(The law of limitation applicable to a general guarantee and the guarantee issued by banks and financial institutions are different. This article explains the law of limitation explicitly applicable to bank guarantees, invocation and cancellation of bank guarantees)
The law of limitation of time means the time-limit for different suits within which an aggrieved person can approach the court to obtain a decree against the principal debtor and surety. The different time limit or period of limitation is prescribed in the Schedule to the Limitation Act, 1963, for different types of suits, appeals or applications. The suit filed, appeal preferred and application made after the expiry of time-limit is struck by the law of limitation and same will not be admitted by the court as evidence for breach of contract.
Time-limit for enforcement of bank guarantees:
The time limit for raising any dispute or claim by the beneficiary in case of guarantee contracts is generally 3 years from the breach of contract. The section 28 of contract act prohibits the parties to an agreement to substitute their own periods of limitation in place of the periods laid in the act. However, the third exception to Banking laws (amendment) act 2012 brings following exception to the statute book.
“This section shall not render illegal if a contract in writing by which any bank or financial institutions stipulate a term in a guarantee or any agreement making a provision for guarantee for extinguishment of the rights or discharge of any party thereto from any liability under or in respect of such guarantee or agreement on the expiry of a specified period which is not less than one year from the date of occurring or non-occurring of a specified event for extinguishment or discharge of such party from the said liability”.
The above-mentioned exception to the banking law provisions enables banks and financial institutions to limit the validity period of the guarantee. The beneficiary of the guarantee shall invoke the guarantee as per clause of the bank guarantee in order to honour his/her claim.
IBA format of limitation clause:
All commercial banks apply the following limitation clause standardised by IBA as a concluding Para of the guarantee. This is to avoid ambiguity if any in the body of the guarantee agreement in respect of banks liability under the guarantee and its validity period.
“Notwithstanding anything contained herein: (i) Our liability under this guarantee shall not exceed Rs…….(Amount) (ii) This bank guarantee shall be valid up to…….(date of expiry of the guarantee) (iii) We are liable to pay the guarantee amount or any part thereof under the bank guarantee only and only if you serve upon us a written claim or demand on or before………………………………….(date of expiry of guarantee or date of expiry of claim period if any claim period is provided in the guarantee agreement to invoke the guarantee after date of expiry of guarantee)”.
The above standard exposure and time-limit clause of IBA neither extinguishes rights nor prescribes a period within which any suit has to be filed. However, it clearly makes a distinction between the creation of an enforceable right and the extinguishment of such right, satisfying provisions of section 28 of contract act, as well as the third exception to Banking laws (amendment) act 2012.
Invocation of Guarantee
A bank is obliged to honour any legitimate claim within the validity period/claim period of the guarantee. If the invocation is in order and there is no court order prohibiting the payment, the bank is required to honour payment to the beneficiary. (Before making the payment to the beneficiary, normally concerned bank informs the applicant about the invocation of the guarantee and ask him to arrange for funds for payment of claim amount).
Cancellation of a Guarantee:
The beneficiary of the guarantee shall invoke the BG on or before the expiry date of the guarantee. The bank is discharged from its liability if no claim is received by it on or before validity period mentioned in the guarantee. When an original Guarantee issued by the bank, not returned to the bank for cancellation after the expiry of guarantee, the procedure for cancellation of expired guarantee adopted by the banks is that a registered notice is sent to the beneficiary of the guarantee to return the original guarantee immediately. If no reply is received or original guarantee is not surrendered for cancellation, the guarantee can be cancelled by the bank after waiting for a reasonable time.
Related articles:
(i)What is the time limit for bank guarantees issued in favour of Government Departments?
(ii) Major types of bank guarantees
(iii) Circumstances that may discharge Guarantor from all liabilities
(iv) How to compute limitation period for personal guarantees
Disclaimer:
This article should not be construed as a professional advice under any circumstance. It is clarified to the readers that the contents provided in this write-up are intended for general information only and cannot be relied upon for real-time professional facts. Readers are advised to refer relevant provisions of law and also to take qualified professional’s advice before applying or accepting any of the points mentioned above. The author or the website accepts no responsibility whatsoever caused by the use of any information provided in this article and shall not be liable for any losses, claims or damages which may arise because of the contents of this post.
Personal guarantors to corporate debtors to come under IBC regime from December 1
Hello sir .
I have made BG against fixed deposit in Hdfc Bank on 18 Jan 2017 to July 2017 and then again extended the same to 30 sep 2017 . The beneficiary is a government department . However no claim raise at the time validity and as well as no reply to the written reminders of the bank .
The govt department didn’t provided me the original BG nor any discharge letter .
Today on 15 nov 2017 .( 45 days) cooling period of 30 days and reminder therein have being served..
On giving application letter of cancellation of lein BG on my FD along indemnity stamp paper the bank start the procedure to cancel the BG. But today the the legal team of bank make an telephonic call to the govt department officer regarding my BG and hold my cancellation procedure on the verbal instruction of the govt officer. Now my questions are :=
1. ) After 45 days of the expiry of BG . Is the beneficiary legally still in position to hold my cancellation procedure of BG. ?
