Article

Note: The Textile Commissioner of India (Commissioner), a government official, issued a memorandum on 11 June 1995 under the Imports and Exports (Control) Act that, export of raw cotton and cotton waste during September 1995-August 1996 were “permitted only against an irrevocable letter of credit.” Exporters were also required to “furnish a bank guarantee” in favor of India (Beneficiary) at the rate of 10% of the contract price, to be in force for 6 months “with a provision for claims for an additional three months, after the last shipment date.”

Four exporters (Exporters) entered four sales of contracts with a Singaporean company in January 1996, and on 31 January 1996 Exporters applied “together with a bank guarantee” for permission to export. The guarantee was issued by M/S Indusind Bank (Guarantor) in favor of Beneficiary. Subsequently, Exporters were permitted to export 9,175 bales of cotton before 31 July 1996, and the permitted export shipment date was extended three times until 28 February 1997.

When Exporters failed to furnish the supporting documents regarding export of goods allocated to them within the stipulated period, Commissioner asked them for the necessary documents within 15 days but no later than 20 January 1997, and informed that a failure to do so would result in a drawing on the guarantees. When Exporters still had not furnished the documents, Commissioner drew on the guarantee on 15 May 1997. Guarantor refused to honor the guarantee, stating that the guarantees could only be drawn before 30 April 1997, within the extended period originally required by the export permission. Commissioner notified Guarantor that, Guarantor was “not absolved of its obligation” of payment in light of the 8 January 1997 amendment to Section 28 of the Indian Contract Act.

In 1999, when Commissioner contacted Exporters and Guarantor again requesting payment and received no response, Commissioner and Beneficiary filed three summary suits against Exporters and Guarantor in the High Court of Bombay. By order in 2001, amended in 2002, the High Court of Bombay granted unconditional leave to Guarantor and conditional leave to Exporters to defend the suit. Beneficiary subsequently appealed to the Division Bench, which dismissed the appeal in 2003. The suits were decreed ex parte against Exporters in 2004.

In a subsequent contest, a learned Single Judge decided on 22 February 2008 that, because the demand guarantees were in force on 8 January 1997 when the Contract Act amendment (Amendment) was made, the clause in the guarantees “extinguishing rights and discharging liability of the Guarantor if a claim was not made within three months of the date of expiry of the bank guarantee” became subject to Amendment and void, and that the drawing was valid. On appeal on 22 February 2011, a Division Bench of the Bombay High Court reversed, stating that although Amendment applied, the suits should be dismissed because the bank guarantees were not drawn on within the prescribed period. Subsequently, Beneficiary appealed to the Supreme Court of India. On 15 September 2016, the Supreme Court in an opinion by R.F. Nariman, J., dismissed the appeal.

Beneficiary claimed that the 1997 amendment to Section 28(b) should apply therefore voiding the condition which restricted the guarantee’s revocable period. Guarantor contended that, the amendment should not apply, since the bank guarantees themselves were dated 31 January 1996 and thus should not be affected by the amendment made a year later. Guarantor also made a secondary argument that even if the amended Section 28 applies, since the amendment had the limited objective of following a Law Commission Report, the clause in the bank guarantees would not be affected. In particular, Guarantor argued that the revised Section 28 suggested by the Law Commission was not enacted verbatim in Section 28(b), and that the crucial words “or on failure to make a claim” are missing from the amended Section 28.

The Court accepted Guarantor’s initial argument, stating “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 already accrued as a result of agreements entered into between parties are sought to be taken away. This being the case, we are of the view that both the Single Judge and Division Bench were in error in holding that the amended Section 28 would apply.”

The Court ruled that the applicable law to the agreement regarding the bank guarantee was that in place on 31 January 1996; the 1997 amendments to Section 28 did not apply.

Text of LC:

“Unless a demand or claim under this guarantee is made against us within three months from the above date (i.e. On or before 30.4.97), all your rights under the said guarantee shall be forfeited and we shall be relieved and discharged from all liabilities hereunder.”

[AWL/AYW]

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