UNION OF INDIA vs. M/S INDUSIND BANK LTD.

Full Judgment Text

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. JUDGMENT 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 1 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

1995 - Au	gust, 199

shipment was permitted only against an irrevocable letter of credit. The exporters were required to furnish a bank guarantee

		m at the rate of 10%<br>was required to be<br>ision for claims for<br>t date of shipment. Th<br>he highest unit value r
4.	The Textile Co	mmissioner invited ap	plications	vide	Press

Note and Memorandum, both dated 9.1.1996, for export of JUDGMENT 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 2 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.<br>6. As the four exporters failed and neglected to furnish

supporting documents regardin	g export of goods allocated to

them within the stipulated perio	d, 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 JUDGMENT 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 3 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, na		mely GPB Fibres Ltd. and M/s
		gamated on 12.9.1997.
Bhagwati Cotton Ltd. were amal

7.	On 23.7.1998, the Textile Commissioner called upon both

the exporters and the Respondent Bank to pay the sums JUDGMENT 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 4 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 remaine	d 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 JUDGMENT 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 5 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.

against th	is judgm

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 JUDGMENT 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	.

6 Page 6 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

e Court ju	dgments

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 JUDGMENT 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 7 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

amendme	nt, whic

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. JUDGMENT 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 8

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 exte

Amendment w.e.f. 08.01.1997

(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 th<br>which extinguishes
		thereto, or discharge	s any party thereto, from
		any liability, under or	in respect of any contract
		on the expiry of a s	pecified period so as to
		restrict any party fro	m enforcing his rights by
		usual legal proceedings, is void to that extent.”

JUDGMENT 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 9 15. The original Section is of 1872 vintage. It remained in this incarnation for over 100 years and was the subject matter of th two Law Commission Reports. The 13 Report of the Law

Septemb	er, 1958

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.” JUDGMENT

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

97t	h Report of March, 1984 suo	motu	decided that the Section

10 Page 10 required amendment. An introduction to the Report stated the point for consideration thus:-

the point<br>time wit	in brief<br>hin whic

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 11

e impact<br>because	of such<br>big corp

5.2 It 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: JUDGMENT (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 12 who do not know with certainty where they stand, ultimately leading to avoidable litigation.

72 should<br>render in	be suita<br>valid con

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.” JUDGMENT

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 13

agreemen<br>orcing his	t which re<br>rights ab

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. JUDGMENT 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 14 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 al	together in so limiting the time.

These are obviously substantiv	e changes in the law which are

remedial in nature and cannot h	ave retrospective effect.

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

JUDGMENT 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 15

retrospective effect when the declared intention is<br>clearly and unequivocally manifest from the<br>language employed in the particular law or in the<br>context of connected provisions. It is always a<br>question whether the legislature has sufficiently<br>expressed itself. To find this one must look at the<br>general scope and purview of the Act and the<br>remedy the legislature intends to apply in the former<br>state of the law and then determine what the<br>legislature intended to do. This line of investigation<br>is, of course, only open if it is necessary. In the<br>words of Lord Selborne in Main v. Stark [1890] 15<br>A.C. 384 at 388, there might be something in the<br>context of an Act or collected from its language,<br>which might give to words prima facie prospective a<br>large operation. More retrospectivity is not to be<br>given than what can be gathered from expressed or<br>clearly implied intention of the legislature.” (pp.<br>758-759)
21.	Considering that the su	bject 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 JUDGMENT 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 16

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:<br>“Perhaps no rule of construction is more firmly<br>established than this — that a retrospective<br>operation is not to be given to a statute so as to<br>impair an existing right or obligation, otherwise than<br>as regards matters of procedure, unless that effect<br>cannot be avoided without doing violence to the<br>language of the enactment. If the enactment is<br>expressed in language which is fairly capable of<br>either interpretation, it ought to be construed as<br>prospective oJnlyU.’ ThDe rGuleM haEs, inN faTct, two aspects,<br>for it, ‘involves another and subordinate rule, to the<br>effect that a statute is not to be construed so as to<br>have a greater retrospective operation than its<br>language renders necessary.” [para 14]
	“Perhaps no rule of co<br>established than this	nstruction is more firmly<br>— that a retrospective
	operation is not to be giv	en to a statute so as to
	impair an existing right or	obligation, otherwise than
	as regards matters of pro	cedure, unless that effect
	cannot be avoided witho	ut 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 oJnlyU.’ ThDe rGuleM haEs, inN faTct, 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 17