2) is the bank still liable to entertain the instructions of the beneficiary when in the 2nd reminder the bank have written clearly that the bank is no more liable to any obligation regarding claim and renewal of BG . As 30 days period has over after expiry of BG validity.?
3) as per RBI after 30 days period from the lapse of validity of BG , the bank is to issue the letter to release the Lein on FD. Then how the bank can hold it so long ??
4) is the original BG and discharge letter is still required from beneficiary ??
5) what are my right as a customer and investor in bank as I got FD in Hdfc Bank. ??
Plz call me if possible . As your reply and one call can safe my business and money .
Regards
Baljit Singh
9814809955
It is one one of the most difficult task for the customer (LG applicant) to get the original guarantee from the Government departments. However, i is a common practice by all the banks to insist for return of original guarantee issued to Government department. This is because bank guarantees issued in favour of the Government department have the validity period of 30 years from the date of expiry of guarantee, not withstanding validity period mentioned in the guarantee is for a shorter period. This is the reason why banks insist for return of original guarntee duly cancelled by the concerned department.
Dear Mr Naik,
Many thanks for sharing information on BG validity. Kindly throw some light on the legal provision that prescribe that Bank Guarantees submitted with Government Departments shall remain valid for 30 years.
Best Wishes,
Rajinder Choudhary
Dear Choudharyji, Please read my article What is the time limit for bank guarantees issued in favour of Government Departments?at following link.
https://bankingschool.co.in/loans-and-advances/what-is-the-time-limit-for-bank-guarantees-issued-in-favour-of-government-departments/
Sir,
Firstly thank you for the informative article.
We issued an Advance Bank Guarantee from HDFC Bank in Delhi against FD in favour of a Big private corporate company against the receipt of Advance payment for the products to be supplied. The supplies have been made & the bank guarantee in original is submitted to the bank WITHOUT the discharge/covering letter.
The bank guarantee validity date is also expired.
Now, after 6 months also, they are not removing the Lien from FD saying discharge letter is mandatory because there is an ‘onerous clause’ in the BG.
The point to which they are referring to the onerous clause in BG is:
“The Bank Guarantee cannot be cancelled by the supplier/contractor if the order is cancelled for any reason. Consequently the cancellation of the order will only be effective after the buyer/client issues a letter to ………………………………………..(Name and address of the bank) instructing them to cancel the letter of guarantee and the same is acted upon by us.”
But according to us, this above point is valid only if the Bank Guarantee was to be cancelled in the BG validity period, then discharge letter is required. The beneficiary has flatly refused to provide any discharge letter no matter what.
What can I do to force the bank to cancel the BG & remove the lien on my FD. I have so far been in touch with the branch & redressal office through e-mail only who are still maintaining that the discharge letter is mandatory.
Also, there is no auto renewal clause.
Thank you for reading.
I’m sharing the following link to enable you to understand the position in the case of guarantees issued in favour of Government departments.
https://bankingschool.co.in/loans-and-advances/what-is-the-time-limit-for-bank-guarantees-issued-in-favour-of-government-departments/
Infact all the Government departments/Public Sector Undertakings, etc. to accept bank guarantees issued in the Model Bond and return the original guarantee bond or discharge letter once the guarantee is expired. There is no reason for concerned department refusing return original guarantee or discharge certificate and harass the clients.
Thank you for your reply Sir.
Firstly, this is a private co.
Secondly, they have already issued the BG in original but are not issuing the discharge letter. Bank is insisting on discharge letter too to cancel & remove lien.
It is important that the original guarantee shall be returned by the beneficiary along with a covering letter or a simple discharge letter. This is needed to avoid future litigation from the beneficiary that the original guarantee was removed and cancelled without their authority.
Sir,
Kindly elaborate on the mode of encashing the BGs. In other words, whether BG can be submitted to the bankers of beneficiary ( in whose favour BG is issued) ? If yes, whether it is necessary to have the account in the same bank as Issuing Bank ? If the beneficiary does not have account in the same bank, but another bank and in other city as well, what are ways in which BG can be envoked ?
Regards
The beneficiary may invoke the guarantee simply by sending a letter of invocation to the bank during the currency of the guarantee. To be on safer side the beneficiary sends the letter of invocation by Registered Post. Ack due to prove that the guarantee was invoked before the expiry of the guarantee. However, if in the Guarantee it has been mentioned that beneficiary at the time of invocation will have to return the original guarantee then, the beneficiary has to give back the original Bank Guarantee. There is no need to maintain an account by the beneficiary with the bank which has issued the guarantee. The guarantee amount may be demanded by DD on the place of the beneficiary.
Sir,
Will I get interest , if i cancelled the BG 1 month before the mature date, ie: bg was for 14 months , and i cancelled it in 13th month. plz reply.
Banks (lenders) will not allow their money to let-go easily. A due course of legal action will take place including attaching your salary etc. It cannot be avoided. Further, your CIBIL credit rating will fall and you will not be able to raise further loans from any lending institutions. If you have become defaulter because of genuine reasons approach the Bank Manager and explain your difficulties and inform him when and how you will repay the loan.