Page 1 REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOS.9087-9089 of 2016

(ARISING OUT OF SLP (CIVIL) NOS.16166-16168 OF 2011)

UNION OF INDIA & ANR. …APPELLANTS

VERSUS

M/S INDUSIND BANK LTD. & ANR. …RESPONDENTS

J U D G M E N T

R.F. Nariman, J.

1.Leave granted.

2.The present appeals by the Union of India raise an

interesting question as to the applicability of the 1997

Amendment to Section 28 of the Contract Act, 1872. The facts

of the three appeals are similar inasmuch as they concern four

exporters who belong to what is known as the GPB Group of

Companies.

1

Page 2 3.By a Memorandum dated 6.11.1995, issued by the Textile

Commissioner under the Imports and Exports (Control) Act,

1947, terms and conditions for export of raw cotton and cotton

waste for September, 1995 - August, 1996 were laid down. The

shipment was permitted only against an irrevocable letter of

credit. The exporters were required to furnish a bank guarantee

in the prescribed form at the rate of 10% of the contract price.

The bank guarantee was required to be kept valid up to 6

months with a provision for claims for an additional three

months, after the last date of shipment. The allocation of quota

was on the basis of the highest unit value realization.

4.The Textile Commissioner invited applications vide Press

Note and Memorandum, both dated 9.1.1996, for export of

10,000 bales of extra long staple cotton. It was mentioned in

the Press Note and the Memorandum that the shipment period

will be 180 days from the date of registration of quota or up to

31.8.1996, whichever is earlier.

5.Pursuant to this Press Note and Memorandum, four sale

contracts were executed between M/s Indocomex Fibres Pvt.

Ltd., Singapore and the four exporters, all in January, 1996. On

2

Page 3 31.1.1996, the four exporters made an application together with

a bank guarantee of even date. In February, the exporters were

permitted to export the total quantity of 9175 bales vide an

Allocation-cum-Registration Certificate dated 6.2.1996 within a

validity period of shipment up to 31.7.1996. It may be

mentioned in passing that this date was extended as many as

three times, the third extension being notified as upto

28.2.1997.

6.As the four exporters failed and neglected to furnish

supporting documents regarding export of goods allocated to

them within the stipulated period, the Textile Commissioner, by

a letter dated 3.1.1997, called upon the exporters to submit the

necessary documents within 15 days from the date of issue of

this letter but not later than 20.1.1997, failing which the bank

guarantees would be enforced. As the exporters failed and

neglected to furnish these documents, the Textile

Commissioner, vide letters dated 15.5.1997, invoked the bank

guarantees. Vide letters of even date, the Respondent Bank

refused to pay under the said guarantees, stating that the same

could be invoked only within the extended period of three

3

Page 4 months i.e. up to 30.4.1997, and not later. By a letter dated

27/28.8.1997, the Textile Commissioner informed the

Respondent Bank that in light of the amendment to Section 28

of the Indian Contract Act, which came into force on 8.1.1997,

the Bank was not absolved of its obligation to make payment

under the bank guarantee. To this, the Bank vide letter dated

19.9.1997, reiterated its earlier stand and stated that it was not

liable to make payment under the bank guarantee after

30.4.1997. It may be mentioned in passing that two of the

aforesaid group companies, namely GPB Fibres Ltd. and M/s

Bhagwati Cotton Ltd. were amalgamated on 12.9.1997.

7.On 23.7.1998, the Textile Commissioner called upon both

the exporters and the Respondent Bank to pay the sums

covered by the bank guarantee. As this letter evoked no

response, three summary suits - being 2959/1999, 2963/1999

and 2996/1999 - were filed on 8.4.1999 by the Union of India

and the Textile Commissioner against the exporters and the

Bank in the High Court of Bombay. By order dated 4.12.2001,

as amended on 22.1.2002, unconditional leave to defend the

suits was granted to the Bank, and conditional leave to so

4

Page 5 defend the suits to the exporters upon depositing the amount of

Rs.3,82,59,450/- in the Court within 12 weeks from the date of

the said order. On 20.1.2003/27.2.2003, the Division Bench

dismissed the appeal filed by the Union of India on the ground

that it was not maintainable under Clause 15 of the Letters

Patent of the High Court. On 14.8.2003, an SLP filed by the

Union of India met with the same fate.

