Companies Act Case Laws Central Inland Water Transport Corporation Vs Brojo Nath Ganguly

Companies Act Case Laws

Central Inland Water Transport Corporation Vs Brojo Nath Ganguly

PETITIONER:

CENTRAL INLAND WATER TRANSPORT CORPORATION LTD. &  ANR. ETC.

Vs.

RESPONDENT:
BROJO NATH GANGULY & ANR.

DATE OF JUDGMENT06/04/1986

BENCH:
MADON, D.P.
BENCH:
MADON, D.P.
SEN, A.P. (J)

CITATION:
1986 AIR 1571 1986 SCR (2) 278
1986 SCC (3) 156 1986 SCALE (1)799
CITATOR INFO :
R 1987 SC 111 (3,4)
F 1988 SC 286 (5)
E&D 1989 SC1977 (8)
R 1990 SC 808 (7)
E&F 1991 SC 101 (10,20,45,65,84,88,94,100,182,
RF 1992 SC 1 (133)
RF 1992 SC 76 (3)
ACT:
A. Constitution of India, 1950, Article 12 – “State”
whether a Government company as defined in section 617 of
the Indian Companies Act, 1956, is “the State” within the
meaning of Article 12 of the Constitution.
B. Words and phrases – ‘Unconscionable bargain”,
“distributive justice, reasonableness and fair play” Meaning
of – Constitution of India, Articles 14, 38 and 39 read with
sections 16, 19A of the Indian Contracts Act, 1872.
C. Contract of Employment – Whether an unconscionable
term in a contract of employment is void under section 23 of
the Indian Contract Act, 1872, as being opposed to public
policy and, when such a term is contained in a contract of
employment entered into with the Government company, is also
void as infringing Article 14 of the Constitution in case a
Government company is “the State” under Article 12 of the
Constitution.
D. The Central Inland Water Transport Corporation
Limited (A Government of India Undertaking) – service,
Discipline and Appeal Rules, 1979, Rule 9(1) Validity of
Whether the said provision is discriminatory and violates
Article 14 of the Constitution and also void under section
16 of the Contract Act as opposed to public policy under
section 23 ibid.

 

HEADNOTE:
The Central Inland Water Transport Corporation which
was incorporated on February 22, 1967 is a company owned by
the Government of India and the State Governments of West
Bengal and Assam. It is a Government company within the
meaning of section 617 of the Companies Act, 1956. The
Memorandum of Association and the Articles of Association of
the said
279
corporation indicate that the corporation is under the
complete control and management of the Central Government
though all the shares were and are owned by the Central
Government and the two State Governments. A company called
“Rivers Steam Navigation Company Limited” which was carrying
on very much the same business including the maintenance and
running of river service as the corporation is doing was
ordered to be wound up by an order dated May 5, 1967 passed
by the Calcutta High Court and upon payment to all the
creditors it came to be dissolved. By a scheme of
Arrangement approved by the High Court and entered into
between the said dissolved company and the corporation the
assets and certain liabilities of the said company was taken
over by the corporation. The Scheme of Arrangement provided
as follows:
(a) that the new company shall take as many of the
existing staff or labour as possible and as can be
reasonably taken over by the said transferee company subject
to any valid objection to any individual employee or
employees;
(b) that as to exactly how many can be employed it is
left to the said transferee company’s bonafide discretion;
(c) that those employees who cannot be taken over shall
be paid by the transferor company all moneys due to them
under the law and all legitimate and legal compensations
payable to them either under Industrial Disputes Act or
otherwise legally admissible and that such moneys shall be
provided by the Government of India to the existing
transferor company who will pay these dues.
Brojo Nath Ganguly the first respondent in Civil Appeal
No. 4412 of 1985 was at the date when the said scheme of
arrangement became effective, working in the said company
and his services were taken over by the Corporation and he
was appointed on September 8, 1967 as a Deputy Chief
Accounts Officer. Tarun Kanti Sengupta, the first respondent
in Civil Appeal No. 4413 of 1985 was also working in the
said company and his services were also taken over by the
Corporation and he was appointed on September 8, 1967 as
Chief Engineer on the ship “River Ganga” Letters of
appointment issued to both these respondents provided that
they would be subject to the service rules and regulations
including the conduct rules to be framed
280
by the Corporation. Service rules were framed by the
Corporation for the first time in 1970 and were replaced by
new rules in 1979 known as “The Central Inland Water
Transport Corporation Limited – Service, Discipline and
Appeal Rules, 1979”. The said rules applied to all employees
in the service of the Corporation in all units in West
Bengal, Bihar, Assam or in other State or Union Territory
except those employees who were covered by the Standing
orders under the Industrial Employment (Standing Orders)
Act, 1956 or those employees in respect of whom the Board of
Directors has issued separate orders. Rule 9 of the said
rules refers to termination of employment for acts other
than misdemeanor. Under Rule 10 an Employee is to retire on
completion of the age of 58 years though in exceptional
cases and in the interests of the Corporation an extension
may be granted with the prior approval of the Chairman-cum-
Managing Director and the Board of Directors. Rule 33
provides for suspension of an employee where a disciplinary
proceeding against him is contemplated or Dis pending or
where a case against him in respect of a criminal offence is
under investigation or trial. Rule 36 sets out the different
penalties which can be imposed on an employee for his
misconduct. Rule 38 prescribes the procedure for imposing a
major penalty and sets out in detail how a disciplinary
inquiry is to be held. Rule 39 provides for action to be
taken by the disciplinary authority on the report made by
the Inquiring Authority. Rule 40 prescribes the procedure to
be followed for imposing minor penalties. Rule 43 provides
for a special procedure to be followed in certain cases
which consists of dispensing with disciplinary inquiry
altogether. Rule 45 provides for an appeal against an order
imposing penalty to the appropriate authority specified in
the Schedule to the said Rules and Rule 45A provides for a
review.
The first respondent Mr. Ganguly in Civil Appeal No.
4412 of 1985 was promoted to the Manager (Finance), in
October 1980 and also acted as General Manager (Finance)
from November 1981 to March 1982. On February 16, 1983 a
confidential letter was sent to him by the General Manager
(Finance) who is the Third Appellant to reply within 24
hours to the allegation of negligence in the maintenance of
Provident Fund Accounts. Ganguly made a representation as
also gave a detailed reply to the said show cause notice.
Thereafter by a letter dated February 26, 1983 signed by the
Chairman-cum-Managing Director
281
of the Corporation, a notice under clause (i) of Rule 9 or
the Service Rules was given to Ganguly terminating his
services with the Corporation with immediate effect. Along
with the said letter a cheque for three months’ basic pay
and dearness allowance was enclosed.
The First Respondent in Civil Appeal No. 4413 of 1985
Sengupta was promoted to the post of General Manager (River
Services) with effect from January 1, 1980. His name was
enrolled by the bureau of public enterprises and he was
called for an interview for the post of Chairman-cum-
Director of the Corporation by the Public Enterprises
Selection Board. However, he could not appear before the
Selection Board as he received the letter calling him for
the interview after the date fixed in that behalf. The new
Chairman-cum-Managing Director who was selected at the said
interview and is alleged to have borne a grudge against Sen
Gupta for having completed against him for the said post, on
February 1, 1983, issued a charge-sheet against Sengupta
intimating to him that a disciplinary inquiry was proposed
to be held against him under the said Rules and calling upon
him to file his written statement of defence. By his letter
dated February 10, 1983, addressed to the Chairman-cum-
Managing Director, Sengupta denied the charges made against
him and asked for inspection of documents and copies of
statements of witnesses mentioned in the said charge-sheet.
By a letter dated February 26, 1983, signed by the Chairman-
cum-Managing Director notice was given to Sengupta under
clause (i) of Rule 9 of the said Rule, terminating his
service with the Corporation with immediate effect. Along
with the said letter a cheque for three month’s basic pay
and dearness allowance in lieu of notice was enclosed.
Both Ganguly and Sengupta filed writ petitions in the
Calcutta High Court under Article 226 of the Constitution
challenging the termination of their services as also the
validity of the said Rule 9(i). In both these writ petitions
rule nisi was issued and ex parte and ad interim order
staying the operation of the said notices of termination was
passed by a learned Single Judge of the High Court. The
appellants went in Letters Patent Appeal before a Division
Bench of the said High Court against the said ad interim
orders. On January 28, 1985 the Division Bench ordered in
both these Appeals that the
282
said writ petitions should stand transferred to and heard by
it along with the said appeals. The said appeals and writ
petitions were, thereupon, heard together and by a common
judgment delivered on August 9, 1985, the Division Bench
held that the Corporation was a “state” within the meaning
of Article 12 of the Constitution and that the said Rule
9(i) was ultra vires Article 14 of the Constitution.
Consequently the Division Bench struck down the said Rule
9(i) as being void. It also quashed the impugned orders of
termination dated February 26, 1983. hence the appeals by
special leave by the Court .
Arguments for the Appellants :-
1. A government company stands on a wholly different
footing from a statutory corporation for while a statutory
corporation is established by a statute, a Government
company is incorporated like any other company by obtaining
a certificate of incorporation under the Companies Act and,
therefore, a Government company cannot come within the scope
of the term “The State” as defined in Article 12 of the
Constitution.
2. A statutory corporation is usually established in
order to create a monopoly in the State in respect of a
particular activity. A Government company is, however, not
established for this purpose;
3. The Corporation does not have the monopoly of inland
water transport but is only a trading company as is shown by
the objects clause in its Memorandum of Association; and
4. Assuming a Government company is “the State” within
the meaning of Article 12, a contract of employment entered
into by it is like any other contract entered into between
two parties and a term in that contract cannot be struck
down under Article 14 of the Constitution on the ground that
it is arbitrary or unreasonable or unconscionable or one-
sided or unfair.
Arguments on behalf of the Respondents :
283
1. The definition of the expression “the State” given
in Article 12 is wide enough to include within its scope and
reach a Government company.
2. A State is entitled to carry on any activity, even a
trading activity, through any of its instrumentalities or
agencies, whether such instrumentality or agency be one of
the departments of the Government, a statutory corporation,
a statutory authority or a Government company incorporated
under the Companies Act.
3. Merely because a Government company carries on a
trading activity or is authorised to carry on a trading
activity does not mean that it is excluded from the
definition of the expression “the State” contained in
Article 12.
4. A Government company being “the State” within the
meaning of Article 12 is bound to act fairly and reasonably
and if it does not do so its action can be struck down under
Article 14 as being arbitrary.
5. A contract of employment stands on a different
footing from other contracts. A term in a contract of
employment entered into by a private employer which is
unfair, unreasonable and unconscionable is bad in law. Such
a term in a contract of employment entered into by the State
is, therefore, also bad in law and can be struck down under
Article 14.
Dismissing the appeals, the Court,
^
HELD : 1.1 The word “State” has different meanings
depending upon the context in which it is used. The
expression “The State” when used in Parts III & IV of the
Constitution is not confined to only the federating States
or the Union of India or even to both. By the express terms
of Article 12, the expression “the State” includes : (i) the
Government of India; (ii) Parliament of India; (iii) the
Government of each of the States which constitute the Union
of India; (iv) the Legislature of each of the States which
constitute the Union of India; (v) all local authorities
within the territory of India; (vi) all local authorities
under the control of the Government of India; (vii) all
other authorities within the
284
territory of India; and (viii) all other authorities under
the control of the Government of India. [306 D; 309 A-B]
1.2 Where an interpretation clause defines a word to
mean a particular thing, the definition is explanatory and
prima facie restrictive and whenever an interpretation
clause defines a term to include something the definition is
extensive. While an explanatory and restrictive definition
confines the meaning of the word defined to what is stated
in the interpretation clause, so that wherever the word
defined is used in the particular statute in which that
interpretation clause occurs, it will bear only that meaning
unless where, as is usually provided, the subject or context
otherwise requires an extensive definition expands or
extends the meaning of the word defined to include within it
what would otherwise not have been comprehended in it when
the word defined is used in its ordinary sense. Article 12
uses the word “includes”, it thus extends the meaning of the
expression “the State” so as to include within it also what
otherwise may not have been comprehended by that expression
when used in its ordinary legal sense. [310 F-H; 311 A-B]
1.3 The definition of the expression “the State” in
Article 12, is however, for the purposes of Parts III and IV
of the Constitution, whose contents cleary show that the
expression “the State” in Article 12 as also in Article 36
is not confined to its ordinary and constitutional sense as
extended by the inclusive portion of Article 12 but is used
in the concept of the State in relation to the Fundamental
Rights guaranteed by Part III of the Constitution and the
Directive Principles of State Policy contained in Part IV of
the Constitution which principles are declared by Article 37
to be fundamental to the governance of the country and
enjoins upon the State to apply making laws. [311 C-E]
1.4 Article 298 of the Constitution expands the
executive power of the Union of India and of each of the
States which collectively constitute the Union to carry on
any trade or business. By extending the executive power of
the Union and of each of the States to the carrying on of
any trade or business Article 298 does not, however, convert
either the Union of India or any of the States which
collectively form the Union into a Merchant buying and
selling
285
goods or carrying on either trading or business activity,
for A the executive power of the Union and of the States
whether in the field of trade or business or in any other
field, is always subject to constitutional limitations and
particularly the provisions relating to Fundamental Rights
in Part III of the Constitution and is exercisable in
accordance with and for the furtherance of the Directive
Principles of State Policy prescribed by Part IV of the
Constitution. [322 E-G]
The State is an abstract entity and it can, therefore
only act through its agencies or instrumentalities, whether
such agency or instrumentality be human or juristic. The
trading and business activities of the State constitute
“public enterprise”. The structural forms in which the
Government operates in the field of public enterprise are
many and varied. These may consist of Government
departments, statutory bodies, statutory corporations,
Government companies etc. The immunities and privileges
possessed by bodies so set up by the Government in India
cannot, however, be the same as those possessed by similar
bodies established in the private sector because the setting
up of such bodies is referable to the executive power of the
Government under Article 298 to carry on any trade or
business. [322 H; 323 A-B; 324 C-D]
Sukhdev Singh & Ors. v. Bhagatram Sardar Singh
Baghuvanshi & Anr.. [1975] 3 S.C.R. 619 referred to.
