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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 & 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.”

Thence, the writ petition was dismissed.

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