If Contract Involves Sufficient Intrinsic Material To Catapult It To Realm Of Public Law, Principles Of Natural Justice Apply While Adjudging Breach Of Such Contract- Karnataka HC

A Karnataka High Court Bench of Justice Krishna S Dixit has held that if a contract involves sufficient intrinsic material to catapult it to the realm of public law, the principles of natural justice apply while adjudging the breach of such a contract.

In that context, it was said that, "Conventionally speaking, the principles of natural justice belong to the domain of public law and therefore do maintain distance from the realm of private law, unless statute says otherwise. At times, these domains share a blurred boundary, warrants no deliberation. The right question to ask is: ‘whether a contract in question involves sufficient intrinsic material that would catapult it to the realm of public law…?’ If answer is in the affirmative, ordinarily the principles of natural justice cannot be kept at a bay while adjudging the breach of terms of such a contract. After all, in a Welfare State like ours, John Rawls’ “Justice as Fairness” happens to be an operational norm, whether one calls it a principle of natural justice or not."

Senior Counsel Aditya Sondhi, among others, appeared for the petitioners, while Senior Counsel V Srinivasa Raghavan, among others, appeared for the respondents.

In this case, the petitioners approached the High Court against a letter issued by the Karnataka Power Corporation Limited (KPCL) demanding a sum of Rs.52,63,00,000/-, by way of ‘penalties’.

Before the Court, the respondent vehemently insisted upon relegating the petitioners to ordinary civil remedy on the ground of disputed facts, which cannot be easily determined under Articles 226 & 227 of the Constitution Court, owing to the usual constraints a Writ Court will have in matters like this.

The petitioners contended a breach of the principles of natural justice.

The Court observed that the impugned demand suffered from the vice of non-consideration of relevant material and the denial of a reasonable opportunity of hearing to the stakeholders.

In that context, it was further said that, "A perusal of the correspondence between the battling parties as is available from record shows that the first respondent-KPCL changed its stand prompted by AG’s Audit Report and the opinion of the Advocate General, which were generated unilaterally."

The Court also had noted that the respondents placed no consideration on the petitioners' letters explaining why the adverse Audit Objections were unsustainable.

In light of the same, the Court held that there was a violation of natural justice. In that context, it was said that, "petitioners case of violation of principles of natural justice, is substantiated."

The Court while allowing the Writ Petition in part, observed, "...this Writ Petition succeeds in part; a Writ of Certiorari issues quashing the impugned order only to the extent it levies a penalty of Rs.33,00,00,000/- (Rupees thirty three crore) in terms of Article 10.2 of the FSA and also another sum of Rs.5,72,00,000/- (Rupees five crore & seventy two lakh) only in terms of Article 10.4 of the FSA; matter is remitted to the portals of first respondent-KPCL for the de novo determination of the amount payable by the petitioners toward the actual cost of procurement of coal from alternative source under Article 10.5 of the FSA in the light of the observations hereinabove made. The said exercise shall be accomplished within a period of eight weeks with the participation of petitioners. Contentions so far as this aspect is concerned, are kept open."

Cause Title: Karnataka Emta Coal Mines Ltd. & Anr. vs Karnataka Power Corporation Ltd. & Anr.

Click here to read/download the Judgment