Vinu: Hey Manu, I came across something called "Section 28" in one of our bank guarantee documents. Can you explain what Section 28 is and when it applies to a bank guarantee?

Manu: Of course, Vinu! Section 28 of the Indian Contract Act, 1872, deals with agreements that restrict legal proceedings. Specifically, it addresses clauses that limit the time period within which a party can enforce their rights under a contract, including bank guarantees (BGs).

Vinu: So, does that mean a bank guarantee can have a time limit for when it can be enforced?

Manu: Yes, exactly. Sometimes, a bank guarantee will include a clause that limits the period during which the beneficiary can make a claim. However, Section 28 used to make such clauses void, as they were seen as restricting the enforcement of rights. But there was an amendment in 2013 which allowed for certain conditions under which a time limit could be legally set.

Vinu: Can you give me an example to make it clearer?

Manu: Sure! Let’s say we are contractors, and we’ve issued a performance bank guarantee to our client through a bank. The guarantee is for one year. Now, if the bank guarantee includes a clause stating that the beneficiary must make a claim within 6 months from the date of the guarantee's expiry, Section 28 would apply here.

Before the 2013 amendment, such a clause would have been void. But after the amendment, if this time limit is clearly mentioned and agreed upon by all parties, it is now enforceable.

Vinu: So, after the amendment, if the client doesn’t make a claim within that 6-month period, they lose their right to enforce the bank guarantee?

Manu: Exactly, Vinu. The bank guarantee provides security to the government, but Shree Constructions is still on the hook for the amount. If they can’t pay SBI back, the bank could take legal action or use any collateral Shree Constructions provided when they issued the guarantee.

Vinu: That’s really interesting. So, it’s important to carefully read the terms of the bank guarantee and understand any time limits imposed, right?

Manu: Absolutely, Vinu. Understanding the time limits and the implications of Section 28 is crucial when dealing with bank guarantees. It can protect both the issuing bank and the guarantor if the terms are clear and legally enforceable.

Vinu: Thanks for breaking it down, Manu. This really helps me understand the importance of Section 28 and how it applies to bank guarantees.

Manu: Happy to help, Vinu! It’s always good to be clear on these legal aspects.