1.5 The whole process of judicial interpretation lies
in extending or applying by analogy the ratio decidendi of
an earlier case to a subsequent case which differs it in
certain essentials, so as to make the principle laid down in
the earlier case fit in with the new set of circumstances.
The sequitur of the above assumption would be that the Court
should tell the suitor that there is no precedent governing
his case and, therefore, it cannot give him any relief. This
would be to do gross injustice. Had this not been done, the
law would have never advanced. [348 D-F]
1.6 Authorities constituted under and corporations
established by statutes have been held to be
instrumentalities and agencies of the Government in a long
catena of decisions of the Supreme Court. The observations
in several of these decisions are general in nature and take
in their sweep all
286
instrumentalities and agencies of the State, whatever be the
form which such instrumentality or agency may have assumed.
If there is an instrumentality or agency of the State which
has assumed the garb of a Government company as defined in
section 617 of the Companies Act, it does not follow that it
thereby ceases to be an instrumentality or agency of the
State. For the purposes of Article 12 one must necessarily
see through the corporate veil to ascertain whether behind
that veil is the face of an instrumentality or agency of the
State. The corporation squarely falls within these
observations and it also satisfies the various tests which
have been laid down. Merely because it has so far not the
monopoly of inland water transportation is not sufficient to
divest it of its character of an instrumentality or agency
of the State. It is nothing but the Government operating
behind a corporate veil, carrying out a governmental
activity and governmental functions of vital public
importance. There can thus be no doubt that the corporation
is “the State” within the meaning of Article 12 of the
Constitution.[349 A-F]
1.7 The Central Inland Water Transport Corporation is
not only a Government company as defined in section 617 of
the Companies Act 1956, but is wholly owned by the three
Governments – Central Government and the Governments of West
Bengal and Assam jointly. It is financed entirely by these
three Governments and is completely under the control of the
Central Government, and is managed by the Chairman and Board
of Directors appointed by the Central Government and
removable by it. In every respect it is thus a veil behind
which the Central Government operates through the
instrumentality of a Government company. The activities
carried on by the Corporation are of vital national
importance. There can thus be no doubt that the corporation
is a Government undertaking in the public sector. The
corporation itself has considered that it is a Government of
India Undertaking. The complete heading of the impugned Rule
is “The Central Inland Water Transport Corporation Ltd. (A
Government of India Undertaking) Service, Discipline and
Appeal Rules, 1979.” In the face of so much evidence it is
ridiculous to describe the corporation as a trading company.
The activities of the corporation are of great importance to
public interest, concern and welfare and are activities of
the nature carried on by a modern State and particularly a
modern welfare State. [343 E-G; 346 E-G]
287
Sukhdev Singh & Ors. v. Bhagat Ram Sardar Singh
Raghuvanchi & Anr., [1975] 3 S.C.R. 619; Ramana Dayaram
Shetty v. The International Airport Authority of India &
Anr., [1979] 3 S.C.R. 1014; Managing Director, Uttar Pradesh
Ware Housing Corporation & Anr. v. Vinay Narain Vajpayee,
[1980] 2 S.C.R. 773; Ajay Hasia etc. v. Khalid Mujib
Sehravardi & Ors. etc., [1981] 2 S.C.R. 79; Prakash Rekhi v.
Union of India & Anr., [1981] 2 S.C.R. 111; B.S. Minhas v.
Indian Statistical Institute & Ors [1983] 4 S.C.C. 582;
Manmohan Singh Jaitla v. Commissioner, Union Territory of
Chandigarh & Ors., [1984] Supp. S.C.C. 540; Workmen of
Hindustan Steel Ltd. & Anr. v. Hiodustan Steel Ltd. & Ors.,
[1984] Supp. S.C.C. 554, 560; – P.K. Ramachandra Iyer & Ors.
v. Union of India & Ors., [1984] 2 S.C.R. 141; A.L. Kalra v.
Project and Equipment Corporation of India Ltd., [1984] 3
S.C.R. 316 and West Bengal State Electricity Board & Ors. v.
Desh Bandhu Ghosh & Ors., [1985] 3 S.C.C. 116 followed.
Praga Tools Corporation v. C.A. Imanual & Ors., [1969]
3 S.C.R. 773; State of Bihar v. Union of India & Anr.,
[1970] 2 S.C.R. 522; S.L. Agarwal v. General Manager,
Hindustan Steels Ltd., [1970] 3 S.C.R. 363; Sabhajit Tewary
v. Union of India & Ors., [1975] 3 S.C.R. 616; and S.C.
Dhanoa v. Municipal Corporation Delhi & Ors., [1981] 3
S.C.C. 431 distinguished.
Rai Sahib Ram Jewaya Kapur & Ors. v. State of Punjab,
[1955] 2 S.C.R. 225; Rajasthan State Electricity Board,
Jaipur v. Mohan Lal & Ors., [1967] 3 S.C.R. 377; Gurugobinda
Basu v. Sankari Prasad Ghosal & Ors., [1964] 4 S.C.R. 311,
315; Rylands v. Fletcher, [1868 L.R. 3 H.L. 330 and Donoghue
v. Stevenson, [1932] A.C. 562 referred to.
2.1 The word “unconscionable” is defined when used with
reference to actions as “showing no regard for conscience;
irreconcilable with what is right or reasonable”. An
unconscionable bargain would, therefore, be one which is
irreconcilable with what is right or reasonable. If a
contract or term thereof is unconscionable at the time the
contract is made, the Court may refuse to enforce the
contract. An unconscionable bargain could be brought about
by economic duress even between parties who may not in
economic terms be situate differently. [355 A; 360 A-B]
288
Pickering v. IIfracombe, [1868] L.R. 3 C.P. 235; Occidental
Worldwide Investment Corpn. v. Skibs A/S Avanti, [1976] 1
Llyod’s Rep. 293; North Ocean Shipping Co. Ltd. v. Hynddai
Construction Co. Ltd., [1979] Q.B. 705; Pao On v. Lau Yin
Long, [1980] A.C. 614; and Universe Tankships of Manrovia v.
International Transport workers Federation, [1981] 1 C.R.
129 reversed in [1981] 2 W.L.R. 803 referred to.
2.2 According to the doctrine of distributive Justice,
distributive fairness and justice in the possession of
wealth and property can be achieved not only by taxation but
also by regulatory control of private and contractual
transactions even though this might involve some sacrifice
of individual liberty. [360 C-D]
When our Constitution states that it is being enacted
to give to all the citizens of India “Justice, Social,
economic and political”, when clause (I) of Article 38 of
the Constitution directs the State to strive to promote the
welfare of the people by securing and protecting as
effectively as it may a social order in which social,
economic and political justice shall inform all the
institutions of the national life, when clause (2) of
Article 38 directs the State in particular, to minimise the
inequalities in income, not only amongst individuals but
also amongst group of people residing in different areas or
engaged in different vocations and when Article 39 directs
the State that it shall, in particular, direct its policy
towards securing that the citizens men and women equally,
have the right to an adequate means of livelihood and that
the operation of the economic system does not result in the
concentration of wealth and reasons of production to the
common detriment and that there should equal pay for equal
work for both men and women, it is the doctrine of
distributive justice which is speaking through the words of
the Constitution. [361 C-F]
Lingappa Pochanna Appelwar v. State of Maharashtra &
Anr., [1985] 1 S.C.C. 479 referred to.
2.3 Another theory which has made its emergence in
recent years in the sphere of the law of contracts in the
test of reasonableness or fairness of a clause in a contract
where there is inequality of bargaining power. In such cases
it is
289
recognised that the freedom of contract is absent. In such A
cases, judicial review is permitted and consequential relief
allowed. [361 F-G]
Gillespie Brothers & Co. Ltd. v. Roy Bowles Transport
Ltd., [1973] 1 Q.B. 400; Lloyds Bank Ltd. v. Bundy, [1974] 3
All. E.R. 757; A. Schroeder music Publishing Co. Ltd. v.
Macaulay (Formerely Instone), [1974] 1 W.L.R. 1308; and
Levison & Anr. v. Patent Steam Carpet Co. Ltd., [1978] 1
Q.B. 69 referred to.
2.4 Article 14 of the Constitution guarantees to all
persons equality before the law and the equal protection of
the laws. This principle is that the Courts will not enforce
and will, when called upon to do so, strike down an unfair
and unreasonable contract, or an unfair and unreasonable
clause in a contract entered into between parties who are
not equal in bargaining power. The above principle will
apply where the inequality of bargaining power is the result
of the great disparity in the economic strength of the
contracting parties. It will apply where the inequality is
the result of circumstances, whether of the creating of the
parties or not. It will apply to situations in which the
weaker party is in a position in which he can obtain goods
or services or means of livelihood only upon the terms
imposed by the stronger party or go without them. It will
also apply where a man has no choice, or rather no
meaningful choice, but to give his assent to a contract or
to sign on the dotted line in a prescribed or standard form
or to accept a set of rules as part of the contract,
however, unfair unreasonable or unconsionable a clause in
that contract or form or rules may be. This principle will
not apply when the bargaining power of the contracting
parties is equal or almost equal. mis principle may not
apply where both parties are businessmen and the contract is
a commercial transaction. In today’s complex world of giant
corporations with their vast infrastructural organisations
and with the State through its instrumentalities and
agencies entering into almost every branch of industry and
commerce, there can be myriad situations which result in
unfair and unreasonable bargains between parties possessing
wholly disproportionate and unequal bargaining power. The
Court must judge each case on its own facts and
circumstances when called upon to do so by a party under
section 31(1) of H the Specific Relief Act, 1963. [370 A-G]
290
2.5 In the vast majority of cases, however, such
contracts with unconscionable term are entered into by the
weaker party under pressure of circumstances, generally
economic, which results in inequality of bargaining power.
Such contracts will not fall within the four corners of the
definition of “undue influence” as defined by section 16(1)
of the Indian Contract Act. The majority of such contracts
are in a standard or prescribed form or consist of a set of
rules. They are not contracts between individuals containing
terms meant for those individuals alone. Contracts in
prescribed or standard forms or which embody a set of rules
as part of the contract are entered into by the party with
superior bargaining power with a large number of persons who
have far less bargaining power or no bargaining power at
all. Such contracts which affect a large number of persons
or a group or groups of persons, if they are unconscionable,
unfair and unreasonable are injurious to the public
interest. To say such a contract is only voidable would be
to compel each person with whom the party with superior
bargaining power had contracted to go to Court to have the
contract adjudged voidable. This would only result in
multiplicity of litigation which no Court should encourage
and also would not be in public interest. Such a contract or
such a clause in a contract ought, therefore, to be adjudged
void under section 23 of the Indian Contract Act, as opposed
to public policy. [371 C-H]
2.6 The Indian Contract Act does not define the
expression “public policy” or “opposed to public policy”.
From the very nature of things, such expressions are
incapable of precise definition. Public policy, however, is
not the policy of a particular government. It connotes some
matter which concerns the public good and the public
interest. The concept of what is for the public good or in
the public interest or what would be injurious or harmful to
the public good or the public interest has varied from time
to time. As new concepts take the place of old, transactions
which were once considered against public policy are now
being upheld by the courts and similarly where there has
been a well-recognized head of public policy, the courts
have not shirked from extending it to new transactions and
changed circumstances and have at times not even flinched
from inventing a new head of public policy. The principles
governing public policy must be and are
291
capable on proper occasion, of expansion or modification.