8.All four exporters remained ex parte, as a result of which

the suits came to be decreed ex parte against the said

exporters on 29.11.2004.

9.On contest with the Bank, a learned Single Judge of the

Bombay High Court on 22.2.2008, was of the view that as the

bank guarantees in question were in force on 8.1.1997, when

the amendment to Section 28 of the Contract Act took place,

the amended Section 28 would apply to the facts of these

cases. This being the case, the clause in the bank guarantees

extinguishing rights and discharging the liability of the Bank if a

claim were not to be made within three months of the date of

expiry of the bank guarantee, was held to be void.

Consequently, it was held that the invocation of the aforesaid

5

Page 6 bank guarantees, being without the aforesaid time constraint,

was valid, and the said suits were, therefore, decreed in favour

of the Union of India and against the bank.

10. In an appeal against this judgment, by the impugned

judgment dated 20.4.2011, a Division Bench of the Bombay

High Court, while holding that the amended Section 28 would

apply to the facts of these cases, came to the opposite

conclusion by following certain judgments of this Court, and

therefore, reversed the learned Single Judge, holding that since

the bank guarantees were not invoked within the time

prescribed, the suits would have to be dismissed. The Union of

India has filed the present appeals before us.

11.Shri A.K. Panda, learned senior advocate appearing on

behalf of the Union of India, has stated that the Single Judge

was correct in applying Section 28(b) as amended in 1997, and

that the condition contained in the bank guarantee which

restricted the period within which it could be invoked is,

therefore, void. To buttress his submission, he cited (1995) 2

SCC 630, R. Rajagopal Reddy v. Padmini

Chandrasekharan. According to learned counsel, the Division

6

Page 7 Bench, having reiterated that the amended Section 28(b) would

apply, was not correct in its conclusion that such clause in the

bank guarantees would not be void. According to learned

counsel, the Supreme Court judgments relied upon were all

pre-amendment, and could not therefore be relied upon to

arrive at the opposite result from the learned Single Judge.

12.On the other hand, Dr. A.M. Singhvi, learned senior

advocate, and Shri Krishnan Venugopal learned senior

advocate, contended that both the Single Judge and the

Division Bench were not correct in applying the amendment to

Section 28. According to both the learned counsel, the bank

guarantees themselves being dated 31.1.1996, would not be

affected by an amendment made one year later i.e. on

8.1.1997. The relevant date and the relevant law applicable

would be as on 31.1.1996, which would be the unamended

Section 28. This being the case, according to them, a catena of

judgments has held that if a clause in a contract does not

restrict the limitation period within which one can approach a

Court, then it is perfectly valid and not hit by Section 28

(unamended). For this purpose, they cited several judgments

7

Page 8 before us. An alternative plea was also raised by them that, on

the assumption that the amended Section 28 would apply, even

then, regard being had to the limited object sought to be

achieved by the amendment, which followed a Law

Commission Report, it would be clear that even on application

of Section 28(b), the aforesaid clause in the bank guarantees

would not be hit. In particular, they argued that the revised

Section 28 suggested by the Law Commission was not in fact

enacted verbatim in Section 28(b), and that the crucial words

“or on failure to make a claim” are missing in the amended

Section 28. They also referred to a subsequent amendment of

Section 28 in 2012, specifically dealing with bank guarantees,

in the course of their arguments.

13.The primary contention with which we are faced is

whether Section 28 applies in its original form or whether it

applies after amendment in 1997. In order to answer this

question, it is first necessary to set out Section 28 in its original

form and Section 28 after amendment. The Section reads as

under:-

8

Page 9 Original Section

28. Every agreement, by which any party thereto is

restricted absolutely from enforcing his rights under

or in respect of any contract, by the usual legal

proceedings in the ordinary tribunals, or which

limits the time within which he may thus enforce his

rights, is void to that extent.

