India: Dispute Resolution & Arbitration Monthly Newsletter I September 2021

L&T Ltd & Anr v. PNB & Anr

W.P. (C) 7677/2019

Background facts

• Based on an erroneous interpretation of Section 28 of the Indian Contract Act, 1872 (Contract Act), Punjab National Bank (PNB/Respondent No. 1) forced a mandatory and unalterable claim period of a minimum of 12 months pertaining to bank guarantees. It defined that claim period is a time-period contractually agreed between the creditor and principal debtor which provides a grace period beyond the validity period of the guarantee to make a demand on the bank for a default which occurred during the validity period. The claim period is meant to provide grace time beyond the validity of the guarantee which may or may even exist in a bank guarantee.
• Based on the above premise, Larsen & Toubro Ltd (L&T Ltd/Petitioner) had challenged the communication issued by Respondent No. 1 dated August 18, 2018 addressed to the Petitioners stating that a claim period in a bank guarantee which is less than 12 months would render the claim period void and will effectively increase the claim period under the bank guarantee to 3 years under the Limitation Act, 1963.
• The Petitioner had also challenged the communication issued by RBI (Respondent No. 2) dated February 10, 2017 which stated that it will be open to the banks to stipulate time as a condition precedent to the claim. If the claim is not lodged before that stipulated time, the bank guarantee shall be revoked or terminated, but the stipulated date cannot be less than 1 year. The communication dated December 5, 2018 by Respondent No. 2 to all banks also reiterated the above contention stating that if a bank issues a claim period of less than 1 year on top of the guarantee period, then such a bank guarantee will not have the benefit of Exception 3 to Section 28 of the Contract Act.
• The Petitioner made a prima facie case in its favor by showing that since the Petitioner is one of the largest construction companies of India, it has a few contracts with Government bodies and Public Sector Undertakings. The Petitioner must normally issue 'Performance Bank Guarantee' or 'Advance Bank Guarantee' during performance of the contract. On account of the abovementioned interpretation of Section 28 of the Contract Act, the Petitioner is unnecessarily made liable to pay commission charges for such extended bank guarantee when, as per the contract between the principal debtor and the creditor, the claim period would be shorter. The Petitioner also becomes liable to maintain collateral security for supporting extended claim period.
• The extended claim period effects the Petitioners' capability to do business by entering new contracts and effects the fundamental rights of the Petitioners under Article 19 (1) (g) of the Constitution of India. Thus, the present Writ Petition.

Issue at hand?

• Interpretation of Section 28 of the Indian Contract Act, 1872.

Decision of the Court

• Prior to the amendment, Section 28 of the Contract Act provided that a clause limiting the time within which the rights are to be enforced, is void, if the rights to be enforced under the contract continued to exist even beyond the shorter period agreed for enforcing the rights. The Law Commission, however, held that prima facie such a position appears highly anomalous. By providing for extinction of a right, the parties are creating a law of limitation of their own.
• The amended Section 28 of the Contract Act was enacted to do away with the earlier distinction between remedy and right i.e., a clause barring the remedy only was void but a clause extinguishing a right was valid. The T.R. Andhyarujina Committee recommended that the time to approach the appropriate court for enforcement of beneficiary's rights under the bank guarantee must be reduced to 1 year. Thereafter, Exception 3 to Section 28 of the Contract Act was added.
• The Court held that Exception 3 to Section 28 of the Contract Act deals with curtailment of the period for the creditor to approach the Court/Tribunal to enforce his rights. It does not deal with the claim period within which the beneficiary is entitled to lodge his claim with the bank/guarantor. The Court further relied on the judgment of Union of India v. IndusInd Bank¹ , specifically paragraph 28, which clearly shows that the Court interpreted the relevant clauses of the bank guarantee to hold that neither of the clauses seek to limit the time within which the right is to be enforced. The said clauses were not dealing with the claim period i.e. the grace period beyond the validity of the bank guarantee to make a demand on the bank for a default which had occurred during the validity period.
• Based on the above, the Court held that Respondent No. 1 is erroneously of the view that they are in law mandated to stipulate a claim period of 12 months in the bank guarantee, failing which the clause shall be void under Section 28 of the Contract Act. A claim period is a time-period contractually agreed between the creditor and principal debtor which provides a grace period beyond the validity period of the guarantee to make a demand on the bank for a default which occurred during the validity period. Section 28 of the Contract Act does not deal with said claim period; rather, it deals with right of the creditor to enforce his rights under the bank guarantee in case of refusal by the guarantor to pay before an appropriate Court or Tribunal

Gemini Bay Transcription Pvt Ltd v. Integrated Sales Service Ltd & Anr

Civil Appeal Nos. 8343-8344 of 2018

Background facts

• An award was granted in favor of Integrated Sales Services Ltd (Respondent) and damages amounting to USD 690 million were jointly payable by the opposite parties who were nonsignatories to the arbitration agreement. The proceedings were governed by Delaware law with the seat of arbitration in Kansas City, Missouri, USA.
• Subsequently, the Respondent filed an application for enforcement of the award under Section 48 of the Arbitration and Conciliation Act, 1996 before the Bombay High Court. The Single Judge Bench held that the foreign award was not enforceable against the non-signatories to the arbitration agreement. On appeal, the Division Bench reversed the judgement and held that none of the grounds enumerated in Section 48 were satisfied to resist the enforcement of the foreign award. Consequently, Gemini Bay Transcription Pvt Ltd (Petitioners) approached the Supreme Court (SC) resisting the enforcement of the foreign award. The grounds relied upon by the Petitioners were:
  • Under Section 47(1)(c) and Section 44, the burden of proving that the foreign award is enforceable is on the award-holder. In the case of non-signatory to the arbitration agreement, such a burden can only be discharged if evidence is advanced which would independently establish that the non-signatory party is covered by the foreign award. Since the Respondents did not do so in the present case, the award was unenforceable.
  • The award could not be enforced because non-signatories to an arbitration agreement would be covered under sub-clauses (a) and (c) of Section 48(1).
  • The ground of 'natural justice' under Section 48(1)(c) for refusal to enforce the award would be attracted since the award lacked reasons. Hence, the award suffered from perversity.
  • Commission of tort is outside the scope of contractual disputes and, as the cause of action in the present case arose in tort, the award cannot be enforced.
  • Under Section 46, the foreign award is binding only on the people between whom it is made and not the ones who may claim under the parties.
  • Damages were awarded but the actual loss was not proved.

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