Practices which were considered perfectly normal at one time
have today become abnoxious and oppressive to public
conscience. If there is no head of public policy which
covers a case, then the court must in consonance with public
conscience and in keeping with public good and public
interest declares such practice to be opposed to public
policy. Above all, in deciding any case which may not be
covered by authority Indian Courts have before them the
beacon light of the Preamble to the Constitution. Lacking
precedent, the Court can always be guided by that light and
the principles underlying the Fundamental Rights and the
Directive Principles enshrined in our Constitution. [372 A-
D; 373 C-E]
The normal rule of Common Law has been that a party who
seeks to enforce an agreement which is opposed to public
policy will be non-suited. The types of contracts to which
the principle formulated in this case applies are not
contracts which are tainted with illegality but are
contracts which contain terms which are so unfair and
unreasonable that they shock the conscience of the Court.
They are opposed to public policy and required to be
adjudged void. [373 F; 374 D-E]
A. Schroeder Music Publishing Co. Ltd. v. Macaulay
(Formerely Instone), [1974] 1 W.L.R. 1308; Janson v.
Driefontein Consolidated Mines Limited, [1902] A.C. 484,
500; Richardson v. Mellish [1824] 2 Bing. 229, 252; s.c. 130
E.R. 294, 303 and [1824-34] All E.R. Reprint 258, 266;
Enderby Town Football Club Ltd. v. Football Association
Ltd., [1971] Ch. 591, 606; and Kedar Nath Metani & Ors. v.
Prahlad Bai & Ors., [1960] 1 S.C.R. 861 referred to.
3.1 Rule 9(i) of the Central Inland Water Transport
Corporation Ltd. (A Government of India Undertaking)
Service, Discipline and Appeal Rules, 1979 confers upon the
corporation the power to terminate the service of a
permanent employee by giving him three months’ notice in
writing or in lieu thereof to pay him the equivalent of
three months’ basic v pay and dearness allowance. A clause
such as Rule 9(1) in a contract of employment affecting
large sections of the public is harmful and injurious to the
public interest for it tends to create a sense of insecurity
in the minds of those to whom it applies and consequently it
is against the public good.
292
Such a clause, which apply be described as “the Henry VIII
clause”, therefore, is opposed to public policy and being
opposed to public policy it is void under section 23 of the
Indian Contract Act. It confers absolute and arbitrary power
upon the corporation. It does not even state who on behalf
of the Corporation is to exercise that power. There are no
guidelines whatever laid down to indicate in what
circumstances the power given by rule 9(i) is to be
exercised by the Corporation. No opportunity whatever of an
hearing is at all to be afforded to the permanent employee
whose services is being terminated in the exercise of this
power. Even where the corporation could proceed under Rule
36 and dismiss an employee on the ground of misconduct after
holding a regular disciplinary inquiry, it is free to resort
instead to Rule 9(i) in order to avoid the hassle of an
inquiry. [375 H; 376 A-B; G-H; 377 E-F]
West Bengal State Electricity Board & Ors. v. Desh
Bandhu Ghosh & Ors., [1985] 3 S.C.C. 116; Union of India
etc. v. Thusiram Patel etc., [1985] 3 S.C.C. 398 and
Swadeshi Cotton Mills V. Union of India, [1981] 2 S.C.R.
533, 591.
3.2 The power conferred by Rule 9(i) is not only
arbitrary but is also discriminatory, for it enables the
corporation to discriminate between employee and employee.
It can pick up one employee and apply to him clause (i) of
Rule 9. It can pick up another employee and apply to him
clause (ii) of Rule 9. It can pick up yet another employee
and apply to him sub-clause (iv) of clause (b) of Rule 36
read with Rule 38 and to yet another employee it can apply
Rule 37. All this the corporation can do when the same
circumstances exist as would justify the corporation in
holding under Rule 38 a regular disciplinary inquiry into
the alleged misconduct of the employee. In the instant case,
both the contesting Respondents had, in fact been asked to
submit their explanation to the charges made against them.
Sen Gupta had been informed that a disciplinary inquiry was
proposed to be held in his case. The charges made against
both the Respondents were such that a disciplinary inquiry
could easily have been held. It was, however, not held but
instead resort was had to rule 9(i). [378 C-E]
Employees cannot be equated with goods which can be
bought and sold. It is equally not possible to equate a
contract of employment with a mercantile transaction between
293
two businessmen and much less to do so when the contract of
employment is between a powerful employer and a weak
employee. [379 E-F]
3.2 It is true that there is mutuality in clause 9(i)
the same mutuality as in a contract between the lion and the
lamb that both will be free to roam about in the jungle and
each other will be at liberty to devour the other. When one
considers the unequal position of the corporation and its
employees, the argument of mutuality becomes laughable. [380
A-B]
3.3 Rule 9(i) is both arbitrary and unreasonable and it
also wholly ingonre and sets aside the audi alteram partem
rule, it, therefore, violates Article 14 of the Constitution
to the extent that it confers upon the corporation the right
to terminate the employment of a permanent employee by
giving him three months’ notice in writing or by paying him
the equivalent of three months’ basic pay and dearness
allowance in lieu of such notice. [381 D; 387 B-C]
As the corporation is “the State” within the meaning of
Article 12, it was amenable to the writ jurisdiction of the
High Court under Article 226. It is now well-established
that an instrumentality or agency of the State being “the
State” under Article 12 of the Constitution is subject to
the Constitutional limitations, and its actions are State
actions and must be judged in the light of the Fundamental
Rights guaranteed by Part III of the Constitution. The
actions of an instrumentality or agency of the State must,
therefore, be in conformity with Article 14 of the
Constitution. [380 D-F]
Sukhdev singh & Ors. v. Bhagatram Sardar Singh
Raghuvanshi & Anr., [1975] 3 S.C.R. 619; Ramana Dayaram
Shetty v. The International Airport Authority of India &
Ors., [1979 3 S.C.R. 1014; Ajay Hasia etc. v. Khalid Mujib
Sehravardi & Ors. etc., [1981] 2 S.C.R. 79; and Union of
India v. Thulsiram Patel etc., [1985] 3 S.C.C. 398 referred
to.
Radhakrishna Agarwal & Ors. v. State of Bihar & Ors.,
[1977] 3 S.C.R. 249 distinguished.
OBSERVATION
294
the purposes of both Part III and Part IV of the
Constitution, State actions, including actions of the
instrumentalities and agencies of the State, must not only
be in conformity with the Fundamental Rights guaranteed by
Part III but must also be in accordance with the Directive
Principles of State Policy prescribed by Part IV. Clause (a)
of Article 39 provides that the State shall, in particular,
direct its policy towards “securing that the citizens, men
and women, equally have the right to adequate means of
livelihood.” Article 41 requires the State, within the
limits of its economic capacity and development, to “make
effective provision for securing the right to work.” An
adequate means of livelihood cannot be secured to the
citizens by taking away without any reason the means of
livelihood. The mode of making “effective provision for
securing the right to work” cannot be by giving employment
to a person and then without any reason throwing him out of
employment. The action of an instrumentality or agency of
the State, if it frames a service rule such as clause (a) of
Rule 9 or a rule analogous thereto would, therefore, not
only be violative of Article 14 but would also be contrary
to the Directive Principles of State Policy contained in
clause (a) of Article 39 and in Article 41. [385 F-H; 386 A-
B]
(2) Rule 9 also confers upon a permanent employee the
right to resign from the service of the Corporation. By
entering into a contract of employment a person does not
sign a bond of slavery and a permanent employee cannot be
deprived of his right to resign. A resignation by an
employee, would, however, normally require to be accepted by
the employer in order to be effective. It can be that in
certain circumstances an employer would be justified in
refusing to accept the employee’s resignation as, for
instance, when an employee wants to leave in the middle of a
work which is urgent or important and for the completion of
which his presence and participation are necessary. An
employer can also refuse to accept the resignation when
there is a disciplinary inquiry pending against the
employee. In such a case, to permit an employee to resign
would be to allow him to go away from the service and escape
the consequences of an adverse finding against him in such
an inquity. There can also be other grounds on which an
employer would be justified in not accepting the resignation
of an employee. The Corporation ought to make suitable
provisions in that behalf in the said Rules. [386 D-G]
295

 

JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 4412 &
4413 of 1985.
From the Judgment and Order dated 9.8.1985 of the
Calcutta High Court in F.M.A.T. No. 1604 and 649 of 1983.
Shanti Bhushan, Subrata Ray and A.K. Sil for the
Appellants.
Dr. Y.S. Chitale, H.K. Puri, G.A. Shah, Mrs. Anil
Katiyal, C.V. Subba Rao and R.N. Poddar for the Respondents.
Mridul Ray and K. Swami for the Interveners.
The Judgment of the Court was delivered by
MADON, J. These Appeals by Special Leave granted by
this Court raise two questions of considerable importance to
Government companies and their employees including their
officers. These questions are
1) Whether a Government company as defined in
section 617 of the Companies Act, 1956, is “the
State” within the meaning of Article 12 of the
Constitution?
2) Whether an unconscionable term in a contract of
employment is void under section 23 of the Indian
Contract Act, 1872, as being opposed to public
policy and, when such a term is contained in a
contract of employment entered into with a
Government company, is also void as infringing
Article 14 of the Constitution in case a
Government company is “the State” under Article 12
of the Constitution?
Although the record of these Appeals is voluminous, the
salient facts lie within a narrow compass. The First
Appellant in both these Appeals, namely, the Central Inland
Water Transport Corporation Limited (hereinafter referred to
in short as “the Corporation”), was incorporated on February
22, 1967. The majority of the shares of the Corporation were
at all times and still are held by the Union of India which
is
296
the Second Respondent in these Appeals, and the remaining
shares were and are held by the State of West Bengal and the
State of Assam. Section 617 of the Companies Act, 1959 (Act
No.l of 1956), provides as follows :
“617. Definition of ‘Government Company’.-
For the purposes of this Act Government company
means any company in which not less than fifty-one
per cent of the paid-up share capital is held by
the Central Government, or by any State Government
or Governments, or partly by the Central
Government and partly by one or more State
Governments and includes a company which is a
subsidiary of a Government company as thus
defined.”
As all the shares of the Corporation are held by different
Governments, namely, the Government of India and the
Governments of West Bengal and Assam, the Corporation is not
only a Government company as defined by the said section 617
but is a company wholly owned by the Central Government and
two State Governments.
Clause III(A) of the Memorandum of Association of the
Corporation lists the main objects of the Corporation and
clause III(B) of the Memorandum of Association lists the
objects incidental or ancillary to the main objects. It is
unnecessary to reproduce all these objects for according to
the Petitions filed by the Corporation for obtaining Special
Leave in these Appeals, it is currently engaged in carrying
out the following activities, namely,
(i) maintaining and running river service with
ancillary function of maintenance and operation of
river-site jetty and terminal;
(ii) constructing vessels of various sizes and
descriptions;
(iii) repairing vessels of various sizes and
descriptions; and
(iv) undertaking general engineering activities.
297
Article 4 of the Articles of Association of the
Corporation provides that the Corporation is a private
company within the meaning of clause (iii) of sub-section
(1) of section 3 of the Companies Act and that no invitation
is to be issued to the public to subscribe for any shares
in, or debentures or debenture stock of, the Corporation.
Article 51 of the Articles of Association confers upon the
President of India the power to issue from time to time such
directions or instructions as he may consider necessary in
regard to the affairs or the conduct of the business of the
Corporation or of the Directors thereof. The said Article
also confers upon the President the power to issue such
directions or instructions to the Corporation as to the
exercise and performance of its functions in matters
involving national security or public interest. Under the
said Article, the Directors of the Corporation are bound to
comply with and give immediate effect to such directions and
instructions. Under Article 51A, the President has the power
to call for such returns, accounts and other information
with respect to properties and activities of the Corporation
as might be required from time to time. Under Article 40,
subject to the provisions of the Companies Act and the
directions and instructions issued from time to time by the
President under Article 51, the business of the Corporation
is to be managed by the Board of Directors. Under Article
14(a), subject to the provisions of section 252 of the
Companies Act, the President is to determine in writing from
time to time the number of Directors of the Corporation
which, however is not to be less than two or more than
twelve and under Article 14(b), at every annual general
meeting of the Corporation, every Director appointed by the
President is to retire but is eligible for re-appointment.
