Claim periods for bank guarantees submitted for contracts

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P K GHOSH (Querist)
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05 May 2014 As part of the contracts that we execute for implementation of projects for various clients, we need to essentially submit the following Bank Guarantees (BGs) to them;

 To draw advance from the client, for which a BG of equivalent value is submitted, normally valid till the adjustment of all advances from the running bills.

 For covering performance of the completed project during the warranty period, which could range from 12 to 24 months, and this is normally linked with the release of the last 10% payment of the contract, payable on submission of the BG.

In both the above cases, the clients ask for a claim period after the expiry of the validity of the BG, so that in case there are any claims from them, this could be raised during the claim period. The claim period, as stipulated by the client, normally ranges from 3 months to 6 months.

So far we had been submitting BGs in both the above categories, to our clients, incorporating the clauses as worded by the client and generally accepted by the banks, (in some cases with minor modifications). The validity and the claim periods mentioned in the BGs were as per the stipulation of the client, as mentioned in the contract with them.

Recently, however, our bankers have been demanding that irrespective of the claim period asked by the client, the BGs would be issued by them with a claim period of 1 year minimum. On seeking clarifications from them, they have informed as below:

“Department of Financial Services, Ministry of Finance , Government of India vide their letter dated 24.01.2013 had informed that the Banking Laws (Amendment) Act came into effect w.e.f. 18.01.2013 as regards to change in Limitation Act as per India Contract Act, 1872 u/s 28. As per the new Act the minimum claim period is 1 year irrespective of the expiry date.”

While we are not very sure whether the bank is acting on the correct premises, (since we do not have a full picture of the related provisions), on checking with other banks, we gather that no such measure of charging for 1 full year of claim period, even if the beneficiary needs a lesser claim period, is being enforced by them.

Prima facie this stipulation seems illogical, since besides making us unnecessarily pay commission and block funds for a longer period, it also exposes us to unforeseen liabilities and risks, because the client is being given an encashment option even beyond the period sought by him.

We would be obliged to get an informed view on this to take it up further with the bank.

PK GHOSH
BHUBANESWAR

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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19 July 2024 The issue regarding the claim period stipulated by banks for Bank Guarantees (BGs) is critical in contractual agreements, especially for projects where these guarantees are submitted. Here’s an informed view on the situation based on the details provided:

### Understanding the Background:

1. **Typical BG Requirements:**
- BGs are commonly required for projects to cover advance payments and performance warranties. These BGs include validity periods and claim periods after expiry.

2. **Client's Requirements:**
- Clients typically stipulate a claim period (usually 3 to 6 months) after the BG's expiry to raise any claims.

3. **Bank's Requirement Change:**
- Recently, your bank has mandated a minimum claim period of 1 year for BGs issued, citing changes in the Limitation Act under the Banking Laws (Amendment) Act, 2013.

### Analysis and Key Points:

- **Legal Basis:**
- The Banking Laws (Amendment) Act, 2013, introduced changes to align the Limitation Act with the Indian Contract Act, 1872. This includes setting a minimum claim period of 1 year, irrespective of the contract terms.
- Banks are legally bound to comply with these provisions, and they may interpret this as a mandatory requirement.

- **Impact on Businesses:**
- For businesses like yours, this mandated 1-year claim period can be problematic. It extends the period during which the bank must honor claims by the client, potentially exposing your company to prolonged financial obligations.

- **Industry Practice Variations:**
- While your bank has implemented this minimum claim period, other banks may not have uniformly adopted this approach. Variations in practice among banks are possible due to interpretation or internal policies.

- **Risk and Cost Considerations:**
- A longer claim period ties up your funds for an extended duration and may increase the cost due to extended bank commission charges.
- It also increases the risk exposure for your company since the client retains the right to claim against the BG for a longer period, even beyond what may be contractually agreed.

### Next Steps:

1. **Seek Clarification:**
- Request a detailed clarification from your bank on the specific legal provisions and their interpretation regarding the 1-year claim period.
- Understand if there are any alternatives or exceptions that could apply to your specific situation.

2. **Engage Legal Expertise:**
- Consider consulting with a legal expert specializing in banking laws to assess the implications and potential options available.
- Legal counsel can help navigate the nuances of the Banking Laws (Amendment) Act and its impact on BGs.

3. **Negotiation and Communication:**
- Based on insights gained, engage in discussions with your bank to explore possible solutions or adjustments that align with your business needs and minimize undue financial burden.

4. **Document Everything:**
- Keep detailed records of all communications, agreements, and legal opinions regarding the BGs and claim periods to protect your company’s interests.

In conclusion, while the mandated 1-year claim period by your bank appears rooted in legal amendments, its practical implications for your business warrant thorough exploration and possibly negotiation with the bank. Understanding the legal framework and seeking informed guidance will be crucial in addressing this matter effectively.

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