Amendment w.e.f. 08.01.1997

28. Agreements in restraint of legal proceeding,

void. Every Agreement,

(a)by which any party thereto is restricted

absolutely from enforcing his rights under or in

respect of any contract, by the usual legal

proceedings in the ordinary tribunals, or which

limits the time within which he may thus enforce

his rights, is void to that extent;

(b)which extinguishes the rights of any party

thereto, or discharges any party thereto, from

any liability, under or in respect of any contract

on the expiry of a specified period so as to

restrict any party from enforcing his rights by

usual legal proceedings, is void to that extent.”

14.In order to answer this primary question, we have first to

see whether the change made in Section 28 could be said to be

clarificatory or declaratory of the law, and hence retrospective. It

is common ground that the statute has not made the aforesaid

amendment retrospective as it is to come into force only with

effect from 8.1.1997.

9

Page 10 15.The original Section is of 1872 vintage. It remained in this

incarnation for over 100 years and was the subject matter of

two Law Commission Reports. The 13

th

Report of the Law

Commission of India, September, 1958 examined the Section

and ultimately decided that it was not necessary to amend it,

given the fact that there is a well-known distinction between

agreements providing for relinquishment of rights as well as

remedies as against agreements for relinquishing remedies

only. This was reflected in para 57 of the Report as follows:-

“57.Decided cases reveal a divergence of opinion

in relation to certain clauses of insurance policies

with reference to the applicability of this Section. On

examination, it would appear that these cases do

not really turn on the interpretation of the Section,

but hinge on the construction of the insurance

policies in question. The principle itself is well

recognized that an agreement providing for the

relinquishment of rights and remedies is valid, but

an agreement for relinquishment of remedies only

falls within the mischief of Section 28. Thus, in our

opinion, no change is called for by reason of the

aforesaid conflict of judicial authority.”

16.Several decades passed, until the Law Commission in its

97

th

Report of March, 1984 suo motu decided that the Section

10

Page 11 required amendment. An introduction to the Report stated the

point for consideration thus:-

“1.2Under Section 28 of the Indian Contract Act,

1872 – to state the point in brief – an agreement

which limits the time within which a party to an

agreement may enforce his rights under any

contract by proceedings in a court of law is void to

that extent. But the Section does not invalidate an

agreement in the nature of prescription, that is to

say, an agreement which provides that, at the end

of a specified period. If the rights thereunder are

not enforced, the rights shall cease to exist. As will

be explained in greater detail in later Chapters of

this Report, this position creates serious anomalies

and hardship, apart from leading to unnecessary

litigation. Prima facie, it appeared to the

Commission that the Section stood in need of

reform on this point. The arguments for and against

amendment of the section will be set out later. For

the present, it is sufficient to state that the problem

is one of considerable practical importance as such

stipulations are frequently found in agreements

entered into in the course of business.”

17.After going through the existing case law and finding that

the existing case law resulted in economic injustice because of

unequal bargaining power, the Law Commission decided to

recommend a change in the Section. This was done as

follows:-

11

Page 12 “5.1We now come to the changes that are needed

in the present law. In our opinion, the present legal

position as to prescriptive clauses in contracts

cannot be defended as a matter of justice, logic,

commonsense or convenience. When accepting

such clauses, consumers either do not realize the

possible adverse impact of such clauses, or are

forced to agree because big corporations are not

prepared to enter into contracts except on these

onerous terms. “Take it or leave it all”, is their

general attitude, and because of their superior

bargaining power, they naturally have the upper

hand. We are not, at present, dealing with the

much wider field of “standard form contracts” or

“standard” terms. But confining ourselves to the

narrow issue under discussion, it would appear that

the present legal position is open to serious

objection from the common man’s point of view.

Further, such clauses introduce an element of

uncertainty in transactions which are entered into

daily by hundreds of persons.

5.2It is hardly necessary to repeat all that we

have said in the preceding Chapters about the

demerits of the present law. Briefly, one can say

that the present law, which regards prescriptive

clauses as valid while invalidating time limit clauses

which merely bar the remedy, suffers from the

following principal defects:

(a)It causes serious hardship to those who are

economically disadvantaged and is violative of

economic justice.

