1. Environmental compliance — Bank guarantees furnished to secure adherence to pollution control directions — Invocation of guarantees by regulatory board following observed non-compliance. (Para 4 , 5 , 6 , 7 , 8 , 9 , 10 )
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2019 Supreme(SC) 935
SUPREME COURT OF INDIA
DHANANJAYA Y. CHANDRACHUD, INDIRA BANERJEE, JJ.
Andhra Pradesh Pollution Control Board – Appellant
Versus
CCL Products (India) Limited – Respondent
Civil Appeal No. 7005 of 2017
Decided On : 22-07-2019
Advocates:
Advocate Appeared:
For the Appellants : Mr. T.V.S. Raghavendra Sreyas, Mrs. Gayatri Gulati Sreyas, Ms. Sneh Dhillon.
For the Respondents: Mr. Sajan Poovayya, Mr. G. Ramakrishna Prasad, Mr. Suyodhan Byrapaneni, Mr. Pratibhanu Singh Kharola, Ms. Pilza Moonis, Ms. Priyanka M.P.
Advocate Appeared:
For the Appellants : Mr. T.V.S. Raghavendra Sreyas, Mrs. Gayatri Gulati Sreyas, Ms. Sneh Dhillon.
For the Respondents: Mr. Sajan Poovayya, Mr. G. Ramakrishna Prasad, Mr. Suyodhan Byrapaneni, Mr. Pratibhanu Singh Kharola, Ms. Pilza Moonis, Ms. Priyanka M.P.
Important Points
IMPORTANT POINTS
Bank guarantee constitutes an independent contract between the issuing bank and the beneficiary to whom the guarantee is issued. Such a contract is independent of the underlying contract between the beneficiary and the third party at whose behest the bank guarantee is issued. Therefore, Court should not interfere with the invocation or encashment of a bank guaranty so long as the invocation was in terms of the bank guaranty.
A demand once made invoking Bank guaranty would oblige the bank to pay under the terms of the bank guarantee. It is not for the bank to determine as to whether the invocation of the bank guarantees was justified.
Bank guarantee constitutes an independent contract between the issuing bank and the beneficiary to whom the guarantee is issued. Such a contract is independent of the underlying contract between the beneficiary and the third party at whose behest the bank guarantee is issued. Therefore, Court should not interfere with the invocation or encashment of a bank guaranty so long as the invocation was in terms of the bank guaranty.
A demand once made invoking Bank guaranty would oblige the bank to pay under the terms of the bank guarantee. It is not for the bank to determine as to whether the invocation of the bank guarantees was justified.
Subject
Bankruptcy and Insolvency - Bank Guarantees
Act Referred
Headnote
(a) Bank guarantee - Invocation - Bank guarantee constitutes an independent contract between the issuing bank and the beneficiary to whom the guarantee is issued - Such a contract is independent of the underlying contract between the beneficiary and the third party at whose behest the bank guarantee is issued - Therefore, Court should not interfere with the invocation or encashment of a bank guarantee so long as the invocation was in terms of the bank guarantee.
(b) Bank guaranty - Invocation - A demand once made invoking Bank guaranty - Would oblige the bank to pay under the terms of the bank guarantee - It is not for the bank to determine as to whether the invocation of the bank guarantees was justified. (Para 20)
(c) Bank guarantee - Invocation - Bank guaranty taken to secure compliance with environmental standards prescribed in accordance with law - Respondent failing to discharge its obligations - Appellant rightly invoked the bank guarantees. (Para 21)
Facts of the case:
The respondent commenced its operations in 1995 for the manufacture and sale of instant coffee. It was granted consent under the Water (Prevention and Control of Pollution) Act 1974.
Complaints were received by the appellant and by the District Collector, Guntur in regard to the environmental pollution caused by the appellant. A notice to show cause was issued by the appellant to the respondent. A Task Force Committee was constituted by the appellant which, after hearing the respondent, issued directions to it.
In addition, the appellant directed the respondent to furnish three bank guarantees: two in the amount of Rs. 10,00,000 each and the third in the amount of Rs. 5,00,000 to secure compliance with the conditions specified in Part A, Part B and Part C above in regard to the functioning of the respondent.
The bank guarantees were invoked and the amount of Rs. 25,00,000 covered by three bank guarantees was paid over to the appellant by the State Bank of India.
The respondent moved the Tribunal.
The Tribunal held that the principles of natural justice were required to be followed prior to invoking the bank guarantees. Finding fault with the appellant for failing to do so, the Tribunal held that the invocation was unwarranted and the amount which has been received by the appellant should be refunded to the respondent.
Finding of the Court:
Impugned order is not sustainable.
Result: Appeal allowed.
