Appeal No. 1262 of 2001,Arb. Petition No. 573 of 2001

22nd March, 2002

Petitioner Counsel: Mr. GULAM VAHANVATI,Ms. R. HAKEEM,Vyas , Bhalwal
Respondent Counsel: Mr. N. G. THAKKAR,Mr. HARISH ARYA,Mr. DAVID GOMES

Cases Cited:
Kum. Srilekha Vidyarthi Vs. State of U.P., AIR 1991 SC 537 [Para 4]
M/s. Omprakash Pariwal Vs. Union of India, AIR 1988 Calcutta 143 [Para 4]
V. Raghunatha Rao Vs. State of A.P., 1983(1) ALT 461 [Para 4]
M/s. Dwarkadas Marfatia & Sons Vs. Board of Trustees of the Port of Bombay, AIR 1989 SC 1642 [Para 4]
Mahavir Auto Stores Vs. Indian Oil Corporation, AIR 1990 SC 1031 [Para 4]
Assistant Excise Commissioner Vs. Issac Peter, (1994) 4 SCC 104 [Para 7]
Hajee S V. M Mohamed Jamaludeen Bros. & Co. Vs. Government of Tamil Nadu, (1997) 3 SCC 466 [Para 8]
Food Corporation of India Vs. Jagannath Dutta, 1993 Supp (3) SCC 635 [Para 9]

JUDGMENT

SHAH, J. :- This appeal is directed against the order of the learned single Judge by which interim injunction has been issued in petition under section 9 of the Arbitration and Conciliation Act, 1996, hereinafter referred to as the "Act", restraining the appellant Oil and Natural Gas Corporation Ltd. (ONGC) from acting on the notice of termination dated 16-10-2001. The brief facts giving rise to this appeal and indicating the points for decision herein are now stated.

2. On 19-2-1999 the appellant floated a tender for manning, running, operating, repairing and maintenance on hire of three vessels under Group IX i.e. Samudrika 2, Samudrika 7 and Sindhu 9. The respondent was one of the tenderers. On 30-12-1999 a contract was signed between the appellant and respondent for vessel Samudrika 2 for the primary term of 2 and half years from 9-12-1999. Clause 1-10-1 of the agreement provided that the duration of the contract shall be for the period of 2 and half years (30 months) with effect from the date of vessel being handed over to the respondent. It was further set out that the ONGC reserved the right to extend the contract for a further period of six months in two instalments of three months on the same rates, terms and conditions. Clause 19 which is pertaining to termination reads as under :

"The owner reserves its right to terminate the agreement at any time after expiry of one year of contract by giving 30 days notice in writing to the operator without assigning any reason whatsoever".

3. On 16-10-2001 the appellant issued notice terminating contract with effect from 15-11-2001 under clause 19.3 of the agreement. The agreement contains an arbitration clause namely clause 22. The respondent pending reference of the matter to the arbitration moved this court under section 9 of the Act and sought injunction to restrain the appellant from acting on the notice of termination. It was the case of the respondent that there is implied covenant that the agreement will run its full primary term of 2 and half years from 9-12-1999 and that the appellant is bound by the said covenant and based on the said covenant respondent has made huge investments including giving of two bank guarantees. By the amendment, respondent pleaded promissory estoppel based on implied covenant of the contract. By the further amendment it was averred that clause 19.3 of the agreement is unconscionable and opposed to public policy and violative of section 23 of the Contract Act and the appellant are not entitled to invoke and act in pursuance to the said clause 19.3 of the agreement.