(b)In particular, it harms the interests of the

consumer, dealing with big corporations.

(c)It is illogical, being based on a distinction

which treats the more severe flaw as valid,

while invalidating a lesser one.

(d)It rests on a distinction too subtle and refined

to admit of easy application in practice. It

thus, throws a cloud on the rights of parties,

12

Page 13 who do not know with certainty where they

stand, ultimately leading to avoidable

litigation.

5.3On a consideration of all aspects of the

matter, we recommend that Section 28 of the Indian

Contract Act, 1872 should be suitably amended so

as to amend to render invalid contractual clauses

which purport to extinguish, on the expiry of a

specified term, right accruing from the contract.

Here is a suggestion for re-drafting the main

paragraph of Section 28.

Revised Section 28, main paragraph, Contract Act

as recommended

28.Every agreement –

(a)by which any party thereto is restricted

absolutely from enforcing his rights under or in

respect of any contract by the usual legal

proceedings in the ordinary tribunals, or

(b)which limits the time within which he may thus

enforce his rights, or

(c)which extinguishes the rights of any party

thereto under or in respect of any contract on

the expiry of a specified period (or on failure to

make a claim) or to institute a suit or other

legal proceeding within a specified period, or

(d)which discharges any party thereto from any

liability under or in respect of any contract in

the circumstances specified in clause (c), is

void to that extent.”

18.A period of 13 years passed after which this Report was

implemented. The Statement of Objects and Reasons of the

Amendment reads as follows:-

13

Page 14 “ The Law Commission of India has

recommended in its 97

th

report that Section 28 of

the Indian Contract Act, 1872 may be amended so

that the anomalous situation created by the existing

Section may be rectified. It has been held by the

courts that the said Section 28 shall invalidate only

a clause in any agreement which restricts any party

thereto from enforcing his rights absolutely or which

limits the time within which he may enforce his

rights. The courts have, however, held that this

Section shall not come into operation when the

contractual term spells out an extinction of the right

of a party to sue or spells out the discharge of a

party from all liability in respect of the claim. What

is thus hit by Section 28 is an agreement

relinquishing the remedy only i.e. where the

time-limit specified in the agreement is shorter than

the period of limitation provided by law. A distinction

is assumed to exist between remedy and right and

this distinction is the basis of the present position

under which a clause barring a remedy is void, but a

clause extinguishing the rights is valid. This

approach may be sound in theory but, in practice, it

causes serious hardship and might even be abused.

2.It is felt that Section 28 of the Indian Contract

Act, 1872 should be amended as it harms the

interests of the consumer dealing with big

corporations and causes serious hardship to those

who are economically disadvantaged.

3.The Bill seeks to achieve the above objects.

19.What emerges on a reading of the Law Commission

Report together with the Statement of Objects and Reasons for

the Amendment is that the Amendment does not purport to be

14

Page 15 either declaratory or clarificatory. It seeks to bring about a

substantive change in the law by stating, for the first time, that

even where an agreement extinguishes the rights or discharges

the liability of any party to an agreement, so as to restrict such

party from enforcing his rights on the expiry of a specified

period, such agreement would become void to that extent. The

Amendment therefore seeks to set aside the distinction made in

the case law up to date between agreements which limit the

time within which remedies can be availed and agreements

which do away with the right altogether in so limiting the time.

These are obviously substantive changes in the law which are

remedial in nature and cannot have retrospective effect.

20.In Sukhram v. Harbheji, [1969] 3 S.C.R. 752, this Court

held:-

“Now a law is undoubtedly retrospective if the law

says so expressly but it is not always necessary to

say so expressly to make the law retrospective.

