Quashing of clauses in a Government Contract in case of unequal bargain power [Gas Authority of India Limited v. Indian Petrochemicals Corp. Ltd]

Facts and Background: 

M/s Gas Authority of India Limited, ("GAIL") a Government of India undertaking, (incorporated on 16.08.1984), engaged primarily in the activity of providing services for the utilization of natural or associated gas. Indian Petrochemicals Corporation Ltd. ("IPCL") a PSU engaged in the manufacture of petrochemicals ceased to be a public undertaking w.e.f. June 2002, when 26% of its shares were sold to Reliance Petro investments Ltd. in line with the Government’s disinvestment policy.

1.     On 01.01.1999, the Ministry of Petroleum and Natural Gas issued a letter to GAIL for allocation of natural gas to IPCL subject to the condition that a gas supply contract is signed within 60 days of issue of the letter and that the transportation of gas to be done through pipelines laid by M/s IPCL at its own cost.

2.    Accordingly, a gas supply contract was entered between IPCL and GAIL on on 09.11.2001.

3.    IPCL had set up and installed a plant at Gandhar by investing approximately Rs. 4500 crores and laid down pipelines between Hazira and Gandhar at a cost of approximately Rs. 354 crores.

4.    GAIL levied loss of transportation charges in terms of Clauses 10.01 and 4.04 of contract and collected total amount of Rs.134 crores by making deductions in the bills.

This was been challenged by way of writ petition filed u/s 226 of Indian Constitution of India before Hon'ble Delhi High Court.

 The relevant two clauses are extracted below:

 “4.04 The BUYER, in addition to price of GAS mentioned in Article 10, shall pay to the SELLER Rs. 4,16,700/- (Rupees Four Lakh Sixteen Thousand and Seven Hundred) towards fortnightly service charges on account of deployment of manpower by the SELLER for terminal operation and routine maintenance along with applicable taxes / levies thereon, connected with delivery of Gas at the Point of Onward Delivery and receipt of Gas returned by the BUYER at the Point of Return Delivery. The above service charges is exclusive of any material requirements like tools, tackles etc. and also the spares / items / equipments to maintain the terminal in operable condition. Any interruptions in supply of gas to any consumers on account of such material requirement shall be at the risk and cost of the BUYER. The above Service charges shall be increased by 3 (Three) percent per annum on yearly rest basis with effect from 1st April following the scheduled date of commencement of gas supply mentioned under article 2.01 hereinabove. In addition to the above, the BUYER shall also pay to the SELLER transportation charges, as applicable from time to time along the HBJ pipeline system for the quantity of GAS utilized / shrinkage as per formula provided under Article 5.02 or for the difference in quantity of gas measured at the Point of Onward Delivery at Metering Station No. – I (after adjusting the quantity of Gas Bye Passed as mentioned under Article 4.03 hereinabove) and Point of Return Delivery at Metering Station No. – II, whichever is higher. The BUYER shall pay above charges to the SELLER in addition to invoice for supply of gas to be raised as per Article 11 hereinafter along with all applicable taxes / levies thereon. Provided that in case above charges are not paid by the BUYER within 3 (Three) working days of presentation of the invoice, the SELLER will present the invoice for the same to the Bank against Letter of Credit and draw the amount. The BUYER will make arrangements with the Bank in a manner that in such an eventuality the full L/C amount gets automatically reinstated.

10.01 Present price of 1000 (One Thousand) Standard Cubic meters of GAS w.e.f. 1.10.1997 is applicable as per Government Pricing Order No. L-12015/3/94-GP dated 18.9.1997 (Annexure IV) after which the SELLER shall have right to fix the price of GAS which may be as per directive, 3 instruction, order, etc. of the Government of India which is likely to be market related in accordance with current policy of liberalization of the Government of India and the BUYER shall pay to the SELLER such price of GAS. In addition to the above, the BUYER shall also pay to the SELLER transportation charges, as applicable from time to time along the HBJ pipeline system, for the quantity of GAS utilised/ shrinkage. Provided further, the price of GAS so fixed is exclusive of Royalty, Taxes, Duties, Service/Transportation charges and all other statutory levies as applicable at present or to be levied in future. By the Central or State Government of Municipality or any other local body or bodies payable on purchase of Gas from ONGCL/Other Producer(s) by the SELLER or on sale from SELLER to the BUYER or on return of the balance quantity of GAS after processing by the BUYER to the SELLER and these shall be borne by the BUYER over and above the aforesaid price.” (Emphasis supplied).