Under Article 15(a), the President has the power at any time
and from time to time to appoint any person as an Additional
Director. Under Article 16, the President has the power to
remove any Director appointed by him from office at any time
in his absolute discretion. Under Article 17, the vacancy in
the office of a Director appointed by the President caused
by retirement, removal, resignation, death or otherwise, is
to be filled by the President by fresh appointment. Article
18 provides that the Directors are not required to hold any
share qualification. Under Article 37, the President may
from time to time appoint one of the Directors to the office
of the Chairman of the Board of
298
Directors or to the office of the Managing Director or to
both these offices for such time and at such remuneration as
the President may think fit and the President may also from
time to time remove the person or persons so appointed from
service and appoint another or others in his or their place
or places. Under Article 41, the Chairman of the Board has
the power, on his own motion, and is bound, when requested
by the Managing Director in writing, to reserve for the
consideration of the President the matters relating to the
working of the Corporation set out in the said Article.
Article 42 lists the matters in respect of which prior
approval of the President is required to be obtained. Under
Article 47, the auditor or auditors of the Corporation are
to be appointed or re-appointed by the Central Government on
the advice of the Comptroller and Auditor-General of India.
The said Article also confers power upon the Comptroller and
Auditor-General of India to direct the manner in which the
accounts of the corporation are to be audited and to give
the auditors instructions in regard to any matter relating
to the performance of their function. Under the said
Article, he has also the power to conduct a supplementary or
test audit of the accounts of the Corporation by such person
or persons as he may authorize in that behalf and for the
purposes of such audit to require such information or
additional information to be furnished to such person or
persons on such matters by such person or persons as the
Comptroller and Auditor-General may, by general or special
order, direct.
Under clause (V) of the Memorandum of Association, the
authorized share capital was rupees four crores. It was
raised to rupees ten crores by a special resolution passed
at the Annual General Meeting of the Corporation held on
December 30, 1972, and further raised to rupees twenty
crores by a special resolution passed at the Annual General
Meeting held on November 5, 1979.
The above facts and the provisions aforementioned of
the Memorandum of Association and the Articles of
Association clearly show that not only is the Corporation a
Government company of which all the shares were and are
owned by the Central Government and two State Governments
but is a Government company which is under the complete
control and management of the Central Government.
299
A company called the “Rivers Steam Navigation Company
Limited” was carrying on very much the same business
including the maintenance and running of river service as
the Corporation is doing. A Scheme of Arrangement was
entered into between the said company and the Corporation.
The Calcutta High Court by its order dated May 5, 1967,
approved the said Scheme of Arrangement and order the
closure of the said Company and further directed that upon
payment to all the creditors of the said Company, the said
Company would stand dissolved without winding up by an order
to be obtained from the High Court and accordingly, upon
payment to all the creditors, the said Company was ordered
to be dissolved. The said Scheme of Arrangement provided
that the assets and certain liabilities of the said Company
would be taken over by the Corporation. The said Scheme of
Arrangement as approved by the High Court also provided as
follows :
“a) That the new Company shall take as many of the
existing staff or labour as possible and as can be
reasonably taken over by the said transferee
Company subject to any valid objection to any
individual employee or employees.
b) That as to exactly how many can be employed it
is left to the said transferee Company’s bona fide
discretion.
c) That those employees who cannot be taken over
shall be paid by the transferor Company all moneys
due to them under the law and all legitimate and
legal compensations payable to them either under
Industrial Disputes Act or otherwise legally
admissible and that such moneys shall be provided
by the Government of India to the existing
transferor Company who will pay these dues.”
The First Respondent in Civil Appeal No. 4412 of 1985,
Brojo Nath Ganguly, was, at the date when the said Scheme of
Arrangement became effective, working in the said Company
and his services were taken over by the Corporation and he
was appointed on September 8, 1967, as a Deputy Chief
Accounts Officer. The First Respondent in Civil Appeal No.
4413 of 1985, Tarun Kanti Sengupta, was also working in the
said
300
Company and his services were also taken over by the
Corporation and he was appointed on September 8, 1967, as
Chief Engineer on the ship “River Ganga”. It is unnecessary
to refer at this stage to the terms and conditions of the
letters of appointment issued to these two Respondents as
they have been subsequently superseded by service rules
framed by the Corporation except to state that under the
said letters of appointment the age of superannuation was
fifty-five years unless the Corporation agreed to retain
them beyond this period. The said letters of appointment
also provided that these Respondents would be subject to the
service rules and regulations including the conduct rules.
Service rules were framed by the Corporation for the first
time in 1970 and were replaced by new rules in 1979.
We are concerned in these Appeals with the “Central
Inland Water Transport Corporation Ltd. Service Discipline
and Appeal Rules” of 1979 framed by the Corporation. These
rules will hereinafter be referred to in short as “the said
Rules”. The said Rules apply to all employees in the service
of the Corporation in all units in West Bengal, Bihar, Assam
or in other State or Union Territory except those employees
who are covered by the Standing Orders under the Industrial
Employment (Standing Orders) Act, 1946, or those employees
in respect of whom the Board of Directors has issued
separate orders. Rule 9 of the said Rules deals with
termination of employment for acts other than misdemeanour.
The relevant provisions of the said Rule 9 relating to
permanent employees are as follows :
“9. TERMINATION OF EMPLOYMENT FOR ACTS OTHER THAN
MISDEMEANOUR. –
(i) The employment of a permanent employee shall
be subject to termination on three months’ notice
on either side. The notice shall be in writing on
either side. The Company may pay the equivalent of
three months’ basic pay and dearness allowance, if
any, in lieu of notice or may deduct a like amount
when the employee has failed to give due notice.
(ii) The services of a permanent employee can be
terminated on the grounds of “Services no longer 1
required in the interest of the Company” without
301
assigning any reason. A permanent employee whose
services are terminated under this clause shall be
paid 15 days’ basic pay and dearness allowance for
each completed year of continuous service in the
Company as compensation. In addition he will be
entitled to encashment of leave at his credit.” B
Under Rule 10, an employee is to retire on completion of the
age of fifty-eight years though in exceptional cases and in
the interest of the Corporation, an extension may be granted
with the prior approval of the Chairman-cum-Managing
Director and the Board of Directors. Rule 11 provides as
follows :
“11. RESIGNATION. –
Employees who wish to leave the Company’s services
must give the Company the same notice as the
Company is required to give them under Rule 9.”
Rule 33 provides for suspension of an employee where a
disciplinary proceeding against him is contemplated or is
pending or where a case against him in respect of any
criminal offence is under investigation or trial. Rule 34
provides for payment of subsistence allowance during the
period of suspension. Rule 36 sets out the different
penalties which can be imposed on an employee for his
misconduct. These penalties are divided into minor and major
penalties. Rule 37 is as follows :
“37. ACTS OF MISCONDUCT.-
Without prejudice to the general meaning of the
term ‘misconduct’ the Company shall have the right
to terminate the services of any employee at any
time without any notice if the employee is found
guilty of any insubordination, intemperance or
other misconduct or of any breach of any rules
pertaining to service or conduct or non-
performance of his duties.”
Rule 38 prescribes the procedure for imposing a major
penalty and sets out in detail how a disciplinary inquiry is
to be held. Rule 39 provides for action to be taken by the H
302
disciplinary authority on the report made by the Inquiring
Authority. Rule 40 prescribes the procedure to be followed
for imposing minor penalties. Rule 43 provides for a special
procedure to be followed in certain cases. This special
procedure consists of dispensing with a disciplinary inquiry
altogether. The said Rule 43 provides as follows :
“43. SPECIAL PROCEDURE IN CERTAIN CASES. –
Notwithstanding anything contained in Rule 38, 39
or 40, the disciplinary authority may impose any
of the penalties specified in Rule 36 in any of
the following circumstances :
i) The employee has been convicted on a criminal
charge, or on the strength of facts or conclusions
arrived at by a judicial trial; or
ii) where the disciplinary authority is satisfied
for reasons to be recorded by it in writing that
it is not reasonably practicable to hold an
inquiry in the manner Provided in these Rules; or
iii) where the Board is satisfied that in the
interest of the security of the Corporation
Company, it is not expedient to hold any inquiry
in the manner provided in these rules.”
Rule 45 provides for an appeal against an order imposing
penalty to the appropriate authority specified in the
Schedule to the said Rules and Rule 45-A provides for a
review.
We are concerned in these Appeals with the validity of
clause (i) of Rule 9 only.
So far as Ganguly, the First Respondent in Civil Appeal
No. 4412 of 1985, is concerned, he was promoted to the post
of Manager (Finance) in October 1980 and also acted as
General Manager (Finance) from November 1981 to March 1982.
On February 16, 1983, a confidential letter was sent to him
by the General Manager (Finance), who is the Third Appellant
in Civil Appeal No. 4412 of 1985, to reply within twenty-
four hours to the allegation of negligence in the
maintenance of
303
Provident Fund Accounts. Ganguli made a representation as
also gave a detailed reply to the said show cause notice.
Thereafter by a letter dated February 26, 1983, signed by
the Chairman-cum-Managing Director of the Corporation, a
notice under clause (i) of Rule 9 of the said Rules was
given to Ganguli terminating his service with the
Corporation with immediate effect. Along with the said
letter a cheque for three months’ basic pay and dearness
allowance was enclosed.
So far as Sengupta, the First Respondent in Civil
Appeal No. 4413 of 1985, is concerned, he was promoted to
the post of General Manager (River Services) with effect
from January 1, 1980. His name was enrolled by the Bureau of
Public Enterprises and he was called for an interview for
the post of Chairman-cum-Director of the Corporation by the
Public Enterprises Selection Board. According to Sengupta,
he could not appear before the Selection Board as he
received the letter calling him for the interview after the
date fixed in D that behalf. According to Sengupta, the new
Chairman-cum-Managing Director who was selected at the said
interview bore a grudge against him for having competed
against him for the said post and on February 1, 1983, he
issued a charge-sheet against Sengupta intimating to him
that a disciplinary inquiry was proposed to be held against
him under the said Rules and calling upon him to file his
written statement of defence. By his letter dated February
10, 1983, addressed to the Chairman-cum-Managing Director,
Sengupta denied the charges made against him and asked for
inspection of documents and copies of statements of
witnesses mentioned in the said charge-sheet. By a letter
dated February 26, 1983, signed by the Chairman-cum-Managing
Director notice was given to Sengupta under clause (i) of
Rule 9 of the said Rule, terminating his service with the
Corporation with immediate effect. Along with the said
letter a cheque for three months’ basic pay and dearness
allowance in lieu of notice was enclosed. G
Both Ganguly and Sengupta filed writ petitions in
Calcutta High Court under Article 226 of the Constitution
challenging the termination of their service as also the
validity of the said Rule 9(i). In both these writ petitions
rule nisi was issued and an ex parte interim order staying
304
the operation of the said notice of termination was passed
by a learned Single Judge of the High Court. The Appellants
before us went in Letters Patent Appeal before a Division
Bench of the said High Court against the said ad interim
orders, the appeal in the case of Ganguly being F.M.A.T. No.
1604 of 1983 and in the case of Sengupta being F.M.A.T. No.
649 of 1983. On January 28, 1985, the Division Bench ordered
in both these Appeals that the said writ petitions should
stand transferred to and heard by it along with the said
appeals. The said appeals and writ petitions were thereupon
heard together and by a common judgment delivered on August
9, 1985, the Division Bench held that the Corporation was a
State within the meaning of Article 12 of the Constitution
and that the said Rule 9(i) was ultra vires Article 14 of
the Constitution. Consequently the Division Bench struck
down the said Rule 9(i) as being void. It also quashed the
impugned orders of termination dated February 26, 1983. It
is against the said judgment and orders of the Calcutta High
Court that the present Appeals by Special Leave have been
filed.
The contentions raised on behalf of the Corporation at
the hearing of these Appeals may be thus summarized :
(1) A Government company stands on a wholly
different footing from a statutory corporation for
while a statutory corporation is established by a
statute, a Government company is incorporated like
any other company by obtaining a certificate of
incorporation under the Companies Act and,
therefore, a Government company cannot come within
the scope of the term “the State” as defined in
Article 12 of the Constitution.
(2) A statutory corporation is usually established
in order to create a monopoly in the State in
respect of a particular activity. A Government
company is, however, not established for this
purpose.
(3) The Corporation does not have the monopoly of
inland water transport but is only a trading
company as is shown by the objects clause in its u
Memorandum of Association.
305
(4) Assuming a Government company is “the State”
within the meaning of Article 12, a contract of
employment entered into by it is like any other
contract entered into between two parties and a
term in that contract cannot be struck down under
Article 14 of the Constitution on the ground that
it is arbitrary or unreasonable or unconscionable
or one-sided or unfair.
At the hearing of these Appeals the Union of India, which is
the Second Respondent in these Appeals, joined in the
contentions raised by the Corporation.
The arguments advanced on behalf of the contesting
Respondents in broad outlines were as follows :
(1) The definition of the expression “the State”
given in Article 12 is wide enough to include
within its scope and reach a Government company.
(2) A State is entitled to carry on any activity,
even a trading activity, through any of its
instrumentalities or agencies, whether such
instrumentality or agency be one of the
Departments of the Government, a statutory
corporation, a statutory authority or a Government
company incorporated under the Companies Act.