4. The learned single Judge appears to have taken the view that clause 19.3 is unconscionable and against public policy and violates section 23 of the Contract Act. In this behalf the learned Judge has relied on the decision of the Supreme Court in Kum. Srilekha Vidyarthi etc. Vs. State of U.P. and ors. AIR 1991 SC 537. The learned Judge also referred to a decision of the Calcutta High Court in M/s. Omprakash Pariwal and anr. Vs. Union of Indian and ors. AIR 1988 Calcutta 143 and a decision of the Andhra Pradesh High Court in V. Raghunatha Rao Vs. State of A.P. and ors. 1983(1) ALT 461. The learned Judge was of the opinion that if the appellant has invoked clause 19.3 all that means is that the appellant need not communicate reasons for termination to the respondent but it does not mean that power can be exercised, capriciously or arbitrarily. Then referring to the decisions of the Supreme Court in M/s. Dwarkadas Marfatia and Sons Vs. Board of Trustees of the Port of Bombay AIR 1989 SC 1642 and Mahavir Auto Stores and ors. Vs. Indian Oil Corporation and ors. AIR 1990 SC 1031, the learned Judge concluded thus:

".....The matter is no longer in the realm of private contract as explained by the Apex Court it is now in the public domain. To my mind, therefore, considering all the aspects, it would be unjust to allow respondents who have not disclosed to the court the basis for their actions to contend that clause 19.3 is an answer to their action namely that the contract is terminable and they are not bound to give reasons. That argument was rejected by the Apex Court nearly a decade ago in Srilekha (supra). All that such a clause means is that you need not communicate the reasons but reasons must exist when a challenge is thrown that the action is arbitrary, the reasons must be disclosed".

5. Having heard the learned Advocate General for the appellant and Mr. Thakkar for respondent, in our opinion, it is not possible to agree with the view expressed by the learned single Judge that clause 19.3 is unconscionable and opposed to public policy. Clause 19.3 gives power to the appellant to determine to contract after expiry of one year without assigning any reasons. All that the appellant did was to exercise that right or power to terminate the contract whose terms and conditions were well known and agreed to by the respondent. Thus the contract by virtue of clause 19.3 sets out the power of termination by the appellant and the appellant has so acted under that clause. The clause while setting out the right of termination further says that the appellant can do so without assigning any reason for the same. However, in the present case the duty to act fairly is sought to be imported into the contract to modify and alter its terms and create an obligation upon the appellant which is not there in the contract. It is settled position of law that where the contracts are freely entered with the State there is no scope for invoking the doctrine of fairness and reasonableness for the purpose of altering or adding to the terms and conditions of the contracts. In such cases the question of public law based on Article 14 of the Constitution do not arise and the matter must be decided strictly in the realm of private law rights governed by the general law relating to contracts with reference to the provisions of Specific Relief Act providing for non-enforceability of certain types of contracts.

6. The decisions relied upon by the learned single Judge in the cases of Kum. Srilekha Vidyarthi and M/s. Dwarkadas Marfatia and Sons and Mahabir Auto Stores have no application to the facts of the present case, the mutual rights and liabilities of the parties being governed by the terms of the contract. In M/s. Dwarkadas Marfatia & Sons it was held that where the public authority is exempt from the operation of the statute like the Rent Control Act it must be presumed that such exemption from the statute is coupled with the duty to act fairly and reasonably. The decision does not say that the terms and conditions of contract can be varied, added or altered by importing the said doctrine. In the case of Kum. Srilekha Vidhyarthi it was a mass termination of District Government Counsel in the State of U.P. It was a case of termination from a post involving public element and was a case of non government servant holding a public office and as such it was held to be a matter within the public law field. This decision too does not support the view taken by the learned single Judge. The third decision in Mahabir Auto Stores turned out on its peculiar facts. All that was done was to advise the IOC to take the appellant into confidence before putting an end to his long standing right. It is significant to note that it was not a case where the rights of the parties were governed by a contract.