There are occasions when a law may be held to be

retrospective in operation. Retrospection is not to

be presumed for the presumption is the other way

but many statutes have been regarded as

retrospective without a declaration. Thus it is that

remedial statutes are always regarded as

prospective but declaratory statutes are considered

retrospective. Similarly sometimes statutes have a

15

Page 16 retrospective effect when the declared intention is

clearly and unequivocally manifest from the

language employed in the particular law or in the

context of connected provisions. It is always a

question whether the legislature has sufficiently

expressed itself. To find this one must look at the

general scope and purview of the Act and the

remedy the legislature intends to apply in the former

state of the law and then determine what the

legislature intended to do. This line of investigation

is, of course, only open if it is necessary. In the

words of Lord Selborne in Main v. Stark [1890] 15

A.C. 384 at 388, there might be something in the

context of an Act or collected from its language,

which might give to words prima facie prospective a

large operation. More retrospectivity is not to be

given than what can be gathered from expressed or

clearly implied intention of the legislature.” (pp.

758-759)

21.Considering that the subject matter of Section 28 is

“agreements”, the unamended Section 28 would be the law

applicable as on 31.1.1996, which is the date of the agreement

of bank guarantee. It now remains for us to deal with the case

law cited by both sides.

22.In R. Rajagopal Reddy v. Padmini Chandrasekharan,

(1995) 2 SCC 630, this Court was called upon to interpret the

Benami Transactions (Prohibition) Act, 1988. A 3-Judge Bench

of this Court overruled Mithilesh Kumari v. Prem Behari

16

Page 17 Khare, (1989) 2 SCC 95, in arriving at the conclusion that the

1988 Act was prospective and not retrospective. In so

overruling the Division Bench judgment, this Court held that the

Act is not expressly retrospective, so that an enquiry would lie

as to whether it could be said to be clarificatory or declaratory.

The language of Section 4(1) of the statute made it clear that it

would apply to suits filed only after the 1988 Act came into force

Further, the Bench went on to quote Maxwell on Interpretation

as follows:

“Perhaps no rule of construction is more firmly

established than this — that a retrospective

operation is not to be given to a statute so as to

impair an existing right or obligation, otherwise than

as regards matters of procedure, unless that effect

cannot be avoided without doing violence to the

language of the enactment. If the enactment is

expressed in language which is fairly capable of

either interpretation, it ought to be construed as

prospective only.’ The rule has, in fact, two aspects,

for it, ‘involves another and subordinate rule, to the

effect that a statute is not to be construed so as to

have a greater retrospective operation than its

language renders necessary.” [para 14]

It then went on to hold as follows:

“As regards, reason 3, we are of the considered

view that the Act cannot be treated to be declaratory

in nature. Declaratory enactment declares and

clarifies the real intention of the legislature in

17

Page 18 connection with an earlier existing transaction or

enactment, it does not create new rights or

obligations. On the express language of Section 3,

the Act cannot be said to be declaratory but in

substance it is prohibitory in nature and seeks to

destroy the rights of the real owner qua properties

held benami and in this connection it has taken

away the right of the real owner both for filing a suit

or for taking such a defence in a suit by benamidar.

Such an Act which prohibits benami transactions

and destroys rights flowing from such transactions

as existing earlier is really not a declaratory

enactment. With respect, we disagree with the line

of reasoning which commanded to the Division

Bench. In this connection, we may refer to the

following observations in Principles of Statutory

Interpretation, 5th Edn., 1992, by Shri G.P. Singh, at

page 315 under the caption ‘Declaratory statutes’:

“The presumption against retrospective operation

is not applicable to declaratory statutes. As stated

in Craies and approved by the Supreme Court:

‘For modern purposes a declaratory Act may be

defined as an Act to remove doubts existing as to

the common law, or the meaning or effect of any

statute. Such Acts are usually held to be

retrospective. The usual reason for passing a

declaratory Act is to set aside what Parliament

deems to have been a judicial error whether in the

statement of the common law or in the interpretation

of statutes. Usually, if not invariably, such an Act

contains a preamble, and also the word “declared”

as well as the word enacted.’