(3) Merely because a Government company carries on
a trading activity or is authorized to carry on a
trading activity does not mean that it is excluded
from the definition of the expression “the State”
contained in Article 12.
(4) A Government company being “the State” within
, the meaning of Article 12 is bound to act fairly
J and reasonably and if it does not do so, its
action can be struck down under Article 14 as
being arbitrary.
(5) A contract of employment stands on a different
footing from other contracts. A term in a contract
of employment entered into by a private employer H
306
which is unfair, unreasonable and unconscionable
is bad in law. Such a term in a contract of
employment entered into by the State is,
therefore, also bad in law and can be struck down
under Article 14.
During the course of the hearing of these Appeals the
Central Inland Water Transport Corporation Officers’
Association made an application for permission to intervene
in these Appeals and permission to intervene was granted to
it by this Court. The said Association supported the stand
taken by the contesting Respondents.
We will now examine the correctness of the rival
submissions advanced at the Bar.
The word “State” has different meanings depending upon
the context in which it is used. In the sense of being a
polity, it is defined in the Shorter Oxford English
Dictionary, Third Edition, Volume II, page 2005, as “a body
of people occupying a defined territory and organized under
a sovereign government”. The same dictionary defines the
expression “the State” as “the body politic as organized for
supreme civil rule and government; the political
organization which is the basis of civil government; hence,
the supreme civil power and government vested in a country
or nation”. According to Black’s Law Dictionary, Fifth
Edition, page 1262, “In its largest sense, a ‘state’ is a
body politic or a society of men”. According to Black, the
term “State” may refer “either to the body politic of a
nation (e.g. United States) or to an individual governmental
unit of such nation (e.g. California)”. In modern
international practice, whether a community is deemed a
State or not depends upon the general recognition accorded
to it by the existing group of other States. A State must
have a relatively permanent legal organization, determining
its structure and the relative powers of its major governing
bodies or organs. This legal organizational permanence of a
State is to be found in its Constitution. With rare
exceptions, such as the United Kingdom, most States now have
a written Constitution. The Constitutional structure of a
State may be either unitary, as when it has a single system
of government applicable to all its parts, or federal when
it has one system of government operating in certain
respects and in certain matters in all
307
its parts and also separate governments operating in other
respects in distinct parts of the whole. In such a case the
units or sub-divisions having separate governments are
variously called ‘states’ as in India, U.S.A. and Australia,
‘provinces’ as in Canada, ‘cantons’ as in Switzerland, or
designated by other names. B
Our Constitution is federal in structure. Clause (1) of
Article 1 of the Constitution provides that “India, that is
Bharat, shall be a Union of States” and clause (2) of that
Article provides that “The States and the territories
thereof shall be as specified in the First Schedule”. me
word “States” used in Article 1 thus refers to the
federating units, India itself being a State consisting of
these units. The term “States” is defined variously in some
of the other Articles of the Constitution as the context of
the particular Part of the Constitution in which it is used
requires. Part VI of the Constitution is headed ” me States”
and provides for the form of the three organs of a State,
namely, the Executive, the Legislature and the Judiciary.
Article 152, which is the opening Article in Part VI of the
Constitution, provides as follows :
“152. Definition. –
In this Part, unless the context otherwise
requires, the expression ‘State’ does not include
the State of Jammu and Kashmir.”
The State of Jammu and Kashmir is excluded because that
State, though one of the States which constitute the Union
of India, had, in pursuance of the provisions of Article 370
of the Constitution read with the Constitution (Application
to Jammu and Kashmir) Order, 1954 (C.O. 48), set up a
Constituent Assembly for the internal Constitution of the
State and it had framed the Constitution of Jammu and
Kashmir which was adopted and enacted by that Constituent
Assembly on November 17, 1965. Article 152 also, therefore,
uses the expression “State” as meaning the federating units
which constitute the Union of India. Part XIV of the
Constitution deals with services under the Union and the
States. Article 308 provides as follows :
308
“308. Interpretation. –
In this Part, unless the context otherwise
requires, the expression ‘State’ does not include
the State of Jammu and Kashmir.”
This definition read with the other provisions of Part XIV
shows that the word “State” applies to the federating units
(other than the State of Jammu and Kashmir for the reason
mentioned above) which together constitute the Union of
India because in the other Articles of Part XIV wherever the
Union of India is referred to, it is described as “the
Union”. Article 366 of the Constiution defines certain
expressions used in the Constitution of India. That Article,
however, does not contain any definition of the term
“State”. Under Article 367(1), unless the context otherwise
requires, the General Clauses Act, 1897 (Act No. X of 1897),
subject to any adaptations and modifications that may be
made therein by the President of India under Article 372 to
bring that Act into accord with the provisions of the
Constitution, applies for the interpretation of the
Constitution. Clause (58) of section 3 of the General
Clauses Act defines the term “State” as follows :
“(58) ‘State’ –
(a) as respects any period before the commencement
of the Constitution (Seventh Amendment) Act, 1956,
shall mean a Part A State, a Part State or a Part
State. and
(b) as respects any period after such
commencement, shall mean a State specified in the
First Schedule to the Constitution and shall
include a Union Territory.”
This definition, therefore, also confines the term “State”
to the federating units which together form the Union of
India.
We are concerned in these Appeals with Article 12.
Article 12 forms part of Part III of the Constitution which
deals with Fundamental Rights and provides as follows :
309
“12. definition. –
In this Part, unless the context otherwise
requires, ‘the State’ includes the Government and
Parliament of India and the Government and the
Legislature of each of the states and all local or
other authorities within the territory of India or
under the control of the Government of India.”
(Emphasis supplied)
The same definition applies to the expression “the State”
when used in Part IV of the Constitution which provides for
the Directive Principles of State Policy, for the opening
Article of Part IV, namely, Article 36, provides :
“36. Definition. –
In this Part, unless the context otherwise
requires, ‘the State’ has the same meaning as in
Part III.”
The expression “local authority” is defined in clause (31)
of section 3 of the General Clauses Act as follows :
“(31) ‘Local authority’ shall mean a municipal
committee, district board, body of port
commissioners or other authority legally entitled
to, or entrusted by the Government with, the
control or management of a municipal or local
fund.”
Thus, the expression “the State” when used in Parts III and
IV of the Constitution is not confined to only the
federating States or the Union of India or even to both. By
the express terms of Article 12 the expression “the State”
includes –
(1) the Government of India, G
(2) Parliament of India
(3) the Government of each of the States which
constitute the Union of India,
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(4) the Legislature of each of the States which
constitute the Union of India,
(5) all local authorities within the territory of
India,
(6) all local authorities under the control of the
Government of India,
(7) all other authorities within the territory of
India, and
(8) all other authorities under the control of the
Government of India.
There are three aspects of Article 12 which require to
be particularly noticed. These aspects are
(i) the definition given in Article 12 is not an
explanatory and restrictive definition but an
extensive definition,
(ii) it is the definition of the expression “the
State” and not of the term “State” or “States”,
and
(iii) it is inserted in the Constitution for the
purposes of Parts III and IV thereof.
As pointed out in Craies on Statute Law, Seventh
Edition, page 213, where an interpretation clause defines a
word to mean a particular thing, the definition is
explanatory and facie restrictive; and whenever an
interpretation clause defines a term to include something,
the definition is extensive. While an explanatory and
restrictive definition confines the meaning of the word
defined to what is stated in the interpretation clause, so
that wherever the word defined is used in the particular
statute in which that interpretation clause occurs, it will
bear only that meaning unless where, as is usually provided,
the subject or context otherwise requires, an extensive
definition expands or extends the meaning of the word
defined to include within it what would otherwise not have
been comprehended in it when the word defined is used in its
ordinary sense. Article 12 uses the
311
word “includes”. It thus extends the meaning of the
expression “the State” so as to include within it also what
otherwise may not have been comprehended by that expression
when used in its ordinary legal sense.
Article 12 defines the expression “the State” while the
other Articles of the Constitution referred to above, such
as Article 152 and Article 308, and clause (58) of section 3
of the General Clauses Act defines the term “State”. The
deliberate use of the expression “the State” in Article 12
as also in Article 36 would have normally shown that this
expression was used to denote the State in its ordinary and
Constitutional sense of an independent or sovereign State
and the inclusive clause in Article 12 would have extended
this meaning to include within its scope whatever has been
expressly set out in Article 12. The definition of the
expression “the State” in Article 12, is however, for the
purposes of Parts III and IV of the Constitution. The
contents of these two Parts clearly show that the expression
“the State” in Article 12 as also in Article 36 is not
confined to its ordinary and Constitutional sense as
extended by the inclusive portion of Article 12 but is used
in the concept of the State in relation to the Fundamental
Rights guaranteed by Part III of the Constitution and the
Directive Principles of State Policy contained in Part IV of
the Constitution which Principles are declared by Article 37
to be fundamental to the governance of the country and
enjoins upon the State to apply in making laws.
What then does the expression “the State” in the
context of Parts III and IV of the Constitution mean? F
Men’s concept of the State as a polity or a political
unit or entity and what the functions of the State are or
should be have changed over the years and particularly in
the course of this century. A man cannot obstinately cling
to the same ideas and concepts all his life. As Emerson said
in his essay on “Self-Reliance”, “A foolish consistency is
the hobgoblin of little minds”. Man is by nature ever
restless, ever discontent, ever seeking something new, ever
dissatisfied with what he has. m is inherent trait in the
nature of man is reflected in the society in which he lives
for a society is a conglomerate of men who live in it. Just
as man by nature is H
312
dissatisfied, so is society. Just as man seeks something
new, ever hoping that a change will bring about something
better, so does society. Old values, old ideologies and old
systems are thus replaced by new ideologies, a new set of
values and a new system, they in their turn to be replaced
by different ideologies, different values and a different
system. The ideas that seem revolutionary become outmoded
with the passage of time and the heresies of today become
the dogmas of tomorrow. What proves to be adequate and
suited to the needs of a society at a given time and in
particular circumstances turns out to be wholly unsuited and
inadequate in different times and under different
circumstances.
The story of mankind is punctuated by progress and
retrogression. Empires have risen and crashed into the dust
of history. Civilizations have flourished, reached their
peak and passed away. In the year 1625, Carew, C.J., while
delivering The opinion of the House of Lords in Re the
Earldom of Oxford, [1625] W.Jo. 96, 101. s.c. [1626] 82 E.R.
50, 53, in a dispute relating to the descent of that
Earldom, said :
“… and yet time hath his revolution, there must
be a period and an end of all temporal things,
finis rerum, an end of names and dignities, and
whatsoever is terrene . . .”
The cycle of change and experiment, rise and fall, growth
and decay, and of progress and retrogression recurs
endlessly in the history of man and the history of
civilization. T.S. Eliot in the First Chorus from “The Rock”
said :
“O Perpetual revolution of configured stars, O
Perpetual recurrence of determined seasons, O
world of spring and autumn, birth and dying! The
endless cycle of idea and action, Endless
invention, endless experiment”.
The law exists to serve the needs of the society which
is governed by it. If the law is to play its allotted role
of serving the needs of the society, it must reflect the
ideas and ideologies of that society. It must keep time with
the heartbeats of the society and with the needs and
aspirations
313
Of the people. As the society changes, the law cannot remain
immutable. The early nineteenth century essayist and wit,
Sydney Smith, said, ‘Then I hear any man talk of an
unalterable law, I am convinced that he is an unalterable
fool.” The law must, therefore, in a changing society march
in tune with the changed ideas and ideologies. Legislatures
are, however, not best fitted for the role of adapting the
law to the necessities of the time, for the legislative
process is too slow and the legislatures often divided by
politics, slowed down by periodic elections and overburdened
with myriad other legislative activities. A constitutional
document is even less suited to this task, for the
philosophy and the ideologies underlying it must of
necessity be expressed in broad and general terms and the
process of amending a Constitution is too cumbersome and
time-consuming to meet the immediate needs. This task must,
therefore, of necessity fall upon the courts because the
courts can by the process of judicial interpretation adapt
the law to suit the needs of the society. n
A large number of authorities were cited before us to
show how the courts have interpreted the expression, “the
State” in Article 12. As these authorities are decisions of
this Court, we must perforce go through the whole gamut of
them though we may preface an examination of these
authorities with the observation that they only serve to
show how the concepts of this Court have changed both with
respect to Article 12 and Article 14 to keep pace with
changing ideas and altered circumstances. Before embarking
upon this task we would, however, like to quote the
following passage (which has become a classic) from the
opening paragraph of Justice Oliver Wendell Holmes’s “The
Common Law” which contains the lectures delivered by him
while teaching law at Harvard and which book was published
in 1881 just one year before he was appointed an Associate
Justice of the Massachusetts Supreme Judicial Court:
” It is something to show that the consistency of
a system requires a particular result, but it is
not all. me life of the law has not been logic: it
has been experience. The felt necessities of the
time, the prevalent moral and political theories,
intuitions of public policy, avowed or
unconscious,
314
even the prejudices which judges share with their
fellow-men, have had a good deal more to do than
the syllogism in determining the rules by which
men should be governed. The law embodies the story
of a nation’s development through many centuries,
and it cannot be dealt with as if it contained
only the axioms and corollaries of a book of
mathematics. In order to know what it is, we must
know what it has been, and what it tends to
become. We must alternately consult history and
existing theories of legislation. But the most
difficult labor will be to understand the
combination of the two into new products at every
stage. The substance of the law at any given time
pretty nearly corresponds, so far as it goes, with
what is then understood to be convenient; but its
form and machinery, and the degree to which it is
able to work out desired results, depend very much
upon its past.”