Legal Category Hierarchy
Table of Contents
2. Whether principles of natural justice require notice and hearing before invoking bank guarantees issued for environmental compliance versus the independence of bank guarantee contracts. (Para 12 , 13 , 14 , 15 )
3. Bank guarantees are independent contracts between the bank and beneficiary, separate from the underlying transaction, and generally cannot be restrained unless fraud or special equity is proven. (Para 16 , 17 , 18 , 19 , 20 , 21 , 22 )
4. Absent fraud, irretrievable injustice, or special equities, courts should not interfere with the invocation of an unconditional bank guarantee if the invocation follows the guarantee's terms. (Para 18 , 19 )
5. Appeal allowed — Judgment of the National Green Tribunal set aside — Invocation of bank guarantees upheld. (Para 23 )
6. What is the legal nature of a bank guarantee in relation to the underlying contract?
A bank guarantee is an independent and distinct contract between the issuing bank and the beneficiary. It is not qualified by the underlying transaction or the validity of the primary contract between the beneficiary and the third party at whose behest the guarantee was issued. (Para 17 , 18 )
7. Under what circumstances can a court interfere with the encashment of a bank guarantee?
Courts should not interfere with the invocation or encashment of a bank guarantee unless fraud, irretrievable injustice, or special equities are prima facie established by strong evidence as a triable issue to prevent irretrievable injustice. (Para 18 , 19 )
8. What is the primary requirement for the valid invocation of a bank guarantee?
The invocation must be in accordance with the specific terms of the bank guarantee. If the guarantee is in unequivocal and unconditional terms, the bank is obliged to pay on demand without demur or objection, regardless of disputes between the beneficiary and the third party. (Para 18 , 20 )
9. Does the purpose of a bank guarantee, such as securing environmental compliance, necessitate a hearing under principles of natural justice before invocation?
No. Because a bank guarantee constitutes an independent contract, the requirement for a hearing or notice under natural justice does not override the contractual obligation of the bank to pay the beneficiary on demand, provided the invocation is in terms of the guarantee. (Para 16 , 17 , 20 )
JUDGMENT :
DHANANJAYA Y. CHANDRACHUD, J.
1. Admit.
2. This appeal arises from a judgment of the National Green Tribunal “Tribunal” at its Southern Zone Bench at Chennai dated 16 August 2016. The Tribunal allowed the appeal of the respondent in part and held that the invocation of the bank guarantees furnished to the appellant at the behest of the respondent was unwarranted and that the amount should be refunded to the respondent.
3. Since reliefs in terms of the other prayers were declined by the Tribunal, the issue which falls for consideration is whether the Tribunal was justified in interfering with the invocation of three bank guarantees issued to the appellant and in directing the appellant to refund the amounts covered by them to the respondent.
4. The respondent commenced its operations in 1995 for the manufacture and sale of instant coffee. It was granted consent under the Water (Prevention and Control of Pollution) Act 1974. On 6 August 2008, the Union Government amended the Environment (Protection) Rules, 1986 to specify discharge standards for the coffee industry.
5. Complaints were received by the appellant and by the District Collector, Guntur in regard to the environmental pollution caused by the appellant. A notice to show cause was issued by the appellant to the respondent on 2 August 2011. A Task Force Committee was constituted by the appellant which, after hearing the respondent, issued directions to it on 12 August 2011. Based on the recommendations of the Task Force Committee, the following directions were issued to the respondent on 26 August 2011:
“Part A
Improvement of existing system
(a) The industry shall submit the efficiency of the ETP for the treatment of effluents to the board standards.
(b) The Industry shall revamp the existing APC installed to the boilers to meet the board specified standards.
Part B
(a) Fixation of flow meters at various points to ensure continuous operation of existing systems
(b) The industry shall install separate energy meters for all the pollution control equipments installed and submit the records to the RO, Guntur every month.
Part C
(a) The industry shall store the treated effluents in lined lagoons only, for storing the effluents during rainy season.
(b) The industry shall use the treated effluents in industry’s own land.
(c) The industry shall provide separate storm water drains so that the colored effluents do not mix with the rain water.
(d) The industry shall empty the stored effluents in unlined lagoons and lagoons shall be dismantled.
(e) The industry shall not discharge any effluents outside the premises under any circumstances.
(f) The industry shall submit an action plan for removal of colour within 30 days.”
6. In addition, the appellant directed the respondent to furnish three bank guarantees: two in the amount of Rs. 10,00,000 each and the third in the amount of Rs. 5,00,000 to secure compliance with the conditions specified in Part A, Part B and Part C above in regard to the functioning of the respondent.
7. On 6 September 2011, three bank guarantees executed by the State Bank of India were furnished to the appellant. The bank guarantee in the amount of Rs. 5,00,000 was in order to secure compliance with the conditions stipulated in the consent for the establishment and operation of the respondent in terms of the applicable environmental standards. The bank guarantee covered Part C of the directions that were issued on 26 August 2011 which were embedded in the guarantee. The guarantee contained the following stipulation:
“In accordance to the norms laid down by the Board as committed by M/S CCL PRODUCTS (INDIA) LIMITED.
In pursuance of the above, we M/S. CCL PRODUCTS (INDIA) LIMITED, Guarantee the observance and performance by the company of the various terms and obligations as provided in the commitment made above and undertake to pay to the Board subject to a maximum sum not exceeding Rs. 5,00,000/- (Rupees five lakhs only) on demand and in the event of company failing to compl
