What is the time limit for enforcement of bank guarantee?

What is the time limit for enforcement of bank guarantee?

(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 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 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. Officials working in banks and financial institution must take care that the guarantees issued in favour of the Government department have the validity period of 30 years from the date of expiry of guarantee, therefore, it is advisable to cancel the guarantee in case of guarantees issued in favour of Government departments only after the return of original guarantee.

To know more click below

(i) Major types of bank guarantees   (ii) Circumstances that may discharge Guarantor from all liabilities   (iii) How to compute limitation period for personal guarantees


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.

(2) Comments

  1. Baljit Singh

    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

    1. Surendra NaikSurendra Naik - Post author

      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.

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