We will, therefore, briefly sketch the temper of the
times in which our Constitution was enacted and the purposes
for which Parts III and IV inserted in our Constitution.
The bombs which had rained down upon the cities of
Europe, Africa and Asia and the Islands in the Pacific had
changed, and changed dramatically, not only the political
but also the sociological, ideological and economic map of
the world. A world reeling from the horrors of the Second
World War and seeking to recover from the trauma caused by
its atrocities sought to band all nations into one Family of
Man and for this purpose set up the United Nations
Organization in order to save succeeding generations from
the scourge of war which had twice in this century brought
untold sorrow to mankind and in order to reaffirm faith in
fundamental human rights, in the dignity and worth of the
human person and in the equal rights, of man and woman and
of nations large or small, and thus to give concrete shape
to the dream of philosophers and poets that the war-drums
would throb no longer and the battle-banners would be furled
in the Parliament of Man and the Federation of the World.
But much had gone before. There was the signing of the
Inter-Allied Declaration of June 12, 1941, at St. James’s
Palace in London
315
by the representatives of the United Kingdom, the
Commonwealth, General de Gaulle and the governments in exile
of the European countries conquered by Nazi Germany; there
was the Atlantic Charter of August 14, 1941; there was the
Declaration of the United Nations signed on New Year’s Day
of 1942 at Washington, D.C., by twenty-six nations who were
fighting the Axis; there was the Declaration made at the
Moscow Conference in October 1943 and at the Teheran
Conference on December 1, 1943; there was the Dumbarton Oaks
Conference held in Washington, D.C., in August and September
1944; there was the Yalta Conference in February 1945; all
these culminating in the adoption on June 25, 1945, of the
Charter of the United Nations in the Opera House of San
Francisco and the affixing of signatures thereon the next
day in the auditorium of the Veterans’ Memorial Hall.
Thereafter, in pursuance of Article 68 of the Charter of the
United States, the Economic and Social Council set up the
Human Rights Commission in 1946. This Commission began its
work in January 1947 under the chairmanship of Mrs. Eleanore
Roosevelt, the widow of President Franklin D. Roosevelt. The
Universal Declaration of Human Rights prepared by the
Commission was adopted by the General Assembly on December
10, 1948, at its session held in the Palais de Chaillot in
Paris. Of the fifty-eight nations represented at that
Session, none voted against it, two were absent, and eight
abstained from voting.
It was thus in an atmosphere surcharged with human
suffering and yet a firm resolve not to succumb to it that
the Constituent Assembly which was set up to frame the
Constitution of India embarked upon its task on December 9,
1946, re-assembled after the midnight of August 14, 1947, as
the sovereign Constituent Assembly for India. After
Partition and fresh elections in the new Provinces of West
Bengal and East Punjab, it re-assembled on October 31, 1947,
and thereafter on November 26, 1949 adopted and enacted the
Constitution of India.
Before commencing its work, the Constituent Assembly
adopted a Resolution laying down its objectives :
316
” 1. This Constituent Assembly declares its firm
and solemn resolve to proclaim India as an
Independent Sovereign Republic and to draw up for
her future governance a Constitution; . . .
4. Wherein all power and authority of the
Sovereign Independent India, its constituent parts
and organs of government, are derived from the
people: and
5. Wherein shall be guaranteed and secured to all
the people of India justice, social, economic and
political : equality of status, of opportunity,
and before the law; freedom of thought,
expression, belief, faith, worship, vocation,
association, and action, subject to law and public
morality; and
6. Wherein adequate safeguards shall be provided
for minorities, backward and tribal areas, and
depressed and other backward classes; and
7. Whereby shall be maintained the integrity of
the territory of the Republic and its sovereign
rights on land, sea, and air according to justice
and the law of civilised nations: and
8. This ancient land attains its rightful and
honoured place in the world and makes its full and
willing contribution to the promotion of world
peace and the welfare of mankind”.
In its strict legal sense the written Constitution of a
country is a document which defines the regular form or
system of its government, containing the rules that directly
or indirectly affect the distribution or exercise of the
sovereign power of the State and it is thus mainly concerned
with the creation of the three organs of the State – the
executive, the legislature and the judiciary, and the
distribution of governmental power among them and the
definition of their mutual relation (See Sri Sankari Prasad
Singh Deo v. Union of India and State of Bihar, [1952]
S.C.R. 89, 106, O. Hood Phillips’ “Constitutional and
Administrative
317
Law”, Sixth Edition, page 11; Dicey’s “An Introduction to
the Study of the Law of the Constitution”, Tenth Edition,
page 23; and Jowitt’s Dictionary of English Law, Second
Edition, Volume I, page 430).
The framers of our Constitution did not, however, want
to frame for the Sovereign Democratic Republic which was to
emerge from their labours a Constitution in the strict legal
sense. They were aware that there were other Constitutions
which had given expression to certain ideals as the goal
towards which the country should strive and which had
defined the principles considered fundamental to the
governance of the country. They were aware of the events
that had culminated in the Charter of the United Nations.
They were aware that the Universal Declaration of Human
Rights had been adopted by the General Assembly of the
United Nations, for India was a signatory to it. They were
aware that the Universal Declaration of Human Rights
contained certain basic and fundamental rights appertaining
to all men. They were aware that these rights were born of
the philosophical speculations of the Greek and Roman Stoics
and nurtured by the jurists of ancient Rome. They were aware
that these rights had found expression in a limited form in
the accords entered into between the rulers and their
powerful nobles, as for instance, the accord of 1188 entered
into between King Alfonso IX and the Cortes of Leon, the
Magna Carta of 1215 wrested from King John of England by his
barons on the Meadow of Runnymede and to which he was
compelled to affix his Great Seal on a small island in the
Thames in Buckinghamshire – still called Magna Carta Island,
and the guarantees which King Andrew II of Hungary was
forced to give by his Golden Bull of 1822. They were aware
of the international treaties of the midseventeenth century
for safeguarding the right of religious freedom and the
rights of aliens. They were aware of the full blossoming of
the concept of Human Rights in the writings of the
“philosophes” such as Voltaire, Rousseau, Diderot, Rayal,
d’Alembert and others, and of the concrete expression given
to it in the various Declarations of Rights of the American
Colonies (particularly Virginia) and in the American
Declaration of Independence. They were aware that in 1789,
during the early years of the French Revolution, the French
National Assembly had in “The Declaration of the Rights of
Man
318
and of the Citizen” proclaimed these rights in lofty words
and that Revolutionary France had translated them into
practice with bloody deeds. They were aware of the treaties
entered into between various States in the nineteenth
century providing protection for religious and other
minorities. They were aware that these rights had at last
found universal recognition in the Universal Declaration of
Human Rights. They were aware that the first ten Amendments
to the Constitution of the United States of America
contained certain rights akin to Human Rights. They knew
that the Constitution of Eire contained a chapter headed
“Fundamental Rights” and another headed “Directive
Principles of State Policy”. They were aware that the
Constitution of Japan also contained a chapter headed
“Rights and Duties of the People”. They were aware that the
major traditional functions of the State have been the
defence of its territory and its inhabitants against
external aggression, the maintenance of law and order; the
administration of justice, the levying of taxes and the
collection of revenue. They were also aware that
increasingly, and particularly in modern times, several
States have assumed numerous and wide ranging functions,
especially in the fields of education, health, social
security, control and maintenance of natural resources and
natural assets, transport and communication services and
operation of certain industries considered basic to the
economy and growth of the nation. They were also aware that
section 8 of Article 1 of the Constitution of the United
States of America contained “a welfare clause” empowering
the federal government to enact laws for the overall general
welfare of the people. They were aware that countries such
as the United States, the United Kingdom and Germany had
passed social welfare legislation.
The framers of our Constitution were men of vision and
ideals, and many of them had suffered in the cause of
freedom. They wanted an idealistic and philosphic base upon
which to raise the administrative superstructure of the
Constitution. They, therefore, headed our Constitution with
a preamble which declared India’s goal and inserted Parts
III and IV in the Constitution.
319
The Preamble to the Constitution, as amended by the A
Constitution (Forty-second Amendment) Act, 1976, proudly
proclaims:
“WE, THE PEOPLE OF INDIA, having solemnly resolved
to constitute India into a SOVEREIGN SOCIALIST
SECULAR DEMOCRATIC REPUBLIC and to secure to all
its citizens :
JUSTICE, social, economic and political;
LIBERTY of thought, expression, belief, faith and
worship;
EQUALITY of status and of opportunity; and to
promote among them all D
FRATERNITY assuring the dignity of the individual
and the unity and integrity of the Nation;
IN OUR CONSTITUENT ASSEMBLY this twentysixth day
of November, 1949, do HEREBY ADOPT, ENACT AND GIVE
TO OURSELVES THIS CONSTITUTION.”
Part III of the Constitution gives a Constitutional
mandate for certain Human Rights – called Fundamental Rights
in the Constitution — adapted to the needs and requirement
of a country only recently freed from foreign rule and
desirous of forging a strong and powerful nation capable of
taking an equal place among the nations of the world. It
also provides a Constitutional mode of enforcing them.
Amongst these Rights is the one contained in Article 14
which provides : G
“14. Equality before law .–
320
The State shall not deny to any person equality
before the law or the equal protection of the laws
within the territory of India.”
Part IV of the Constitution prescribes the Directive
Principles of State Policy. These Directive Principles have
not received the same Constitutional mandate for their
enforcement as the Fundamental Rights have done. In the
context of the Welfare State which is the goal of our
Constitution, Articles 37 and 38(1) are important. They are
as follows :
“37. Application of the Principles contained in
this Part. –
The provisions contained in this Part shall not be
enforceable by any court, but the principles
therein laid down are nevertheless fundamental in
the governance of the country and it shall be the
duty of the State to apply these principles in
making laws.”
“38. (1) State to secure A social order for the
promotion of welfare of the people. –
(1) The State shall strive to promote the welfare
of the people by securing and protecting as
effectively as it may a social order in which
justice, social, economic and political, shall
inform all the institutions of the national life.”
Under clause (a) of Article 39, the State is, in particular,
to direct its policy towards securing that the citizens, men
and women equally, have the right to an adequate means of
livelihood. Article 41 directs that the State shall, within
the limits of its economic capacity and development, make
effective provision for securing the right to work.
MANOHAR
321
The difference between Part III and Part IV is that
while Part III prohibits the State from doing certain things
(namely, from infringing any of the Fundamental Rights),
Part IV enjoins upon the State to do certain things. This
duty, however, is not enforceable in law but none the less
the Court cannot ignore what has been enjoined upon the
State by Part IV, and though the Court may not be able
actively to enforce the Directive Principles of State Policy
by compelling the State to apply them in the governance of
the country or in the making of laws, the Court can, if the
State commits a breach of its duty by acting contrary to
these Directive Principles, prevent it from doing so.
In the working of the Constitution it was found that
some of the provisions of the Constitution were not adequate
for the needs of the country or for ushering in a Welfare
State and the constituent body empowered in that behalf
amended the Constitution several times. By the very first
amendment made in the Constitution, namely, by the
Constitution (First Amendment) Act, 1951, clause (6) of
Article 19 was amended with retrospective effect. Under this
amendment, sub-clause (g) of clause (1) of Article 19 which
guarantees to all citizens the right to carry on any
occupation, trade or business, was not to prevent the State
from making any law reIating to the carrying on by the
State, or by a corporation owned or controlled by the State,
of any trade, business, industry or service, whether to the
exclusion, complete or partial, of citizens or otherwise.
