ANDHRA PRADESH POLLUTION CONTROL versus CCL PRODUCTS (INDIA) LIMITED on 22 July 2019

[2019] 10 S.C.R. 855

ANDHRA PRADESH POLLUTION CONTROL BOARD

v.

CCL PRODUCTS (INDIA) LIMITED

(Civil Appeal No. 7005 of 2017)

JULY 22, 2019

[DR. DHANANJAYA Y CHANDRACHUD AND

INDIRA BANERJEE, JJ.]

Water (Prevention and Control of Pollution) Act, 1974 –Environment (Protection) rules, 1986 – Respondent wasmanufacturing and selling instant coffee – Appellant receivedcomplaints against the appellant in regard to the environmentalpollution – A Task Force Committee was constituted by the appellant,which after hearing the respondent issued some directions – Inaddition, the appellant directed respondent to furnish bankguarantee of Rs.25 lakhs to secure the compliance with conditionsspecified in the directions – Respondent furnished the required bankguarantee – Thereafter, Board officials of the appellant inspectedthe industry and observed certain violations – Pursuant thereto,the bank guaranties were invoked and amount of Rs.25 lakhscovered by the bank guarantees was paid over to the appellant –Aggrieved, respondent moved to the Tribunal – Tribunal held thatPrinciples of natural justice were not followed and invocation wasunwarranted and directed appellant to refund the amount to therespondent – On appeal, held: It was not for the bank to determineas to whether the invocation of the bank guarantee was justified solong as the invocation was in terms of the bank guarantee – Ademand once made would oblige the bank to pay under the termsof the bank guarantee – In the instant case, the bank correctlyunderstood its legal obligations and paid over the amount to theappellant – Thus, having regard to the terms of the bank guarantees,the principle of law formulated by Tribunal cannot be accepted –Besides, it is evident from materials on record that a show causenotice was issued by the appellant to the respondent and respondenthad also submitted a response – Thus, Tribunal erred in interferingwith the invocation of the bank guarantees, as appellant had clearly

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Aadverted to the fact that the status of compliance was reviewed inthe Task Force Committee meeting and the officials had observedcertain violations – The invocation of the bank guarantees wastherefore in terms of the conditions stipulated in the bankguarantees.

BThe respondent commenced its operations in 1995 for themanufacture and sale of instant coffee. Complaints were receivedby the appellant and by the District Collector in regard to theenvironmental pollution caused by the appellant. A Task ForceCommittee was constituted by the appellant which, after hearingthe respondent, issued directions to it on 12 August 2011. InCaddition, the appellant directed the respondent to furnish threebank guarantees: two in the amount of Rs 10 lakh each and thethird in the amount of Rs 5 lakh to secure compliance with theconditions. On 6 September 2011, three bank guaranteesexecuted by the Bank were furnished to the appellant. The BoardDofficials inspected the industry and observed certain violations.Pursuant thereto, the bank guarantees were invoked on 12September 2012 and the amount of Rs 25 lakh covered by threebank guarantees was paid over to the appellant. The Tribunalheld that the invocation was unwarranted and the amount whichhas been received by the appellant should be refunded to theErespondent. Hence, the present appeals.

Allowing the appeal, the Court

HELD : 1. The settled legal position which has emergedfrom the precedents of this Court is that absent a case of fraud,Firretrievable injustice and special equities, the Court should notinterfere with the invocation or encashment of a bank guaranteeso long as the invocation was in terms of the bank guarantee.[Para 19] [866-E-F]

Conclusion

2. In the present case, the bank undertook to the appellantGthat it would pay the guaranteed amount on demand, subject tothe overall amount stipulated in each of the three bankguarantees. It was not for the bank to determine as to whetherthe invocation of the bank guarantees was justified so long as theinvocation was in terms of the bank guarantee. A demand once H

made would oblige the bank to pay under the terms of the bankguarantee. The Bank correctly understood its legal obligationsand paid over the amount to the appellant. In this view of thematter and having regard to the terms of the bank guarantees,this Court is of the view that the principle of law which has beenformulated by the Tribunal cannot be accepted as reflecting thecorrect legal position. [Para 20] [866-F-H]

3. That apart, this Court is unable to accept the finding ofthe Tribunal that the respondent was kept in the dark on theinvocation. It is evident that following the invocation of the bankguarantees, the respondent itself addressed a communication on20 September 2012 to the Member Secretary of the appellant.The communication contains a specific reference to the invocationof the bank guarantees. That apart, it is evident from the materialon the record that the appellant had issued a notice to show causeto the respondent to which the respondent also submitted aresponse. The purpose and object of the bank guarantees was toenable the appellant to secure compliance with environmentalstandards prescribed in accordance with law. The appellant hasinvoked the bank guarantees issued by the respondent becauseof the failure of the respondent to discharge the obligationsimposed upon it by the Task Force Committee on 26 August 2011.[Para 21] [867-A-C]