	connection with an earlier existing transaction or<br>enactment, it does not create new rights or<br>obligations. On the express language of Section 3,<br>the Act cannot be said to be declaratory but in<br>substance it is prohibitory in nature and seeks to<br>destroy the rights of the real owner qua properties<br>held benami and in this connection it has taken<br>away the right of the real owner both for filing a suit<br>or for taking such a defence in a suit by benamidar.<br>Such an Act which prohibits benami transactions<br>and destroys rights flowing from such transactions<br>as existing earlier is really not a declaratory<br>enactment. With respect, we disagree with the line<br>of reasoning which commanded to the Division<br>Bench. In this connection, we may refer to the<br>following observations in Principles of Statutory<br>Interpretation, 5th Edn., 1992, by Shri G.P. Singh, at
	page 315 under the captio<br>“The presumption again<br>is not applicable to decla<br>in Craies and approved by	n ‘Declaratory statutes’:<br>st retrospective operation<br>ratory statutes. As stated<br>the Supreme Court:
	‘For modern purposes a declaratory Act may be<br>defined as an Act to remove doubts existing as to<br>the common law, or the meaning or effect of any<br>statute. Such Acts are usually held to be<br>retrospective. The usual reason for passing a<br>declaratory AJct Uis Dto GsetM aEsideN wThat Parliament<br>deems to have been a judicial error whether in the<br>statement of the common law or in the interpretation<br>of statutes. Usually, if not invariably, such an Act<br>contains a preamble, and also the word “declared”<br>as well as the word enacted.’

	But the use of the words ‘it is declared’ is not<br>conclusive that the Act is declaratory for these<br>words may, at times be used to introduce new rules<br>of law and the Act in the latter case will only be<br>amending the law and will not necessarily be<br>retrospective. In determining, therefore, the nature<br>of the Act, regard must be had to the substance

18 Page 18

	rather than to the form. If a new Act is to explain an<br>earlier Act, it would be without object unless<br>construed retrospective. An explanatory Act is<br>generally passed to supply an obvious omission or<br>to clear up doubts as to the meaning of the previous<br>Act. It is well settled that if a statute is curative or<br>merely declaratory of the previous law retrospective<br>operation is generally intended. The language ‘shall<br>be deemed always to have meant’ is declaratory,<br>and is in plain terms retrospective. In the absence of<br>clear words indicating that the amending Act is<br>declaratory, it would not be so construed when the<br>pre-amended provision was clear and<br>unambiguous. An amending Act may be purely<br>clarificatory to clear a meaning of a provision of the<br>principal Act which was already implicit. A<br>clarificatory amendment of this nature will have<br>retrospective effect and, therefore, if the principal<br>Act was existing law when the Constitution came<br>into force the amending Act also will be part of the<br>existing law.

	In Mithilesh Kumari v. Prem Behari Khare [(1989) 2<br>SCC 95 : (1989) 1 SCR 621] Section 4 of the<br>Benami Transactions (Prohibition) Act, 1988 was, it<br>is submitted, wrongly held to be an Act declaratory<br>in nature for Jit wUasD noGt pMassEed Nto Tclear any doubt<br>existing as to the common law or the meaning or<br>effect of any statute. The conclusion however, that<br>Section 4 applied also to past benami transactions<br>may be supportable on the language used in the<br>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 19 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<br>no vested right in procedure.

In the absence of a		ny express legislative
intendment of the retrosp		ective application of the
Act, and by virtue of the f		act that the Act creates a
new liability of a high rat		e 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
JUDGMENT<br>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 20

“
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 respi					cit: law looks forward not
backward. As was observed in									Phillips
v. Eyre [(1870) LR 6 QB 1], a retrospective
legislation is contrary to<br>legislation by which the co						the general principle that<br>nduct of mankind is to be
regulated when introduce						d 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 theJ bUasiDs oGf eMveEry NlegTal 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 21

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 a	foresaid 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 acc			rued as a result of agreements

entered into between parties are			sought to be taken away. This

being the case, we are of the v			iew that both the Single Judge

and Division Bench were in error in holding that the amended

Section 28 would apply. JUDGMENT

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 22 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	necessa	ry to s	et o	ut the exact clause in

the bank guarantees in the facts of the present cases. One
such clause reads as under:<br>“…. Unless a demand or claim under this guarantee<br>is made against us within three months from the<br>above date (i.e. On or before 30.4.97), all your<br>rights under the said guarantee shall be forfeited<br>and we shall be relieved and discharged from all<br>liabilities hereunder.”
28.	A similar clause contain		ed in another bank guarantee
reads thus:-
reads thus:-

