Union of India & Anr. v. M/s Indusind Bank Ltd. & Anr.
Background
Four cotton exporters obtained an export quota in 1996 and furnished bank guarantees (issued by the respondent bank) as security, which by their terms could only be invoked within a limited time window after expiry. When the exporters failed to furnish proof of export, the Textile Commissioner invoked the bank guarantees in 1997, but only after the contractual time limit for invocation had already passed. The bank refused to pay, arguing the claim was time-barred under the guarantee's own terms. The Union of India sued, and the key legal question was whether a 1997 amendment to Section 28 of the Contract Act (which generally voids contract clauses that improperly restrict a party's right to sue) made the guarantee's time-limit clause void, and if so, whether that amendment even applied to a guarantee signed before the amendment came into force. A single judge of the Bombay High Court ruled for the Union of India; a Division Bench reversed, ruling for the bank; the Union of India then appealed to the Supreme Court.
Decision Breakdown
The Supreme Court held that the relevant law for testing the validity of the 1996 bank guarantee was the law as it stood on the date the guarantee was executed (31.1.1996), not the law after the 1997 amendment came into force on 8.1.1997, so the unamended Section 28 applied, under which clauses merely fixing a time period for invoking/claiming under a guarantee (as opposed to restricting the right to approach a court) have consistently been held valid and not void. Since the Textile Commissioner invoked the bank guarantees well after the time period specified in the guarantees had expired, the invocation itself was invalid, and the Bank's liability stood extinguished. The Court noted, in passing, that a later 2012 amendment to Section 28 (effective 2013) would validate such time-limit clauses going forward provided the period is at least one year, but that amendment did not apply here. The appeals were accordingly dismissed, with no order as to costs.
Lesson Learnt
A contractual clause that simply sets a reasonable time limit for making a claim or invoking a guarantee (as distinct from barring someone from going to court at all) is generally valid and enforceable, and if you miss that contractual deadline, you can lose your right to claim even if you are otherwise in the right.