12 months in the bank guarantee failing which the clause shall be void under Section 28 of the Contract Act. A perusal of para 15 of the writ petition shows that a claim period has been explained as a time period contractually agreed between the creditor and the 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 has occurred during the validity period. Respondent No. 1 does not deny the above averments of the petitioner in the counter-affidavit. As noted above Section 28 of the Contract Act does not deal with the said claim period. It deals with right of the creditor to enforce his rights under the bank guarantee in case of refusal by the guarantor to pay before an appropriate court or tribunal. Conclusion - i) The Court has territorial jurisdiction to entertain the writ petition. ii) The impugned communications and circulars mandating a minimum 12-month claim period in bank guarantees are based on a misinterpretation of Section 28 and Exception 3 and are therefore illegal and void to the extent they impose such a mandatory claim period. iii) The Court did not adjudicate on the issues of commission and margin money as they were outside the scope of the writ petition. Petition disposed off.

The core legal questions considered by the Court in this matter are:

1. Whether the communications and circulars issued by the respondent banks and the Indian Banks' Association mandating a minimum claim period of 12 months in bank guarantees are legally valid, particularly in light of the interpretation of Section 28 of the Indian Contract Act, 1872.

2. The proper interpretation of Section 28 of the Indian Contract Act, 1872, especially Exception 3 thereto, and its applicability to the claim period stipulated in bank guarantees.

3. Whether the Court has territorial jurisdiction to entertain the writ petition given that the impugned communications were issued from Mumbai and addressed to parties in Mumbai.

4. Whether the issue of charging commission and retention of margin money beyond the validity or claim period of the bank guarantee is a contractual matter outside the scope of the writ jurisdiction.

Issue-wise Detailed Analysis

1. Territorial Jurisdiction of the Court

Legal Framework and Precedents: The Court examined the principles under Article 226(2) of the Constitution of India and relevant case law, including the Full Bench decision of this Court in Sterling Agro Industries Ltd. v. Union of India and the Supreme Court's judgment in Eastern Coalfields Ltd. v. Kalyan Banerjee. The settled position is that if part of the cause of action arises within the territorial jurisdiction of the Court, the writ petition is maintainable. The doctrine of forum conveniens and the nature of cause of action must be considered.

Court's Reasoning and Findings: Although the impugned letters and circulars were issued from Mumbai, the decision underlying those communications emanated from the Head Office's Law Division in Delhi. The petitioner's operations in Delhi are affected by these communications, and the alleged infringement of rights occurs in Delhi as well. Thus, a part of the cause of action arose within Delhi's jurisdiction.

Conclusion: The Court held that it has territorial jurisdiction to entertain the writ petition.

2. Interpretation of Section 28 of the Indian Contract Act, 1872 and Exception 3

Legal Framework and Historical Background: Section 28 prohibits agreements that absolutely restrict enforcement of rights or limit the time within which rights may be enforced. The original section distinguished between extinguishment of rights and limitation of remedies, holding that agreements extinguishing rights were valid but those limiting remedies were void. This distinction was criticized by the Law Commission of India in its 97th Report (1984) for causing hardship and anomaly, leading to an amendment in 1997 which rendered void agreements extinguishing rights on expiry of a specified period.

Exception 3, inserted in 2013, exempts bank and financial institution guarantees from Section 28's operation if they stipulate a term extinguishing rights or discharging liability on expiry of a specified period not less than one year from the occurrence or non-occurrence of a specified event.

Court's Interpretation and Reasoning: The Court analyzed the historical evolution of Section 28 and the Law Commission's recommendations, emphasizing that Exception 3 relates solely to the period within which a creditor must enforce rights before a court (the enforcement period), and not to the claim period within which a beneficiary may invoke the bank guarantee.

The claim period is a contractual grace period agreed between the creditor and principal debtor, allowing the beneficiary to make a demand on the bank for defaults occurring within the validity period of the guarantee. This claim period may or may not exist and is distinct from the enforcement period governed by Section 28 and the Limitation Act.

The Court relied on the judgment of a coordinate Bench in Explore Computers Pvt. Ltd. v. Cats Ltd. & Anr., which held that a clause limiting the right to file suit within a specified claim period is void to the extent it restricts rights under the Limitation Act, but the claim period for invoking the guarantee is a separate contractual matter unaffected by Section 28.

The Court also noted that the respondent bank, in its counter affidavit, admitted that Exception 3 governs the limitation period to institute proceedings before a court and does not govern the claim period.

Treatment of Competing Arguments: The respondent bank contended that the claim period must be at least 12 months to avail the protection of Exception 3, and that a claim period shorter than 12 months would be void, exposing the bank to longer limitation periods under the Limitation Act. The bank relied on a Supreme Court judgment which upheld the validity of clauses extinguishing rights after a specified period, but that case did not address claim periods and was distinguished by the Court.

The Court rejected the bank's interpretation as erroneous, holding that the claim period is a contractual term between creditor and principal debtor and not governed by Section 28 or Exception 3.

Conclusion: The Court held that the impugned communications and circulars mandating a minimum 12-month claim period in bank guarantees are based on a misinterpretation of Section 28 and Exception 3, and are therefore illegal and void to the extent they impose such a mandatory claim period.

3. Contractual Nature of Bank Charges and Retention of Margin Money

Legal Framework: The issue of commission charges and retention of margin money by banks beyond the validity or claim period of a bank guarantee is governed by the contractual terms agreed between the bank and the principal debtor.

Court's Reasoning: The Court noted that no relief was sought by the petitioner regarding bank charges or retention of margin money, and that these are commercial decisions of the bank. The Court declined to interfere in these contractual matters in the writ jurisdiction.

Conclusion: The Court did not adjudicate on the issues of commission and margin money, as they were outside the scope of the writ petition.

Significant Holdings

"Exception 3 to section 28 of the Contract Act deals with the rights of a creditor to enforce his rights under the bank guarantee after happening of a specified event. 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."

"The claim period is a time period contractually agreed between the creditor and the 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 has occurred during the validity period. Section 28 of the Contract Act does not deal with the said claim period."

"The impugned communications and circulars issued by respondent No. 1 and respondent No. 2, to the extent that they reproduce erroneous interpretation of Exception 3 to Section 28 of the Contract Act, are clearly vitiated."

"The Court has territorial jurisdiction to entertain the writ petition as a part of the cause of action has arisen within the territorial jurisdiction of this Court, being the place where the decision was taken and where the petitioner's operations are affected."

"The issue of charging commission and retention of margin money beyond the validity or claim period of the bank guarantee are matters of contract and commercial decision of the bank and are not subject to writ jurisdiction in the present petition."

The Court's final determination was to quash and set aside the impugned communications and circulars to the extent they mandate a minimum 12-month claim period in bank guarantees, holding such a mandate to be contrary to law and based on a misinterpretation of Section 28 of the Indian Contract Act, 1872. The writ petition was accordingly disposed of with all pending applications also disposed.

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