7. In Assistant Excise Commissioner and ors. Vs. Issac Peter and ors. (1994) 4 SCC 104 while rejecting a similar argument in connection with the case of a liquor industry, the Supreme Court observed: (pages 124 and 125 of SCC)

"...Doctrine of fairness of the duty to act fairly and reasonably is a doctrine developed in the administrative law field to ensure the rule of law and to prevent failure of justice where the action is administrative in nature. Just as principles of natural justice ensure fair decision where the function is quasi judicial, the doctrine of fairness is certainly not be invoked to amend, alter or vary the express terms of the contract between the parties. This is so, even if the contract is governed by statutory provisions, i.e. where it is a statutory contract- or rather more so. It is one thing to say that a contract- every contract- must be construed reasonably having regard to its language. But this is not what the licensees say. They seek to create an obligation on the other party to the contract, just because it happens to be the State. They are not prepared to apply the very same rule in converse case, i.e. where the State has abundant supplies and wants the licensees to lift all the stocks. The licensees will undertake no obligation to lift all those stocks even if the State suffers loss. This one sided obligation in modification of express terms of the contract, in the name of duty to act fairly, is what we are unable to appreciate..."

"...We are therefore of the opinion that in case of contracts freely entered into with the State, like the present ones, there is no room for invoking the doctrine of fairness and reasonableness against one party to the contract (State), for the purpose of altering or adding to the terms and conditions of the contract, merely because it happens to be the State. In such cases, the mutual rights and liabilities of the parties are governed by the terms of the contract (which may be statutory in some cases) and the laws relating to contracts. It must be remembered that these contracts are entered into pursuant to public auction, floating of tenders or by negotiations. There is no compulsion on anyone to enter into these contracts. It is voluntary on both sides. There can be no question of the State power being involved in such contract..."

8. In Hajee S V. M Mohamed Jamaludeen Bros & Co. Vs. Government of Tamil Nadu (1997) 3 SCC 466 the question before the Supreme Court was whether the Government can unilaterally rescind a contract if the terms thereof so provided. A single Judge of the Madras High Court had held that any such term in the agreement is null and void being repugnant to the essence of the contract. Reversing the decision of the Madras High Court, the Supreme Court held as follows: (page 471 of SCC)

"The result is that the appellant cannot bypass clause 7 of the instrument under which he obtained the right to collect "chank shells". The said clause adequately empowers the Government to unilaterally terminate the arrangement or revoke the grant without assigning any reason whatsoever. The said clause is valid and could be enforced by the Government at any time and hence the action of the Government in rescinding the contract was valid. The appellant is not therefore entitled to damages".

9. In Food Corporation of India and ors. Vs. Jagannath Dutta and ors. 1993 Supp (3) SCC 635 the Supreme Court expressly overruled the decision of the Calcutta High Court cited by the learned single Judge in this case. The Court held that the High Court was not justified in quashing the impugned notice especially when the terms and conditions of the contract permitted the termination of the agreement by either of the parties.

10. In our opinion, therefore, the learned single Judge has clearly committed an error in holding that clause 19.3 is unconscionable and opposed to public policy. Moreover, in the present case it is obvious that the contract in question was determinable. Admittedly under section 14(1)(c) of the Specific Relief Act, a contract which is in its nature determinable cannot be specifically enforced. Since in the present case the contract was determinable under clause 19.3 it is covered by the said provision of the Specific Relief Act. Under Section 14(e) of the Specific Relief Act no injunction can be granted to prevent breach of contract, performance of which can not be specifically enforced. Thus once it is found that the contract cannot be specifically enforced because it is covered by section 14(1)(c) of the Specific Relief Act, no injunction can be granted to prevent breach of the said contract. In the instant case the respondent under the guise of interim injunction wanted specific performance of the contract which is not permissible in view of the provisions of section 14(1)(c) read with section 41 of the Specific Relief Act.

11. In the result appeal is allowed. The order of the learned single Judge is set aside and injunction is vacated. Respondent is directed to pay cost of the appeal as also the petition to the appellant quantified at Rs.20,000/-.

12. No order on the Notice of Motion.

13. The parties and the authorities to act on the ordinary copy of this order duly authenticated by the personal secretary of this court.

Appeal allowed.