But the use of the words ‘it is declared’ is not

conclusive that the Act is declaratory for these

words may, at times be used to introduce new rules

of law and the Act in the latter case will only be

amending the law and will not necessarily be

retrospective. In determining, therefore, the nature

of the Act, regard must be had to the substance

18

Page 19 rather than to the form. If a new Act is to explain an

earlier Act, it would be without object unless

construed retrospective. An explanatory Act is

generally passed to supply an obvious omission or

to clear up doubts as to the meaning of the previous

Act. It is well settled that if a statute is curative or

merely declaratory of the previous law retrospective

operation is generally intended. The language ‘shall

be deemed always to have meant’ is declaratory,

and is in plain terms retrospective. In the absence of

clear words indicating that the amending Act is

declaratory, it would not be so construed when the

pre-amended provision was clear and

unambiguous. An amending Act may be purely

clarificatory to clear a meaning of a provision of the

principal Act which was already implicit. A

clarificatory amendment of this nature will have

retrospective effect and, therefore, if the principal

Act was existing law when the Constitution came

into force the amending Act also will be part of the

existing law.

In Mithilesh Kumari v. Prem Behari Khare [(1989) 2

SCC 95 : (1989) 1 SCR 621] Section 4 of the

Benami Transactions (Prohibition) Act, 1988 was, it

is submitted, wrongly held to be an Act declaratory

in nature for it was not passed to clear any doubt

existing as to the common law or the meaning or

effect of any statute. The conclusion however, that

Section 4 applied also to past benami transactions

may be supportable on the language used in the

section.” [para 17]

23.Similarly, in Purbanchal Cables & Conductors (P) Ltd.

v. Assam SEB, (2012) 7 SCC 462, this Court had to decide

whether the Interest on Delayed Payments to Small Scale and

19

Page 20 Ancillary Industrial Undertakings Act, 1993 could be said to be

retrospective. After a review of various judgments of this Court,

this Court held:-

“There is no doubt about the fact that the Act is a

substantive law as vested rights of entitlement to a

higher rate of interest in case of delayed payment

accrues in favour of the supplier and a

corresponding liability is imposed on the buyer. This

Court, time and again, has observed that any

substantive law shall operate prospectively unless

retrospective operation is clearly made out in the

language of the statute. Only a procedural or

declaratory law operates retrospectively as there is

no vested right in procedure.

In the absence of any express legislative

intendment of the retrospective application of the

Act, and by virtue of the fact that the Act creates a

new liability of a high rate of interest against the

buyer, the Act cannot be construed to have

retrospective effect. Since the Act envisages that

the supplier has an accrued right to claim a higher

rate of interest in terms of the Act, the same can

only be said to accrue for sale agreements after the

date of commencement of the Act i.e. 23-9-1992

and not any time prior.” [paras 51 and 52]

24.Similarly, in CIT v. Vatika Township (P) Ltd., (2015) 1

SCC 1, this Court held that the proviso to Section 113 of the

Indian Income Tax Act, 1961 was prospective and not

retrospective. In so holding, the Constitution Bench adverted to

certain general principles as under:-

20

Page 21 “Of the various rules guiding how a legislation has to

be interpreted, one established rule is that unless a

contrary intention appears, a legislation is presumed

not to be intended to have a retrospective operation.

The idea behind the rule is that a current law should

govern current activities. Law passed today cannot

apply to the events of the past. If we do something

today, we do it keeping in view the law of today and

in force and not tomorrow's backward adjustment of

it. Our belief in the nature of the law is founded on

the bedrock that every human being is entitled to

arrange his affairs by relying on the existing law and

should not find that his plans have been

retrospectively upset. This principle of law is known

as lex prospicit non respicit: law looks forward not

backward. As was observed in Phillips

v. Eyre [(1870) LR 6 QB 1], a retrospective

legislation is contrary to the general principle that

legislation by which the conduct of mankind is to be

regulated when introduced for the first time to deal

with future acts ought not to change the character of

past transactions carried on upon the faith of the

then existing law.

The obvious basis of the principle against

retrospectivity is the principle of “fairness”, which

must be the basis of every legal rule as was

observed in L'Office Cherifien des

Phosphates v. Yamashita-Shinnihon Steamship Co.