4. For the above reasons, this Court is of the view that theTribunal has erred in interfering with the invocation of the bankguarantees and in directing the appellant to refund the amount ofRs 25 lakhs covered by the three guarantees. While invokingthe bank guarantees, the appellant has clearly adverted to thefact that the status of compliance was reviewed in the Task ForceCommittee Meeting; and that the officials of the appellant hadinspected the industry and had observed certain violations.The invocation of the bank guarantees was therefore in terms ofthe conditions stipulated in the bank guarantees. [Para 22][867-D-G]

Ansal Engineering Projects Ltd. v Tehri HydroDevelopment Corporation Ltd (1996) 5 SCC 450 :[1996] 4 Suppl. SCR 226 ; State Bank of India v Mula AB

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ASahakari Sakhar Karkhana Ltd. (2006) 6 SCC 293 :[2006] 3 Suppl. SCR 320 ; Hindustan Construction Co.Ltd. v. State of Bihar (1999) 8 SCC 436 : [1999] 3 Suppl.SCR 554 – relied on.

Case Law Reference

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 7005Cof 2017.

From the Judgment and Order dated 16.08.2016 of the NationalGreen Tribunal, Southern Zone, Chennai in Appeal No. 63 of 2013 (SZ).

T. V. S. Raghavendra Sreyas, Mrs. Gayatri Gulati Sreyas andMs. Sneh Dhillon, Advs. for the Appellant.D

Sajan Poovayya, Sr. Adv., G. Ramakrishna Prasad, SuyodhanByrapaneni, Ms. Pilza Moonis, Ms. Priyanka M. P. and Pratibhanu SinghKharola, Advs. for the Respondent.

The Judgment of the Court was delivered byEDR. DHANANJAYA Y CHANDRACHUD, J.

1. Admit.

2. This appeal arises from a judgment of the National GreenTribunal[1] at its Southern Zone Bench at Chennai dated 16 August 2016.FThe Tribunal allowed the appeal of the respondent in part and held thatthe invocation of the bank guarantees furnished to the appellant at thebehest of the respondent was unwarranted and that the amount shouldbe refunded to the respondent.

3. Since reliefs in terms of the other prayers were declined bythe Tribunal, the issue which falls for consideration is whether the TribunalGwas justified in interfering with the invocation of three bank guaranteesissued to the appellant and in directing the appellant to refund the amountscovered by them to the respondent.

4. The respondent commenced its operations in 1995 for themanufacture and sale of instant coffee. It was granted consent underthe Water (Prevention and Control of Pollution) Act 1974. On 6 August2008, 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 DistrictCollector, Guntur in regard to the environmental pollution caused by theappellant. A notice to show cause was issued by the appellant to therespondent on 2 August 2011. A Task Force Committee was constitutedby the appellant which, after hearing the respondent, issued directions toit on 12 August 2011. Based on the recommendations of the Task ForceCommittee, the following directions were issued to the respondent on 26August 2011:

“Part A

Improvement of existing system

a. The industry shall submit the efficiency of the ETP for thetreatment of effluents to the board standards.

b. The Industry shall revamp the existing APC installed to theboilers to meet the board specified standards.

Part B

a. Fixation of flow meters at various points to ensure continuousoperation of existing systems

b. The industry shall install separate energy meters for all thepollution control equipments installed and submit the records tothe RO, Guntur every month.

Part C

a. The industry shall store the treated effluents in lined lagoonsonly, for storing the effluents during rainy season.

b. The industry shall use the treated effluents in industry’s ownland.

c. The industry shall provide separate storm water drains so thatthe colored effluents do not mix with the rain water.

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Ad. The industry shall empty the stored effluents in unlined lagoonsand lagoons shall be dismantled.

e. The industry shall not discharge any effluents outside thepremises under any circumstances.

f. The industry shall submit an action plan for removal of colourBwithin 30 days.”

6. In addition, the appellant directed the respondent to furnishthree bank guarantees: two in the amount of Rs 10,00,000 each and thethird in the amount of Rs 5,00,000 to secure compliance with theconditions specified in Part A, Part B and Part C above in regard to theCfunctioning of the respondent.