 The Legal Battle Unfolds:

IPCL challenged the validity of the aforesaid clauses stating that recovery of ‘loss of transportation charges’ by GAIL was arbitrary and unfair on the ground that (1) they were contrary to Government pricing order whereby the price off natural gas is fixed, (2) pipelines utilised for transporting gas were belonging to IPCL which was a mandate of the contract and the allocation letter, (3) GAIL occupied a monopolistic position exercising unequal bargaining power by implementing these clauses and that a very hefty investment is made in setting up the gas cracker plant.

The Single Bench allowed the writ petition and quashed the clauses, directing to refund the charges deducted on account of Loss of transportation charges. GAIL, being aggrieved by the said judgment, preferred a Letters Patent Appeal, which was dismissed affirming the Single Judge’s Order.

Challenge by GAIL before Hon’ble Supreme Court:

1.    Writ Petition is not maintainable as there was arbitration clause. The matter was purely contractual in nature, involving the enforceability and validity of the terms of the contract.

2.    No violation of Fundamental Rights.

3.    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. v. Union of India & Ors.

4.    The claims sought are barred by law of limitation as claim is bought 5 years after signing of contract. Reliance was placed on Lipton India Ltd. & Ors. v. Union of India & Ors to contend that communications between the parties does not extend the period of limitation.

5.    It was pointed out that there were no differences in the bargaining positions of the two organisations where one could be said to be more powerful. Both organisations were public sector enterprises at the relevant time.

6.    IPCL’s and the High Court’s reliance on Central Inland Water Transport Corporation Limited v. Brojonath Ganguly was misplaced as a principle applied to a service contract between the employer and the employee could not be imported to a commercial contract, and that too between two public sector enterprises.

7.    The learned Single Judge had become functus officio having pronounced the judgment dated 19.09.2006. Such a refund raised questions of unjust enrichment, as IPCL would have passed on the ‘loss of transportation charges’ paid by them to their own customers.

Issues:

1.    Whether the writ petition filed by IPCL challenging Clauses 4.04 and 10.01 of the contract was maintainable.

2.    Assuming such a petition was maintainable, whether the High Court could have invalidated the aforementioned clauses on the ground of unequal bargaining power and arbitrariness / unfairness.

3.    Whether monetary relief in the form of refund could have been granted?

Observations and Findings:

1.    Maintainability: Although the dispute arises from a commercial contract, we find that the writ petition challenging the clauses was maintainable. GAIL is a PSU and thus qualifies under the definition of ‘State’ as per Article 12 of the Constitution.

2.    Public Law Element: GAIL was enjoying a monopolistic position with respect to the supply of natural gas in the country. IPCL, having incurred a significant expense in setting up the appropriate infrastructure, had no choice but to enter into agreement with GAIL. Thus, there was a clear public element (Dispute that involves public interest) involved in the dealings between the parties. Reliance placed on ABL Enterprises and Joshi Technologies.

3.    Limitation: The claim is barred by limitation and thus the court while upholding the quashing of the clauses directed that refund should be restricted to a period of three years prior to the date of the filing of the writ petition on account of IPCL’s delay in approaching the court.

4.    Discriminatory and arbitrary: GAIL’s action in levying ‘loss of transportation charges’ was ex facie discriminatory. Insofar as IPCL was mandated to build its own pipeline in terms of the allocation letter and was not using GAIL’s HBJ pipeline at all, it would be extremely unfair that IPCL is charged for loss of transportation charges when it is mandated to lay down its own pipelines and not allowed to transport the gas through the HBJ pipeline. IPCL was 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. GAIL may have made a huge investment in constructing the HBJ pipeline, but at the same time IPCL had also made a huge investment in constructing its own pipelines.

Appeal was allowed partially to the extent of restrict the relief to period of three years insofar as refund is concerned from the date of filing of the writ petition, directing refund to be made within a period of two months from today, failing which it will carry interest at 8% per annum from the date it became due.

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