Ltd. [(1994) 1 AC 486 : (1994) 2 WLR 39 : (1994) 1

All ER 20 (HL)] Thus, legislations which modified

accrued rights or which impose obligations or

impose new duties or attach a new disability have to

be treated as prospective unless the legislative intent

is clearly to give the enactment a retrospective

effect; unless the legislation is for purpose of

supplying an obvious omission in a former legislation

or to explain a former legislation. We need not note

the cornucopia of case law available on the subject

because aforesaid legal position clearly emerges

21

Page 22 from the various decisions and this legal position

was conceded by the counsel for the parties. In any

case, we shall refer to few judgments containing this

dicta, a little later.” [paras 28 and 29]

25.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.

26.Considering that the un-amended Section 28 is to apply, it

is important to advert to the said Section and see what are its

essential ingredients. First, a party should be restricted

absolutely from enforcing his rights under or in respect of any

contract. Secondly, such absolute restriction should be to

approach, by way of a usual legal proceeding, the ordinary

22

Page 23 Tribunals set up by the State. Thirdly, such absolute restriction

may also relate to the limiting of time within which the party may

thus enforce its rights.

27.At this point, it is necessary to set out the exact clause in

the bank guarantees in the facts of the present cases. One

such clause reads as under:

“…. 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.”

28.A similar clause contained in another bank guarantee

reads thus:-

“….Provided however, unless a demand or claim

under this guarantee is made on us in writing within

3 months from the date of expiry of this guarantee in

respect of export of 416.500 M.T. 2450 Bales OF

Raw Cotton, we shall be discharged from all liability

under this guarantee thereafter.”

29.A reading of the aforesaid clauses makes it clear that

neither clause purports to limit the time within which rights are

to be enforced. In other words, neither clause purports to

23

Page 24 curtail the period of limitation within which a suit may be

brought to enforce the bank guarantee. This being the case, it is

clear that this Court’s judgment in Food Corpn. of India v. New

India Assurance Co. Ltd., (1994) 3 SCC 324, would apply on

all fours to the facts of the present case.

30.The judgment of Venkatachala,J. and Bharucha,J. set out

the relevant clause in a fidelity insurance guarantee as follows:-

“…however, that the Corporation shall have no

rights under this bond after the expiry of (period) six

months from the date of termination of the contract.”

31.On the facts in that case, the High Court had allowed the

appeals of the Insurance Companies stating that the said

clause did not entitle the Corporation to file suits against

Insurance companies after the expiry of the six months period

from the date of termination of the respective contracts entered

into. In setting aside the High Court judgment, this Court held

that none of the clauses in the bond required that a suit should

be instituted by the Corporation for enforcing its rights under the

bond within a period of six months from the date of termination

of the contract. The restriction adverted to in the clauses of the

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Page 25 bond envisaged the need for the Corporation to lodge a claim

based on the bond, and that if this was done, a suit to invoke

rights under the bond could be filed within the limitation period

set out in the Limitation Act.

32.In a separate concurring judgment R.M. Sahai, J. after

going into the case law in paragraph 3 of his judgment, made

an extremely perceptive observation. He stated that where the

filing of the suit within limitation is made dependent on any

condition precedent, then such condition precedent not

curtailing the limitation period within which a suit could be filed,

would be valid and not hit by Section 28. In paragraph 8 of the

judgment, the learned Judge put it thus:-

“It does not directly or indirectly curtail the period of

limitation nor does it anywhere provide that the

Corporation shall be precluded from filing suit after

expiry of six months. It can utmost be construed as

a condition precedent for filing of the suit that the

appellant should have exercised the right within the

period agreed to between the parties. The right was

enforced under the agreement when notice was

issued and the company was required to pay the

amount. Assertion of right is one thing than

enforcing it in a court of law. The agreement does

not anywhere deal with enforcement of right in a

court of law. It only deals with assertion of right. The

assertion of right, therefore, was governed by the

agreement and it is imperative as well that the party

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Page 26 concerned must put the other side on notice by

asserting the right within a particular time as

provided in the agreement to enable the other side

not only to comply with the demand but also to put

on guard that in case it is not complied it may have

to face proceedings in the court of law. Since

admittedly the Corporation did issue notice prior to

expiry of six months from the termination of

contract, it was in accordance with the Fidelity

Insurance clause and, therefore, the suit filed by the

appellant was within time.” [para 8]

33.In National Insurance Co. Ltd. v. Sujir Ganesh Nayak

& Co., (1997) 4 SCC 366, this Court had to decide whether

condition 19 of an insurance policy was hit by the unamended

Section 28. Condition 19 reads as follows:-

“Condition 19.—In no case whatever shall the

company be liable for any loss or damage after the

expiration of 12 months from the happening of loss

or the damage unless the claim is the subject of

pending action or arbitration.”

