Bank guarantees: Limiting the enforcement period

By Amit Aggarwal and Rahul Sud, SNG & Partners
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The banks in their normal course of business issue guarantees against deposit of margin money on behalf of their clients in favour of government or government-owned entities. Banks need to know with certainty their liability and the cut-off date when they can extinguish their liability for the issued bank guarantees.

Amit Aggarwal Partner SNG & Partners
Amit Aggarwal
Partner
SNG & Partners

The Limitation Act, 1963, prescribes a time limit of 30 years for all suits to be instituted by the government. Prior to the amendment to section 28 of the Indian Contract Act, 1872, by the Banking Laws (Amendment) Act, 2013, the banks were apprehensive that in view of this limitation period, a stipulation in the contract for discharge of liability was void under section 28.

This was so because in the case of Union of India v Bhagwati Cottons Ltd, Bombay High Court struck down extinguishment clauses as invalid in view of a 1997 amendment to section 28. Even after a division bench of Bombay High Court overruled this decision in Indusind Bank v Union of India, the banks insisted on return of the original bank guarantee or a no-claim notice before they released the margin money.

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SNG & Partners has offices in Delhi, Mumbai, Singapore and Doha. Amit Aggarwal is a partner and Rahul Sud is an associate partner.

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