To Arise A Right Under Bank Guarantee Agreement, Demand Has To Be Made Within Validity Period Of Agreement : Kerala High Court

A bench of Justice N Nagaresh recently the settled the question in a case between the Cochin Port Trust and the Bank of India.

The Court explained that the extended claim period, allowed pursuant to the insertion of Exception 3 to Section 28 of the Contract Act, could be claimed only when the bank guarantee was invoked during the validity of the Agreement or the Bank Guarantee.

"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 Court ruled.

The petitioner, Cochin Port Trust approached the High Court aggrieved by the Bank of India's refusal to encash a bank guarantee in respect of a works contract. The Port Trust sought a declaration that invocation of the Bank Guarantee during the claim period is a valid invocation and binding on the Bank.

The work pertained to petition a tender floated by the Port Trust awarding the work of providing consultancy services for design and supervision of flyover and Rail Overbridge at ICTT area in Vallarpadam. The successful bidder furnished a Bank Guarantee in 2014.

The Bank Guarantee had a validity till 2015, after which it was extended in terms of Exception 3 to Section 28 of the Contract Act, several times till March 31 2019. The claim period for the said guarantee continued one year from the date of expiry, that is, till March 31, 2020.

Exception 3 to Section 28 of the Contract Act allows for an extension of time period within which rights or claims from an Agreement or Bank Guarantee may remain alive.

It reads,
"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 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"

On June 6, 2019, the Port Trust requested the Bank of India to retain the Bank Guarantee amount until further communication was received from the petitioner. Despite the demand, no payment was received.

Pointing out that the demand was admittedly made after the claim period, the Court said,

But, Ext.P8 (extension allowed) specifically provides that the 1 st respondent (Bank of India) 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

The Court ruled that the extended period of claim provided for under Exception 3 to Section 28 of the Contract Act is intended for extinguishment of the rights or discharge of any party from any liability under a Bank Guarantee/agreement.

Therefore, the Court held that the demand could not be made after the expiry of a bank guarantee and dismissed the writ petition.

CASE: COCHIN PORT TRUST v BANK OF INDIA & ANR.

COUNSEL: Advocates M.Gopikrishnan Nambiar, .K.John Mathai, Joson Manavalan, Kuryan Thomas, Paulose C. Abraham (Menon and Pai Advocates) for the Port Trust, Advocate J. Harikumar for Bank of India

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