7. On 6 September 2011, three bank guarantees executed by theState Bank of India were furnished to the appellant. The bank guaranteein the amount of Rs 5,00,000 was in order to secure compliance with theconditions stipulated in the consent for the establishment and operationDof the respondent in terms of the applicable environmental standards.The bank guarantee covered Part C of the directions that were issuedon 26 August 2011 which were embedded in the guarantee. Theguarantee contained the following stipulation:

“In accordance to the norms laid down by the Board as committedEby M/S CCL PRODUCTS (INDIA) LIMITED.

In pursuance of the above, we M/S. CCL PRODUCTS (INDIA)LIMITED, Guarantee the observance and performance by thecompany of the various terms and obligations as provided in thecommitment made above and undertake to pay to the Board subjectFto a maximum sum not exceeding Rs 5,00,000/- (Rupees five lakhsonly) on demand and in the event of company failing to complywith the above conditions/Directions.”

The respondent further undertook that:

“Notwithstanding anything contain herein:G

a) Our liability under this Bank Guarantee shall not exceed Rs.5,00,000/-

b) This Bank Guarantee shall be valid upto 06.09.2013.

c) We are liable to pay the guaranteed amount any part thereof H

under this Bank Guarantee only and only if you serve upon us awritten claim or demand on or before 06.09.2013"

8. The second bank guarantee covered Part B of the stipulationwhich the Task Force Committee had required the respondent to fulfillon 26 August 2011. The bank guarantee contained the followingstipulations:

“In pursuance to the above, we M/S. CCL PRODUCTS (INDIA)LIMITED, Guarantee the observance and performance by thecompany of the various terms and obligations as provided in thecommitment made above and undertake to pay to the Board subjectto a maximum sum not exceeding Rs. 10,00,000/- (Rupees Tenlakhs only) on demand and in the event of company failing tocomply with the above conditions / Directions.

Out liability under the Guarantee is restricted to Rs. 10,00,000/-(Rupees Ten lakhs only). Our Guarantee shall remain in forceuntil 06.09.2013, unless a suit or action to enforce a claim underthis guarantee is filed in writing against us before the date ofexpiry, all our rights under this guarantee shall be forfeited andwe shall be relieved and discharged from all liabilities whatsoeverthere under.”

Notwithstanding anything contain herein:

a) Our liability under this Bank Guarantee shall not exceedRs. 10,00,000/- b) This Bank Guarantee shall be valid upto 06.09.2013.

c) We are liable to pay the guaranteed amount any part thereofunder this Bank Guarantee only and only if you serve upon us awritten claim or demand on or before 06.09.2013.”

9. The third bank guarantee in the amount of Rs 10,00,000 coveredPart A of the stipulations which the Task Force Committee had requiredthe respondent to fulfill on 26 August 2011.

The bank guarantee contained the following stipulation:

“In pursuance to the above, we M/S CCL PRODUCTS (INDIA)LIMITED, Guarantee the observance and performance by thecompany of the various terms and obligations as provided in the A

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Acommitment made above and undertake to pay to the Board subjectto a maximum sum not exceeding Rs. 10,00,000/- (Rupees Tenlakhs only) on demand and in the event of company failing tocomply with the above conditions / Directions.

Our liability under the Guarantee is restricted to Rs. 10,00,000/-B(Rupees Ten lakhs only). Our Guarantee shall remain in forceuntil 06.09.2013, unless a suit or action to enforce a claim underthis guarantee is filed in writing against us before the date ofexpiry, all our rights under this guarantee shall be forfeited andwe shall be relieved and discharged from all liabilities whatsoeverthere under.C

Notwithstanding anything contain herein :

a)Our liability under this Bank Guarantee shall not exceed Rs.10,00,000/- b)This Bank Guarantee shall be valid upto 06.09.2013D

c)We are liable to pay the guaranteed amount any part thereofunder this Bank Guarantee only and only if you serve upon us awritten claim or demand on or before 06.09.2013.”

10. On 12 September 2012, the appellant recorded in acommunication to its Environmental Engineer in the regional office atEGuntur that:

“The status of compliance of was reviewed in the Task ForceCommittee Meeting held on 07.03.2012 and directions were issuedto the industry ….for compliance.

The Board officials inspected the industry on 21.07.2012 and23.08.2012 and observed certain violations. In view of the non-compliance of the industry with the directions issued by the Board,it is decided to invoke the bank guarantee of Rs. 25 Lakhs infavour of the Board.