34.After referring to the relevant case law and a detailed

reference to the Food Corporation judgment, this Court held:-

“Clause 19 in terms said that in no case would the

insurer be liable for any loss or damage after the

expiration of twelve months from the happening of

loss or damage unless the claim is subject of any

pending action or arbitration. Here the claim was not

subject to any action or arbitration proceedings. The

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Page 27 clause says that if the claim is not pressed within

twelve months from the happening of any loss or

damage, the Insurance Company shall cease to be

liable. There is no dispute that no claim was made

nor was any arbitration proceeding pending during

the said period of twelve months. The clause

therefore has the effect of extinguishing the right

itself and consequently the liability also. Notice the

facts of the present case. The Insurance Company

was informed about the strike by the letter of

28-4-1977 and by letter dated 10-5-1977. The

insured was informed that under the policy it had no

liability. This was reiterated by letter dated

22-9-1977. Even so more than twelve months

thereafter on 25-10-1978 the notice of demand was

issued and the suit was filed on 2-6-1980. It is

precisely to avoid such delays and to discourage

such belated claims that such insurance policies

contain a clause like clause 19. That is for the

reason that if the claims are preferred with

promptitude they can be easily verified and settled

but if it is the other way round, we do not think it

would be possible for the insurer to verify the same

since evidence may not be fully and completely

available and memories may have faded. The

forfeiture clause 12 also provides that if the claim is

made but rejected, an action or suit must be

commenced within three months after such

rejection; failing which all benefits under the policy

would stand forfeited. So, looked at from any point

of view, the suit appears to be filed after the right

stood extinguished. That is the reason why

in Vulcan Insurance case [(1976) 1 SCC 943] while

interpreting a clause couched in similar terms this

Court said: (SCC p. 952, para 23)

“It has been repeatedly held that such a clause is

not hit by Section 28 of the Contract Act.”

Even if the observations made are in the nature

of obiter dicta we think they proceed on a correct

reading of the clause.” [para 21]

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Page 28 35.In H.P. State Forest Co. Ltd. v. United India Insurance

Co. Ltd., (2009) 2 SCC 252, this Court had to decide whether

clause 6(ii) of an insurance policy was hit by the unamended

Section 28. This clause reads as follows:-

“6(ii) In no case whatsoever shall the Company be

liable for any loss or damage after the expiration of

12 months from the happening of the loss or

damage unless the claim is the subject of pending

action or arbitration: it being expressly agreed and

declared that if the Company shall declaim liability

for any claim hereunder and such claim shall not

within 12 calendar months from the date of the

disclaimer have been made the subject-matter of a

suit in a court of law then the claim shall for all

purposes be deemed to have been abandoned and

shall not thereafter be recoverable hereunder.”

After a copious reference to Food Corporation and S.G.

Nayak’s case, this Court held that such clauses would not be

hit by Section 28.

36.Considering that the respondents’ first argument has been

accepted by us, we do not think it necessary to go into the finer

details of the second argument and as to whether the aforesaid

clauses in the bank guarantee would be hit by Section 28(b)

after the 1997 amendment. It may only be noticed, in passing,

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Page 29 that Parliament has to a large extent redressed any grievance

that may arise qua bank guarantees in particular, by adding an

exception (iii) by an amendment made to Section 28 in 2012

with effect from 18.1.2013. Since we are not directly concerned

with this amendment, suffice it to say that stipulations like the

present would pass muster after 2013 if the specified period is

not less than one year from the date of occurring or

non-occurring of a specified event for extinguishment or

discharge of a party from liability. The appeals are, therefore,

dismissed with no order as to costs.

……………………J.

(C. Nagappan)

……………………J.

New Delhi; (R.F. Nariman)

September 15, 2016

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