Bank Gurantee-Validity Vs Claim Period

The bank will fix the validity date and claim period as per your wish. If you want to make it same date (The validity date and claim period date) then the bank will do it, they can not refuse.

Dear Sir,

Bank guarantees executed by the bank are at the request of the bank's customer in favour of the other party. The covenants are decided by the parties to the Bank Guarantee mutually. If any of the covenants are not acceptable to any of the parties the purpose of the bank guarantee is not useful. Therefore, any conditions as to covenants are to be acceptable in general. As regards to validity date and claim date, it is the norma practice of the bank to put different dates for the convenience of the parties. The affected party/beneficiary can claim the amount from the bank for the act which has happened before the validity date but withing the claim period. There is no hard and fast rule that these dates need be separate and it can be the same date.

with regards,

MRR gupta

I am not a lawyer but as I understand from our business transactions, the Validity Date is the the final date, before which if any claim is to be put up by beneficiary can be lodged with the bank. The Bank will not entertain any claim after the Validitiy Date. The Claim Date is the date by which claim is to be settled by the bank and the client to the benefiaicary if any claim is  lodged by the benefiairy before the vailidty date. The difference between the Validiy Date and the Claim date is a processing period for the transactions if claim has been lodged before vailidty Date.

This provision is kept because forfeting a bank Gaurantee is a big thing between two parties and the benficiary will generaly try to settle amicably till the Valididty Date. Additional period is therefore needed to settle the claim and depending upon the value, the type of the organisation delay etc the claim period claue is decided.

The period between the issue date and the Validity Date is a Validity period while period between validity Date and the Claim date is Claim period.

When a Bank guarantee is issued, valid for a specified period, usually, the banks debit the BG commission in advance for that much period.  After the said specified period, if beneficiary has to return the bank guarantee document, to the issuer bank, if it was not invoked, during the guarantee period.  The beneficiary cannot invoke the BG after the expiry of the BG period. 

Dear Sirs,

Thanks for your valuable suggesstions and comments.

Regards,

Anantha

Most bank guarantees (BGs) have different expiry and claim dates for the simple reason that communication of a claim to the bank takes some time. For example, let's say A gives a BG to B, where it is written that if machine supplied by A to B breaks down on or before 30th Sep, B may invoke the BG. Here, the expiry date will be 30th Sep. But think of what will happen if the claim date is also 30th Sep, and the machine breaks down at 5 PM on 30th Sep. B will then be unable to lodge a claim to the bank on the same day. But if the claim date would have been say, 31st Dec, B would have been able to send his claim to the bank for A's default during the validity date (30th Sep). This is the only reason why these dates are separate in most cases.

I fully agree with Sri. Prasum Chandra Das who has explained the rationale of validity period and claim period.

What is Bank Guarantee Validity Period?

It is the date on or before which BG has to be invoked or can be invoked by the beneficiary.  It is the expiry date of bank guarantee. The BG will become invalid after the expiry date. The bank is not liable to make payment, if the BG is not invoked on or before expiry date.             

What is claim period?

It is period in which the beneficiary can approach court if the bank refused to honour the invocation of BG that he made within the validity period or otherwise. It is time limitation for raising any dispute before the court or arbitration or with the bank itself. It time period during the claim or dispute or court has to filed before the court or arbitration or bank itself (for any event occurred or non-occurred happened during the validity period), There must be a “Cause Action”  taken place during the validity period of BG for exercise any right during the claim period. If there is no “Cause of Action” then there is no right to be exercised during the claim period.

Explanation:                                                        Generally the time limitation for rising any dispute or claim by the beneficiary is 3 years under the limitation act As a special case for banks, this limitation will be as per clause of the bank guarantee agreement.

Caution: If you are banker and you limit this claim period for less than 12 months in your BG agreement, than your clause will be invalid. The time limitations act will into play, that is to say claim period will become 3 years.

Illustration:                                                          The insurance will be best case to understand the validity period and claim period.  Assume a factory has fire risk insurance policy valid up to 31/12/2013 and claim period as 12 months thereafter. the factory suffered accident on 01/12/2013 then the factory has right file its claim application to the insurance company up to 30/12/2014. Note fire accident should have happened on or before the validity period. If the fire accident happened during claim period, then the insurance company is not liable to pay compensation.

Reference 

Explore Computers Pvt. Ltd. vs Cals Ltd. And Anr. on 3 July, 2006  Delhi high court Banking Laws (Amendment) Act, 2012 in the section 28 of the Indian Contracts Act, 1872. (9 of 1 872)

by 

Viswanathan

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