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The EE, RO, Guntur is directed to address the Bank to invokeBank Guarantee of Rs. 25.0 lakhs in favour of the Board andobtain the amount by way of Demand Draft drawn in favour ofthe Member Secretary, A.P. Pollution Control Board, Hyderabad G

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immediately. The original bank guarantee is to be returned to theBank after obtaining the demand draft.”

In pursuance of the above communication, the bank guaranteeswere invoked on 12 September 2012 and the amount of Rs 25,00,000covered by three bank guarantees was paid over to the appellant by theState Bank of India.

11. Aggrieved by the actions of the appellant invoking the bankguarantees, the respondent moved the Tribunal.

12. The Tribunal by its judgment dated 16 August 2016 held thatthe principles of natural justice were required to be followed prior toinvoking the bank guarantees. Finding fault with the appellant for failingto do so, the Tribunal held that the invocation was unwarranted and theamount which has been received by the appellant should be refunded tothe respondent.

13. In the view of the Tribunal, the purpose of the bank guaranteeswas not “commercial, contractual or industrial” since the guaranteeswere issued to secure compliance with the directions of the appellantregarding environmental norms that must be complied with by therespondent. Hence, it came to the conclusion that before invoking thebank guarantees, it was incumbent upon the appellant to serve a noticeand to furnish a hearing to the respondent.

14. Assailing the judgment of the Tribunal, it has been urged byMr T V S Raghavendra Sreyas, learned counsel appearing on behalf ofthe appellant that first, the Tribunal erred in applying the principles ofnatural justice as a condition to invoke the guarantees. This, it has beensubmitted, is contrary to the settled legal position. Second, it has beenurged that the finding by the Tribunal that there was a breach on the partof the appellant to furnish a reasonable opportunity to the respondent isbelied by the documentary material which shows that notices were issuedby the appellant to the respondent and that the respondent was in factheard by the Task Force Committee. Reliance was placed on the noticeto show cause that was issued by the appellant on 9 January 2012 andthe response filed by the respondent on 16 January 2012. Third, it wasurged that even after the invocation of the bank guarantees, the respondentaddressed a letter dated 20 September 2012 to the appellant expressing A

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Aits grievance against the invocation. Hence, it was submitted that therespondent cannot feign ignorance about the fact that the bank guaranteeshave been invoked. Finally, it was submitted that the appellant wasconstrained to issue a further direction to the respondent for furnishingan additional bank guarantee of Rs 77.50 lakhs on 12 September 2012,the date on which the bank guarantee was invoked. Insofar as this partBof the direction is concerned, it was urged that the challenge was notpressed before the Tribunal. On these counts, it was urged that theTribunal was in error in interfering with the invocation of the bankguarantees.

15. On the other hand, Mr Sajan Poovayya, learned Senior CounselCappearing on behalf of the respondent submitted that first, the tenor ofthe bank guarantees indicate that they were not unconditional. It wasurged that the bank guarantees were furnished to secure compliancewith the specific obligations which were imposed upon the respondent inParts A, B and C of the Task Force Committee’s recommendation datedD26 August 2011. In the present case, it was urged that the demand whichwas made to the State Bank of India was not in terms of the conditionsspecified in the bank guarantees. Second, it was urged that the respondenthas complied with the recommendations of the Task Force Committeeand even at this stage, it would be appropriate if the Tribunal is calledupon to verify compliance. Third, it was urged that the letter of invocationEhas emerged before this Court for the first time and had not been producedbefore the Tribunal. On these grounds, it was urged that the judgmentof the Tribunal interfering with the invocation of the bank guaranteesdoes not warrant interference.

16. At the outset, we must deal with the fundamental basis of theFdecision of the Tribunal in setting aside the invocation of the bankguarantee. The Tribunal held that the purpose of the bank guaranteewas not commercial or industrial but was to secure compliance by theappellant with environmental norms that had been prescribed. Hence,in the view of the Tribunal, the appellant should have furnished a hearingGto the respondent before the bank guarantees were invoked.

17. We are unable to subscribe to the legal position which hasbeen formulated by the Tribunal. A bank guarantee constitutes anindependent contract between the issuing bank and the beneficiary to whom the guarantee is issued. Such a contract is independent of theunderlying contract between the beneficiary and the third party at whosebehest the bank guarantee is issued.

