Contract Law; Union of India Vs. M/s Indusind Bank Ltd. [Supreme Court of India, 15-09-2016]

Contract Act, 1872 – Section 28 – Agreements in restraint of legal proceeding, void – Applicability of the 1997 Amendment – 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, both the Single Judge and Division Bench were in error in holding that the amended Section 28 would apply.



(C. Nagappan) and (R.F. Nariman) JJ.

September 15, 2016



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.

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 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 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 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 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