Supreme Court: Writ Jurisdiction can be Entertained If State in its Contractual Dealings practices Unfairness or Discrimination

Supreme Court: Writ Jurisdiction can be Entertained If State in its Contractual Dealings practices Unfairness or Discrimination

The Supreme Court while adjudicating an appeal in the matter of M/s. Gas Authority of India Limited vs. M/s. Indian Petrochemicals Corp. Ltd. and others, refuted Gas Authority of India Limited's (GAIL) condition imposed on Indian Petrochemicals Corp. Ltd (IPCL) and observed that Writ jurisdiction can be applied in case contractual terms are found to be arbitrary in nature.

The appellant- GAIL is a Government of India undertaking, incorporated on 16th August, 1984, engaged primarily in the activity of providing services for the utilization of natural or associated gas. IPCL respondent no.1, formerly a public sector undertaking, is engaged in the manufacture of petrochemicals.

On 1st January, 1999, the Ministry of Petroleum and Natural Gas, Government of India (hereinafter referred to as 'MoPNG'), the allocating and price-fixing authority for natural gas, issued a letter for allocation of natural gas to IPCL subject to certain conditions. In 2001, IPCL entered a gas supply contract with M/s. Gas Authority of India Limited (GAIL).

As per the terms of the contract IPCL laid down its own pipelines, and those pipelines alone were utilized for carrying gas; GAIL levied a charge for 'loss of transportation charges' for pipelines laid down by GAIL, even when it was not using them. IPCL assailed the recovery of 'loss of transportation charges' as arbitrary and unfair. In this respect Clauses in the contract were challenged on the ground of unequal bargaining power. In view of the same, IPCL claimed refund of the 'loss of transportation charges.'

The Single Judge of the Bombay High Court quashed the impugned clauses. GAIL was also to refund the loss of transportation charge to IPCL. Hence, the present appeal was filed.

At the outset, Mr. Tushar Mehta, learned Solicitor General, appearing for GAIL, contested the very maintainability of the writ petition filed by IPCL. He contended that the parties had provided for arbitration before the Permanent Machinery of Arbitrators in the Bureau of Public Enterprises under Clause 13.1 of the contract. Further, the matter was stated to be purely contractual in nature, involving the enforceability and validity of the terms of the contract, and no case was made out for violation of Fundamental Rights. The presence of a public law element was a sine qua non for the exercise of writ jurisdiction as elucidated in Joshi Technologies International Inc. vs. Union of India and others.

He stated that even if the petition was maintainable, the clauses could not have been invalidated by the High Court. It was pointed out that there were no differences in the bargaining positions of the two organizations where one could be said to be more powerful. Both organizations were public sector enterprises at the relevant time. The contract was stated to be carefully negotiated and reflected the mutual consensus between the parties, as was evident from the inter se communications at the pre-contractual stages. Thus, the clauses could not thus be treated as arbitrary or unfair.

Dr. A.M. Singhvi, learned Senior Counsel, sought to defend the impugned order and the maintainability of writ proceedings with respect to a private contract. The transportation charges were alleged to have a discriminatory effect as IPCL was being treated on par with consumers who were using the HBJ pipeline, whereas IPCL was transporting the gas through its own pipelines. That being the plea, it was urged that the writ jurisdiction was the appropriate remedy as there were questions of arbitrary state action violating the mandate of Article 14.

The two judges bench Justices Sanjay Kishan Kaul and Abhay S. Oka laid the three parameters. First, whether the writ petition filed by IPCL challenging Clauses 4.04 and 10.01 of the contract was maintainable. Second, assuming such a petition was maintainable, whether the High Court could have invalidated the clauses on the ground of unequal bargaining power and arbitrariness / unfairness. Third, whether monetary relief in the form of refund could have been granted after the order dated 19th September, 2006 was passed.

The Court noted that since GAIL is a Public Sector Undertaking and would be covered by the definition of 'State' in Article 12 of the Constitution, it held that the writ petition before the High Court was maintainable. It noted that there is merit in GAIL's contention that at the time of entering into the contract GAIL enjoyed a monopolistic position in supply of natural gas.

With respect to validity of the clauses under which GAIL had levied the loss of transportation cost, the Court noted it was arbitrary, unfair, unjust and in violation of Article 14 of the Constitution of India that IPCL was charged for loss of transportation charges even when it was mandatory for it to lay down its own pipelines and not to transport the gas through HBJ pipeline and by stipulation the price of natural gas is fixed by the Ministry. It was observed that IPCL was being treated at par with other commercial entities who were using pipelines laid down by GAIL.

The Court also noted that IPCL has already incurred heavy expenditure on infrastructure and thus, signing the contract with GAIL was Hobson's choice. The bench opined that "IPCL was bound to follow the allocation terms provided by the principal authority, i.e., MoPNG. Thus, as pleaded by IPCL, they were faced with a "Hobson's choice," where they had to either give up the contract or accept the clauses levying transportation charges. On a conspectus of the above factors, it can be said that GAIL exercised an unequal bargaining power at the time of signing the contract."

"In fact, the contractual exercise of providing such a clause runs contrary to every commercial and common sense and is manifestly arbitrary, as IPCL is not being charged under any general terms but for a specific purpose. This purpose cannot exist in the contract in view of the master authority, i.e., the Union of India, providing to the contrary," added the bench.

The Court was not inclined to admit that the charges had to be paid even though IPCL was not using the pipelines laid down by GAIL merely because GAIL had laid down the pipe for all users generally.

Lastly, the Top Court upheld the order of the High Court and directed GAIL to refund the amount within a period of two months, failing which, an interest of 8 per cent p.a. would be charged.