18. The principle which we have adopted accords with a consistentline of precedent of this Court. In Ansal Engineering Projects Ltd. vTehri Hydro Development Corporation Ltd,[2] a three judge Benchof this Court held thus:

“4. It is settled law that bank guarantee is an independent anddistinct contract between the bank and the beneficiary and is notqualified by the underlying transaction and the validity of theprimary contract between the person at whose instance the bankguarantee was given and the beneficiary. Unless fraud or specialequity exists, is pleaded and prima facie established by strongevidence as a triable issue, the beneficiary cannot be restrainedfrom encashing the bank guarantee even if dispute between thebeneficiary and the person at whose instance the bank guaranteewas given by the bank, had arisen in performance of the contractor execution of the works undertaken in furtherance thereof. Thebank unconditionally and irrevocably promised to pay, on demand,the amount of liability undertaken in the guarantee without anydemur or dispute in terms of the bank guarantee…

5. …The court exercising its power cannot interfere withenforcement of bank guarantee/letters of credit except only incases where fraud or special equity is prima facie made out in thecase as triable issue by strong evidence so as to preventirretrievable injustice to the parties.”

The same principle was followed in State Bank of India v MulaSahakari Sakhar Karkhana Ltd[3]where a two judge Bench of thisCourt held thus:

“33. It is beyond any cavil that a bank guarantee must beconstrued on its own terms. It is considered to be a separatetransaction.

34. If a construction, as was suggested by Mr Naphade, is to beaccepted, it would also be open to a banker to put forward a case 2 (1996) 5 SCC 450

3 (2006) 6 SCC 293

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Athat absolute and unequivocal bank guarantee should be read as aconditional one having regard to circumstances attending thereto.It is, to our mind, impermissible in law.”

A bank guarantee constitutes an independent contract. InHindustan Construction Co. Ltd. v. State of Bihar[4], a two judgeBBench of this Court formulated the condition upon which the invocationof the bank guarantee depends in the following terms:

“9. What is important, therefore, is that the bank guarantee shouldbe in unequivocal terms, unconditional and recite that the amountwould be paid without demur or objection and irrespective of anyCdispute that might have cropped up or might have been pendingbetween the beneficiary under the bank guarantee or the personon whose behalf the guarantee was furnished. The terms of thebank guarantee are, therefore, extremely material. Sincethe bank guarantee represents an independent contract betweenthe bank and the beneficiary, both the parties would be bound byDthe terms thereof. The invocation, therefore, will have to bein accordance with the terms of the bank guarantee, or else,the invocation itself would be bad.”

(Emphasis supplied)

E19. The settled legal position which has emerged from theprecedents of this Court is that absent a case of fraud, irretrievableinjustice and special equities, the Court should not interfere with theinvocation or encashment of a bank guarantee so long as the invocationwas in terms of the bank guarantee.

20. In the present case, the bank undertook to the appellant that itFwould pay the guaranteed amount on demand, subject to the overallamount stipulated in each of the three bank guarantees. It was not forthe bank to determine as to whether the invocation of the bank guaranteeswas justified so long as the invocation was in terms of the bank guarantee.A demand once made would oblige the bank to pay under the terms ofGthe bank guarantee. The State Bank of India correctly understood itslegal obligations and paid over the amount to the appellant. In this viewof the matter and having regard to the terms of the bank guarantees, weare of the view that the principle of law which has been formulated by the Tribunal cannot be accepted as reflecting the correct legal position.

21. That apart, we are unable to accept the finding of the Tribunalthat the respondent was kept in the dark on the invocation. It is evidentthat following the invocation of the bank guarantees, the respondentitself addressed a communication on 20 September 2012 to the MemberSecretary of the appellant. The communication contains a specificreference to the invocation of the bank guarantees. That apart, it isevident from the material on the record that the appellant had issued anotice to show cause to the respondent to which the respondent alsosubmitted a response. The purpose and object of the bank guaranteeswas to enable the appellant to secure compliance with environmentalstandards prescribed in accordance with law. The appellant has invokedthe bank guarantees issued by the respondent because of the failure ofthe respondent to discharge the obligations imposed upon it by the TaskForce Committee on 26 August 2011.

22. For the above reasons, we are of the view that the Tribunalhas erred in interfering with the invocation of the bank guarantees and indirecting the appellant to refund the amount of Rs 25 lakhs covered bythe three guarantees. While invoking the bank guarantees, the appellanthas clearly adverted to the fact that the status of compliance wasreviewed in the Task Force Committee Meeting; and that the officials ofthe appellant had inspected the industry and had observed certainviolations. The invocation of the bank guarantees was therefore in termsof the conditions stipulated in the bank guarantees.

23. The invocation of the bank guarantees was the subject matterof the present appeal. We allow the appeal and set aside the impugnedjudgment and order of the Tribunal. There shall be no order as to costs.

24. Pending application(s), if any, shall stand disposed of.

Ankit Gyan

Appeal allowed.

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