“…	. 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<br>rights under the said guarantee shall be forfeited

“…	JUDGMENT<br>.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 23 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 i	n Food Corpn. of India v. New


India Assurance Co. Ltd.		, (19	94) 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:-<br>“…however, that the Corporation shall have no<br>rights under this bond after the expiry of (period) six
months from the date of te			rmination 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 JUDGMENT 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 24 Page 24 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 w		ithin which a suit could be filed,

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

judgment, the learned Judge put it thus:-

“	It does not directly or indirectly curtail the period of
JUDGMENT<br>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

25 Page 25

concerned must put the other side on notice by<br>asserting the right within a particular time as<br>provided in the agreement to enable the other side<br>not only to comply with the demand but also to put<br>on guard that in case it is not complied it may have<br>to face proceedings in the court of law. Since<br>admittedly the Corporation did issue notice prior to<br>expiry of six months from the termination of<br>contract, it was in accordance with the Fidelity<br>Insurance clause and, therefore, the suit filed by the<br>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 po			licy was hit by the unamended

Section 28. Condition 19 reads			as follows:-

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	]

“	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
JUDG<br>pending action or arbitratio

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

reference to the	Food Corporat	ion 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 26 Page 26

	clause says that if the claim is not pressed within<br>twelve months from the happening of any loss or<br>damage, the Insurance Company shall cease to be<br>liable. There is no dispute that no claim was made<br>nor was any arbitration proceeding pending during<br>the said period of twelve months. The clause<br>therefore has the effect of extinguishing the right<br>itself and consequently the liability also. Notice the<br>facts of the present case. The Insurance Company<br>was informed about the strike by the letter of<br>28-4-1977 and by letter dated 10-5-1977. The<br>insured was informed that under the policy it had no<br>liability. This was reiterated by letter dated<br>22-9-1977. Even so more than twelve months<br>thereafter on 25-10-1978 the notice of demand was<br>issued and the suit was filed on 2-6-1980. It is<br>precisely to avoid such delays and to discourage<br>such belated claims that such insurance policies<br>contain a clause like clause 19. That is for the<br>reason that if the claims are preferred with<br>promptitude they can be easily verified and settled<br>but if it is the other way round, we do not think it<br>would be possible for the insurer to verify the same<br>since evidence may not be fully and completely<br>available and memories may have faded. The<br>forfeiture clause 12 also provides that if the claim is<br>made but reJjecUtedD, aGn MactEion N orT suit must be<br>commenced within three months after such<br>rejection; failing which all benefits under the policy<br>would stand forfeited. So, looked at from any point<br>of view, the suit appears to be filed after the right<br>stood extinguished. That is the reason why<br>in Vulcan Insurance case [(1976) 1 SCC 943] while<br>interpreting a clause couched in similar terms this<br>Court said: (SCC p. 952, para 23)
	“It has been repeatedly held that such a clause is<br>not hit by Section 28 of the Contract Act.”
	Even if the observations made are in the nature<br>of obiter dicta we think they proceed on a correct<br>reading of the clause.” [para 21]

27 Page 27

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:-<br>“6(ii) In no case whatsoever shall the Company be<br>liable for any loss or damage after the expiration of<br>12 months from the happening of the loss or<br>damage unless the claim is the subject of pending<br>action or arbitration: it being expressly agreed and<br>declared that if the Company shall declaim liability<br>for any claim hereunder and such claim shall not<br>within 12 calendar months from the date of the<br>disclaimer have been made the subject-matter of a<br>suit in a court of law then the claim shall for all<br>purposes be deemed to have been abandoned and<br>shall not thereafter be recoverable hereunder.”<br>After a copious reference to Food Corporation and S.G.
	After a copious reference	to Food Corporation	and	S.G.

“	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<br>for any claim hereunder and such claim shall not
within 12 calendar mont<br>disclaimer have been ma				hs from the date of the<br>de the subject-matter of a
suit in a court of law th				en the claim shall for all
purposes be deemed to h
shall not thereafter be reco				verable hereunder.”

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, 28 Page 28 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 JUDGMENT 29 Page 29