2019 (7) TMI 1866 - SC - Indian Laws

Refund claim - Invocation of the bank guarantees - 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? - HELD THAT - The settled legal position which has emerged from the precedents of this Court is that absent a case of fraud, irretrievable injustice and special equities, the 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. In the present case, the bank undertook to the Appellant that it would pay the guaranteed amount on demand, subject to the overall amount stipulated in each of the three bank guarantees. It was not for the bank to determine as to whether the invocation of the bank guarantees was 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 of the bank guarantee. The State Bank of India correctly understood its legal obligations and paid over the amount to the Appellant. In this view of the matter and having regard to the terms of the bank guarantees, the principle of law which has been formulated by the Tribunal cannot be accepted as reflecting the correct legal position. It is evident that following the invocation of the bank guarantees, the Respondent itself addressed a communication on 20 September 2012 to the Member Secretary of the Appellant. The communication contains a specific reference to the invocation of the bank guarantees. That apart, it is evident from the material on the record that the Appellant had issued a notice to show cause to the Respondent to which the Respondent also submitted a response - The Appellant has invoked the bank guarantees issued by the Respondent because of the failure of the Respondent to discharge the obligations imposed upon it by the Task Force Committee on 26 August 2011. The Tribunal has erred in interfering with the invocation of the bank guarantees and in directing the Appellant to refund the amount of ₹ 25 lakhs covered by the three guarantees. While invoking the bank guarantees, the Appellant has clearly adverted to the fact that the status of compliance was reviewed in the Task Force Committee Meeting; and that the officials of the Appellant had inspected the industry and had observed certain violations. The invocation of the bank guarantees was therefore in terms of the conditions stipulated in the bank guarantees. The invocation of the bank guarantees was the subject matter of the present appeal - Appeal allowed.

Issues Involved:
1. Justification of the National Green Tribunal (NGT) in interfering with the invocation of bank guarantees.
2. Compliance with environmental norms by the Respondent.
3. Application of principles of natural justice in the invocation of bank guarantees.
4. Legal validity of the invocation of bank guarantees.

Issue-wise Detailed Analysis:

1. Justification of the National Green Tribunal (NGT) in interfering with the invocation of bank guarantees:

The appeal arises from a judgment of the NGT which partially allowed the Respondent's appeal and held that the invocation of the bank guarantees was unwarranted, directing the Appellant to refund the amounts. The issue for consideration was whether the NGT 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. The Supreme Court found that the NGT erred in its decision, stating that a bank guarantee constitutes an independent contract between the issuing bank and the beneficiary, which is not affected by the underlying contract between the beneficiary and the third party. The invocation of the bank guarantees was in terms of the bank guarantees, and thus, the NGT's interference was not justified.

2. Compliance with environmental norms by the Respondent:

The Respondent, engaged in the manufacture and sale of instant coffee since 1995, was required to comply with environmental standards specified by the Union Government in 2008. Complaints regarding environmental pollution led to a Task Force Committee issuing several directions to the Respondent on 26 August 2011, including the submission of the efficiency of the Effluent Treatment Plant (ETP), revamping of Air Pollution Control (APC) systems, and installation of flow meters and energy meters. The Respondent was also required to furnish three bank guarantees totaling ?25,00,000 to secure compliance with these conditions. The Appellant invoked these guarantees on 12 September 2012 due to observed violations during inspections. The Supreme Court noted that the Respondent was aware of the invocation and had addressed a communication regarding it, confirming non-compliance with the stipulated conditions.

3. Application of principles of natural justice in the invocation of bank guarantees:

The NGT held that the principles of natural justice required a hearing before invoking the bank guarantees, considering the purpose of the guarantees was to secure compliance with environmental norms. The Supreme Court disagreed, emphasizing that a bank guarantee is an independent contract and does not necessitate adherence to principles of natural justice before invocation. The Court cited precedents establishing that absent fraud, irretrievable injustice, or special equities, courts should not interfere with the invocation of a bank guarantee if it is in accordance with its terms. The Supreme Court concluded that the NGT's application of natural justice principles was incorrect.

4. Legal validity of the invocation of bank guarantees:

The bank guarantees were issued to secure compliance with specific environmental obligations. Each guarantee included stipulations regarding the maximum liability, validity period, and conditions for invocation. The Supreme Court reiterated that a bank guarantee is an independent contract, and the bank's obligation to pay arises upon demand, provided the invocation is in terms of the guarantee. The Court found that the invocation was justified as the Appellant had observed violations and issued a notice to show cause, to which the Respondent had responded. The invocation was thus in accordance with the terms of the bank guarantees, and the Appellant's actions were legally valid.

Conclusion:

The Supreme Court allowed the appeal, setting aside the NGT's judgment and order, and upheld the invocation of the bank guarantees by the Appellant. The Court emphasized the independent nature of bank guarantees and the limited grounds for judicial interference in their invocation. The Respondent's non-compliance with environmental norms justified the invocation, and the principles of natural justice did not apply in this context. The appeal was allowed with no order as to costs, and any pending applications were disposed of.

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