Writ Jurisdiction Is Applicable If State Acts Arbitrarily In Its Contractual Dealings- SC Invalidates GAIL's Terms Imposed On IPCL

The Supreme Court held that writ jurisdiction could be exercised against the State, if the State in its contractual dealings had failed to exercise a degree of fairness or had practiced any discrimination.

The Bench of Justice Sanjay Kishan Kaul and Justice Abhay S. Oka observed that “Although the dispute arises from a commercial contract, we find that the writ petition challenging the clauses was maintainable. It is not disputed that GAIL is a Public Sector Undertaking and thus qualifies under the definition of ‘State’ as per Article 12 of the Constitution. At the time of entering into contract, GAIL was enjoying a monopolistic position with respect to the supply of natural gas in the country.”

Solicitor General Tushar Mehta appeared for the appellant and Senior Advocate Abhishek Manu Singhvi appeared for the respondent

It was the case of the appellant that in 1999, Indian Petrochemicals Corporation Ltd. (‘IPCL’) was allotted 0.85 MMSCMD of natural gas by the Ministry of Petroleum and Natural Gas, Government of India, subject to certain conditions enumerated in the allocation letter. In 2001, IPCL entered into a contract with Gas Authority of India Limited (GAIL) for supply of natural gas.

As per the contract, IPCL laid down its own pipelines, which were utilized for carrying gas and GAIL levied charges for ‘loss of transportation charges’ for pipelines laid down by GAIL, even when IPCL was not using them.

IPCL assailed the recovery of ‘loss of transportation charges’ as arbitrary and unfair and IPCL claimed refund of the same. The Single Judge of the High Court quashed the impugned clauses and directed GAIL to refund the charges levied. Appeal was preferred by GAIL before the High Court, which upheld the decision of the Single Judge.

The issues dealt with were-

• Whether the writ petition challenging the clauses of the contract was maintainable or not.

The Apex Court noted that GAIL was a Public Sector Undertaking and thus qualified under the definition of ‘State’ as per Article 12 of the Constitution. Thus, the writ petition challenging the clauses was maintainable.

Further the Court said that the appellant IPCL had no choice but to enter into agreement with GAIL as at the time of entering into the contract, Gail enjoyed monopolistic position with respect to the supply of natural gas in the country. Thus, there was a clear public element involved in the dealings between the parties.

“writ jurisdiction can be exercised when the State, even in its contractual dealings, fails to exercise a degree of fairness or practices any discrimination.” observed the Court.

• Whether the High Court could have invalidated the clauses on the ground of unequal bargaining power and arbitrariness /unfairness.

The Apex Court noted that the validity of the clauses under which ‘loss of transportation charges’ was levied would be extremely unfair and unjust, apart from being an arbitrary action in violation of Article 14 of the Constitution that IPCL was charged for loss of transportation charges when it was mandatory for it to lay down its own pipelines and not to transport the gas through the HBJ pipeline.

Further, the Court noted that IPC, which was using its own pipelines, was being treated at par with other commercial entities who were using pipelines laid down by GAIL.

The Court further noted that IPCL was faced with a “Hobson’s choice”, where they had to either give up the contract or accept the clauses levying transportation charges. The IPCL had already incurred huge expenditure in the construction of its own pipeline. Thus, IPCL had very little choice but to enter unto the contract.

Therefore, “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.” observed the Apex Court

Consequently, the Apex Court refused to accept that the charges had to be paid even though IPCL was not using the pipelines laid down by GAIL.

• Whether monetary relief in the form of refund could have been granted after the order dated September 19,2006 was passed. If yes, whether the whole amount is to be refunded.

The Apex Court noted that the direction for refund arose as a consequence of quashing of the clauses, and, restricted the refund to a period of three years prior to the date of filing of the writ petition on account of IPCL’s delay in approaching the Court.

Accordingly, the Apex Court allowed the appeal and upheld the impugned order of the High Court.

Cause Title- M/s Gas Authority of India Limited v. M/s Indian Petrochemicals Corp. Ltd. & Ors.

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