This amendment also validated the operation of all existing
laws in so far as they had made similar provisions. Article
298, as originally enacted, provided that the executive
power of the Union and of each State was to extend, subject
to any law made by the appropriate Legislature, to the
grant, sale, disposition or mortgage of any property held
for the purposes of the Union or of such State, as the case
may be, and to the purchase or acquisition of property for
those purposes respectively, and to the making of contracts;
and it further provided that all property acquired for the
purposes of the Union or of a State was to vest in the Union
or in such State, as the case may be. Article 298 was
substituted by the Constitution (Seventh Amendment) Act,
1956. As substituted, it provides as follows :
322
“298. Power to carry on trade, etc. –
The executive power of the Union and of each State
shall extend to the carrying on of any trade or
business and to the acquisition, holding and
disposal of property and the making of contracts
for any purpose :
Provided that –
(a) the said executive power of the Union shall,
in so far as such trade or business or such
purpose is not one with respect to which
Parliament may make laws, be subject in each State
to legislation by the State; and
(b) the said executive power of each State shall,
in so far as such trade or business or such
purpose is not one with respect to which the State
Legislature may make laws, be subject to
Legislation by Parliament.”
Article 298, as so substituted, therefore, expands the
executive power of the Union of India and of each of the
States which collectively constitute the Union to carry on
any trade or business. By extending the executive power of
the Union and of each of the States to the carrying on of
any trade or business, Article 298 does not, however,
convert either the Union of India or any of the States which
collectively form the Union into a merchant buying and sell-
ing goods or carrying on either trading or business
activity, for the executive power of the Union and of the
States, whether in the field of trade or business or in any
other field, is always subject to Constitutional limitations
and particularly the provisions relating to Fundamental
Rights in Part III of the Constitution and is exerciseable
in accordance with and for the furtherance of the Directive
Principles of State Policy prescribed by Part IV of the
Constitution.
The State is an abstract entity and it can, therefore,
only act through its agencies or instrumentalities, whether
such agency or instrumentality be human or juristic. me
trading and business activities of the State constitute
323
“public enterprise”. The structural forms in which the
Government operates in the field of public enterprise are
many and varied. These may consist of Government
departments, statutory bodies, statutory corporations,
Government companies, etc. In this context, we can do no
better than cite the following passage from “Government
Enterprise – A Comparative Study” by W. Friedmann and J.F.
Garner, at page 507 :
“The variety of forms in which the various States
have, at different times, proceeded to establish
public enterprises is almost infinite, but three
main types emerge to which almost every public
enterprise approximates: (1) departmental
administration; (2) the joint stock company
controlled completely or partly by public
authority; and finally (3) the public corporation
proper, as a distinct type of corporation
different from the private law company. Each of
these three types will be briefly analysed in a
comparative perspective.
As the tasks of Government multiplied, as a result
of defence needs, post-war crises, economic depressions and
new social demands, the framework of civil service
administration became increasingly insufficient for the
handling of the new tasks which were often of a specialised
and highly technical character. At the same time,
‘bureaucracy’ came under a cloud. In Great Britain j the
late Lord Hewart had written of ‘the new l despotism,’ and
Dr. C.K. Allen of ‘bureaucracy triumphant’. In France the
Confederation Generale du Travail (CGT) had stated in its
Programme in 1920 that ‘We do not wish to increase the
functions of the State itself nor strengthen a system which
would subject the basic industry to a civil service regime,
with all its lack of responsibility and its basic defects, a
process which would subject the forces of production to a
fiscal monopoly. This distrust of government by civil
service, justified or not, was a powerful factor in the
development of a policy of public administration
324
through separate corporations which would operate
largely according to business principles and be
separately accountable. In the common law
countries, where the Government still enjoys
considerable immunities and privileges in the
fields of legal responsibility, taxation, or the
binding force of statutes, other considerations
played their part. It seemed necessary to create
bodies which, if they were to compete on fair
terms in the economic field, had to be separated
and distinct from the Government as regards
immunities and privileges.”
The immunities and privileges possessed by bodies so
set up by the Government in India cannot, however, be the
same as those possessed by similar bodies established in the
private sector because the setting up of such bodies is
referable to the executive power of the Government under
Article 298 to carry on any trade or business. As pointed
out by Mathew, J., in Sukhdev Singh and others v. Bhagatram
Sardar Singh Raghuvanshi and another, [1975] 3 S.C.R. 619
(at page 648), “The governing power wherever located must be
subject to the fundamental constitutional limitations”. The
privileges and immunities of these bodies, therefore, are
subject to Fundamental Rights and exercisable in accordance
with and in furtherance of the Directive Principles of State
Policy.
It is in the context of what has been stated above that
we will now review the authorities cited at the Bar. When we
consider these authorities, we will see how as
Constitutional thinking developed and the conceptual horizen
widened, new vistas, till then shrouded in the mist of
conventional legal phraseology and traditional orthodoxy,
opened out to the eye of judicial interpretation, and many
different facets of several Articles of the Constitution,
including Article 12 and 14, thitherto unperceived, became
visible. There, however, still remain vistas yet to be
opened up, veils beyond which we today cannot see to be
lifted, and doors to which we still have found no key to be
unlocked.
In Rai Sahib Ram Jawaya Kapur and others v. The State
of Punjab, [1955] 2 S.C.R. 225, the State of Punjab, which
used to select books published by private publishers for
325
prescribing them as text-books and for this purpose used to
invite offers from publishers and authors, altered that
practice and amended the notification in that behalf so that
thereafter only authors were asked to submit their books for
approval as text-books. The validity of this notification
was challenged inter alia on the ground that the executive
power of a State under Article 162 extended only to
executing the laws passed by the legislature or supervising
the enforcement of such laws. Under Article 162, subject to
the provisions of the Constitution, the executive power of a
State extends to the matters with respect to which the
Legislature of the State has power to make laws, namely, the
matters enumerated in the State List (List II) in the
Seventh Schedule to the Constitution. Under the proviso to
that Article, in any matter with respect to which the
Legislature of a State and Parliament have power to make
laws, that is, the matters enumerated in the Concurrent List
(List III) in the Seventh Schedule to the Constitution, the
executive power of the State is to be subject to, and
limited by, the executive power expressly conferred by the
Constitution or by any law made by Parliament upon the Union
or authorities thereof. Under Article 154(1), the executive
power of the State is vested in the Governor and is to be
exercised by him either directly or through officers
subordinate to him in accordance with the Constitution. The
corresponding provisions as regards the executive power of
the Union of India are contained in Article 73 and Article
53(1). Repelling the above contention, Mukherjea, C.J., who
spoke for the Constitution Bench of the Court observed (at
page 230) :
“A modern State is certainly expected to engage in
all activities necessary for the promotion of the
social and economic welfare of the community.”
The following passage (at pages 235-36) from the
judgment of the Court in that case with respect to the
meaning of the expression “executive function” is
instructive and requires to be reproduced :
“It may not be possible to frame an exhaustive
definition of what executive function means and
implies. Ordinarily the executive power connotes
the residue of governmental functions that remain
326
after legislative and judicial functions are taken
away. The Indian Constitution has not indeed
recognised the doctrine of separation of powers in
its absolute rigidity but the functions of the
different parts or branches of the Government have
been sufficiently differentiated and consequently
it can very well be said that our Constitution
does not contemplate assumption, by one organ or
part of the State, of functions that essentially
belong to another. The executive indeed can
exercise the powers of departmental or subordinate
legislation when such powers are delegated to it
by the legis lature. It can also, when so
empowered, exercise judicial functions in a
limited way. The executive Government, however,
can never go against the provisions of the
Constitution or of any law. This is clear from the
provisions of article 154 of the Constitution but,
as we have already stated, it does not follow from
this that in order to enable the executive to
function there must be a law already in existence
and that the powers of the executive are limited
merely to the carrying out of these laws.
(Emphasis supplied.)
In Rajasthan State Electricity Board, Jaipur v. Mohan
Lal and others, [19671 3 S.C.R. 377 a Constitution Bench of
this Court by a majority held that the Electricity Board of
Rajasthan constituted under the Electricity (supply) Act,
1948 (Act No. 54 of 1948) was “the State” as defined in
Article 12 because it was “other authority” within the
meaning of that Article. The Court held that the expression
“other authority” was wide enough to include within it every
authority created by a statute, on which powers are
conferred to carry out governmental or quasi-governmental
functions and functioning within the territory of India or
under the control of the Government of India and the fact
that some of the powers conferred may be for the purpose of
carrying on commercial activities is not at all material
because under Articles 19(1)(g) and 298 even the State is
empowered to carry on any trade or business. The Court
further held that in interpreting the expression “other
authority” the principle of ejusdem
327
generis should not be applied, because, for the application
of A that rule, there must be distinct genus or category
running through the bodies previously named; and the bodies
specially named in Article 12 being the executive Government
of the Union and the States, the Legislatures of the Union
and the States and local authorities, there is no common
genus running through these named bodies, nor could these
bodies be placed in one single category on any rational
basis.
Praga Tools Corporation v. C.A. Imanual and others,
[1969] 3 S.C.R. 773 was a case heavily relied upon by the
Appellants. Praga Tools Corporation was a company
incorporated under the Companies Act, 1913, and therefore, a
company within the meaning of the Companies Act, 1956. At
the material time the Union of India held fifty-six per cent
of the shares of the company and the Government of Andhra
Pradesh held thirty-two per cent of its shares, the balance
of twelve per cent shares being held by private individuals.
As being the largest shareholder, the Union of India had the
power to nominate the company’s directors. The company had
entered into two settlements with its workmen’s union. These
settlements were arrived at and recorded in the presence of
the Commissioner of Labour. Subsequently, the company
entered into another agreement with the union, the effect of
which was to enable the company, notwithstanding the earlier
two settlements, to retrench ninety-two of its workmen. Some
of the affected workmen thereupon filed a writ petition
under Article 226 of the Constitution in the Andhra Pradesh
High Court challenging the validity of the subsequent
agreement. A learned Single Judge of the High Court
dismissed the petition on merits. In appeal, a Division
Bench of that High Court held that the company being one
registered under the Companies Act and not having any
statutory duty or function to perform was not one against
which a writ for mandamus or any other writ could lie. The
Division Bench, however, held that though the writ petition
was not maintainable the High Court could grant a
declaration in favour of the petitioners that the impugned
agreement was illegal and void and granted the said
declaration. In appeal by the company, a two-Judge Bench of
this Court held that the Company being a non-statutory body
and one incorporated under the companies Act there was
neither a statutory nor a public duty imposed on it by a
statute in respect of which enforcement could be sought by
means of a
328
mandamus. So far as declaration given by the Division Bench
of the High Court was concerned, the Court held (at page
780) :
“In our view once the writ petition was held to be
misconceived on the ground that it could not lie
against a company which was neither a statutory
company nor one having public duties or
responsibilities imposed on it by a statute, no
relief by way of a declaration as to invalidity of
an impugned agreement between it and its employees
could be granted. The High Court in these
circumstances ought to have left the workmen to
resort to the remedy available to them under the
Industrial Disputes Act by raising an industrial
dispute thereunder.”
Though this case was strongly relied upon by the Appellants,
we fail to see how it is relevant to the submissions
advanced by the Appellants. The subsequent agreement
enabling the company to retrench some of its workmen was
challenged on the ground that it was in breach of the
earlier settlements entered into between the company and the
workmen’s union. No question of violation of any of the
Fundamental Rights was at all raised in that case. The only
question which fell for determination was whether a writ of
mandamus can issue to compel the performance of the earlier
settlements or to restrain the enforcement of the impugned
subsequent agreement and the dispute, therefore, was one
which fell within the scope of the Industrial Disputes Act,
1947 (Act No. 14 of 1947).
In State of Bihar v. Union of India and another, [1970]
2 S.C.R. 522 the State of Bihar filed nine suits under
Article 131 in connection with the delayed delivery of iron
and steel materials for the construction work- of the Gandak
project. In all these suits the first defendant was the
Union of India while the second defendant in six of these
suits was the Hindustan Steel Ltd. and in the remaining
three, the Indian Iron and Steel Company Ltd. This Court
held that the specification of the parties in Article 131
was not of an extensive kind and excluded the idea of a
private citizen, a firm or a corporation figuring as a
disputant either alone or even along with a State or with
the Government of India in the
329
category of a party to the dispute under Article 131. The
Court further held that the enlarged definition of the
expression “the State” given in Parts III and IV of the
Constitution did not apply to Article 131 and, therefore, a
body like the Hindustan Steel Ltd. could not be considered
as “a State” for the purpose of Article 131. We fail to see
in what way this decision is at all relevant to the point.
The question before the Court in that case was whether the
Hindustan Steel Ltd. Or the Indian Iron and Steel Company
Ltd. was a State to enable a suit to be filed against it
under Article 131 and not whether either of these companies
fell within the scope of the definition of the expression
“the State” in Article 12. C
Another authority relied upon by the Appellants was
S.L. Agarwal v. General Manager, Hindustan Steel Ltd.,
[1970] 3 S.C.R. 363. The facts of that case and the
contentions raised thereunder show that this authority is
equally Irrelevant. In that case an employee of the
Hindustan Steel Ltd., whose services were terminated, filed
a petition under Article 226 claiming that such termination
was wrongful as it was really by way of punishment as the
provisions of Article 311(2) of the Constitution had not
been complied with. This Court held that the protection of
clause (2) of Article 311 was available only to the
categories of persons mentioned in that clause and that
though the appellant held a civil post as opposed to a
military post, it was not a civil post under the Union or a
State and, therefore, he could not claim the protection of
Article 311(2). The contention which was raised on behalf of
the appellant was that as Hindustan Steel Ltd. was entirely
financed by the Government and its management was directly
the responsibility of the Government, the post was virtually
under the Government of India. This contention was rejected
by the Court holding that the company had its independent
existence and by law relating to corporations it was
distinct from its members and, therefore, it was not a
department of the Government nor were its employees servants
holding posts under the Union. No question arose in that
case whether the company was “the State” within the meaning
of Article 12 and all that was sought to be contended was
that it was a department of the Government.
330
In Sabhajit Tewary v. Union of India and others, [1975]
3 S.C.R. 616 this Court held that the Council of Scientific
and Industrial Research which was a society registered under
the Societies Registration Act was not an authority within
the meaning of Article 12 and, therefore, certain letters
written by it to the petitioner with respect to his
remuneration could not be challenged as being discriminatory
and violative of Article 14. The contention raised in that
case was that the rules governing the said Council showed
that it was really an agent of the Government. This Court
rejected the said contention in these words (at page 617) :
“This contention is unsound. The Society does not
have a statutory character like the Oil and
Natural Gas Commission, or the Life Insurance
Corporation or Industrial Finance Corporation. It
is a society incorporated in accordance with the
provisions of the societies Registration Act. The
fact that the t) Prime Minister is the President
or that the Government appoints nominees to the
Governing Body or that the Government may
terminate the membership will not establish
anything more than the fact that the Government
takes special care that the promotion, guidance
and co-operation of scientific and industrial
research, the institution and financing of
specific researches, establishment or development
and assistance to special institutions or
departments of the existing institutions for
scientific study of problems affecting particular
industry in a trade, the utilisation of the result
of the researches conducted under the auspices of
the Council towards the development of industries
in the country are carried out in a responsible
manner.”
We now come to a case of considerable importance,
namely, Sukhdev Singh and others v. Bhagatram Sardar Singh
Kaghuvanshi and another. Two questions fell to be determined
in this case, namely, (i) whether statutory corporations are
comprehended within the expression “the State” as defined in
Article 12, and (ii) whether the regulations framed by a
statutory corporation in exercise of the power conferred by
the statute creating the corporation have the force of law.
The majority
331
of a Constitution Bench of this court answered both these A
questions in the affirmative. me statutory corporations
before the Court in that case were the Oil and Natural Gas
Commission established under the Oil and Natural Gas
Commission Act, 1956, the Life Insurance Corporation
established under the Life Insurance Corporation Act, 1956,
and the Industrial Finance Corporation established under the
Industrial Finance Corporation Act, 1948. Ray, C.J.,
speaking for himself and Chandrachud and Gupta, JJ., pointed
out (at page 634) that “The State undertakes commercial
functions in combination with Governmental functions in a
welfare State.” The majority held that “the State” as
defined in Article 12 comprehends bodies created for the
purpose of promoting economic interests of the people and
the circumstance that statutory bodies are required to carry
on some activities of the nature of trade or commerce does
not indicate that they must be excluded from the scope of
the expression “the State”, for a public authority is a body
which has public or statutory duties to perform and which
performs those duties and carries on its transactions for
the benefit of the public and not for private profit and by
that fact such an authority is not excluded from making a
profit for the public benefit. Mathew, J., in his concurring
judgment held that a finding of State financial support plus
an unusual degree of control over the management and
policies might lead one to characterize an operation as
State action. The learned Judge observed (at page 651-52) :
“Institutions engaged in matters of high public
interest or performing public functions are by
virtue of the nature of the function performed
government agencies. Activities which are too
fundamental to the society are by definition too
important not to be considered government
function. This demands the delineation of a theory
which requires government to provide all persons
with all fundamentals of life and the
determinations of aspects which are fundamental.
The State today has an affirmative duty of seeing
that all essentials of life are made available to
all persons. The task of the State today is to
make possible the achievement of a Good life both
by removing obstacles in the path of such
achievements
332
and in assisting individual in realizing his ideal
of self-perfection. Assuming that indispensable
functions are government functions, the problem
remains of defining the line between fundamentals
and non-fundamentals. The analogy of the doctrine
of ‘business affected with a public interest’
immediately comes to mind.”
After referring to the relevant provisions of the Acts under
which the above statutory bodies were established, Mathew,
J., continued (at pages 654-5) :
“The fact that these corporations have independent
personalities in the eye of law does not mean that
they are not subject to the control of government
or that they are not instrumentalities of the
government. These corporations are instrumentali-
ties or agencies of the state for carrying on
businesses which otherwise would have been run by
the state departmentally. If the state had chosen
to carry on these businesses through the medium of
government departments, there would have been no
question that actions of these departments would
be ‘state actions’. Why then should actions of
these corporations be not state actions?
The ultimate question which is relevant for our
purpose is whether such a corporation is an agency
or instrumentality of the government for carrying
on a business for the benefit of the public. In
other words, the question is, for whose benefit
was the corporation carrying on the business? When
it is seen from the provisions of that Act that on
liquidation of the Corporation, its assets should
be divided among the shareholders, namely, the
Central and State governments and others, if any,
the implication is clear that the benefit of the
accumulated income would go to the Central and
State Governments. Nobody will deny that an agent
has a legal personality different from that of the
principal. The fact that the agent is subject to
the direction of the principal does not mean that
he has no legal personality of his own. Likewise,
MANOHAR
333
merely because a corporation has legal personality
of its own, it does not follow that the
corporation 1 cannot be an agent or
instrumentality of the state, l if it is subject
to control of government in all important matters
of policy. No doubt, there might be some
distinction between the nature of control
exercised by principal over agent and the control
exercised by government over public corporation.
That, I think is only a distinction in degree. The
crux of the matter is that public corporation is a
new type of institution which has sprung from the
new social and economic functions of government
and that it therefore does not neatly fit into old
legal categories. Instead of forcing it into them,
the later should be adapted to the needs of
changing time and conditions.”
(Emphasis supplied.)
Various aspects of the question which we have to decide
were exhaustively considered by this Court in Ramana Dayaram
Shetty v. The International Airport Authority of India and
others, [1979] 3 S.C.R. 1014. In that case the Court
observed (at page 1032), “Today the Government, as a welfare
State, is the regulator and dispenser of special services
and provider of a large number of benefits, including jobs,
contracts, licences, quotas, mineral rights, etc.” The ques-
tion in that case was whether the International Airport
Authority constituted under the International Airports
Authority Act, 1971, came within the meaning of the
expression “The State” in Article 12. Under the said Act,
the Authority was a body corporate having perpetual
succession and a common seal and was to consist of a
Chairman and certain other members appointed by the Central
Government. The Central Government had the power to
terminate the appointment of or remove any member from the
Board. Although the authority had no share capital of its
own, capital needed by it for carrying out its functions was
to be provided only by the Central Government. While
considering the question whether such a body corporate was
included within the expression “the State”, this Court said
(at page 1036) :
“A corporation mar be created in one of two ways.
334
It may be either established by statute or incor-
porated under a law such as the Companies Act 1956
or the Societies Registration Act 1860. Where a
Corporation is wholly controlled by Government not
only in its policy making but also in carrying out
the functions entrusted to it by the law
establishing it or by the Charter of its
incorporation, there can be no doubt that it would
be an instrumentality or agency of Government. But
ordinarily where a corporation is established by
statute, it is autonomous in its working, subject
only to a provision, often times made, that it
shall be bound by any directions that may be
issued from time to time by Government in respect
of policy matters. So also a corporation
incorporated under law is managed by a board of
directors or committee of management in accordance
with the provisions of the statute under which it
is incorporated. When does such a corporation
become an instrumentality or agency of
Government?”
(Emphasis supplied.)
After considering various factors and the case law on the
subject, the Court thus summed up the position :
It will thus be seen that there are several factor
which may have to be considered in determining
whether corporation is an agency or
instrumentality of Government. We have referred to
some of these factors and they may be summarised
as under : Whether there is any financial
assistance given by the State, and if so what is
the magnitude of such assistance whether there is
any other form of assistance, given by the State,
and if so, whether it is of the usual kind or lt
is extraordinary, whether there is any control of
the management and policies of the corporation by
the State and what is the nature and extent of
such control, whether the corporation enjoys State
conferred or State protected monopoly status and
whether the functions carried out by the
corporation are public functions closely related
to
335
governmental functions. This particularisation of
relevant factors is however not exhaustive and by
its very nature it cannot be, because with
increasing assumption of new tasks, growing
complexities of management and administration and
the necessity of continuing adjustment in
relations between the corporation and Government
calling for flexibility, adaptability and
innovative skills, it is not possible to make an
exhaustive enumeration of the tests which would
invariably and in all cases provide an unfailing
answer to the question whether a corporation is
governmental instrumentality or agency. Moreover
even amongst these factors which we have
described, no one single factor will yield a
satisfactory answer to the question and the court
will have to consider the cumulative effect of
these various factors and arrive at its decision
on the basis of a particularised inquiry into the
facts and circumstances of each case.” D
In the course of its judgment, the Court distinguished the
case of Praga Tools Corporation as also the decision in S.L.
Agarwal v. General Manager, Hindustan Steel Ltd. in very
much the same manner as we have done. So far as the case of
Sabhajit Tewary v. Union of India and others is concerned,
the Court said as follows :
“Lastly, we must refer to the decision in
Sarabhajit Tewari v. Union of India & Ors. where
the question was whether the Council of Scientific
and Industrial Research was an ‘authority’ within
the meaning of Article 12. The Court no doubt took
the view on the basis of facts relevant to the
Constitution and functioning of the Council that
it was not an ‘authority’, but we do not find any
discussion in this case as to what are the
features which must be present before a
corporation can be regarded as an ‘authority’
within the meaning of Article 12. This decision
does not lay down any principle or test for the
purpose of determining when a corporation can be
said to be an ‘authority’. If at all any test can
be gleaned from
336
the decision, it is whether the Corporation is
“really an agency of the Government”. The Court
seemed to hold on the facts that the Council was
not an agency of the Government and was,
therefore, not an ‘authority’.”
In Managing Director, Uttar Pradesh Warehousing Corpora
tion and another v. Vinay Narayan Vajpayee, [1980] S.C.R.773
an employee of the corporation successfully challenged his
dismissal from service. The appellant corporation was
established under the Agricultural Produce (Development and
Warehousing) Corporation Act, 1956, and was deemed to be a
Warehousing Corporation for a State under the Warehousing
Corporation Act, 1962. In his concurring judgment, Chinnappa
Reddy, J.,said (at page 784) :
“I find it very hard indeed to discover any
distinction, on principle between a person
directly under the employment of the Government
and a person under the employment of an agency or
instrumentality of the Government or a
Corporation, set up under a statute or
incorporated but wholly owned by the Government.
It is self evident and trite to say that the
function of the State has long since ceased to be
confined to the preservation of the public peace,
the exaction of taxes and the defence of its
frontiers. It is now the function of the State to
secure ‘social, economic and political justice’,
to preserve ‘liberty of thought, expression,
belief, faith and worship’, and to ensure
‘equality of status and of opportunity’.
(Emphasis supplied)
In Ajay Hasia etc. v. Khalid Mujib Sehravardi and
others etc., [1981] 2 S.C.R. 79 the Regional Engineering
College which was established and administered and managed
by a society registered under the Jammu and Kashmir
Registration of Societies Act, 1898, was held to be “the
State” within the meaning of Article 12. In that case the
Court said (at page 91):
“It is undoubtedly true that the corporation is a
337
distinct juristic entity with a corporate
structure A of its own and it carries on its
functions on business principles with a certain
amount of autonomy which is necessary as well as
useful from the point of view of effective
business management, but behind the formal
ownership which is cast in the corporate mould,
the reality is very much the deeply pervasive
presence of the Government. It is really the
Government which acts through the instrumentality
or agency of the corporation and the juristic veil
of corporate personality worn for the purpose of
convenience of management and administration
cannot be allowed to obliterate the true nature of
the reality behind which is the Government. Now it
is obvious that if a corporation is an
instrumentality or agency of the Government, it
must be subject to the same limitations in the
field of constitutional law as the Government
itself, though in the eye of the law it would be a
distinct and independent legal entity. If the
Government acting through its officers is subject
to certain constitutional limitations, it must
follow a fortiorari that the Government acting
through the instrumentality or agency of a corpora
tion should equally be subject to the same
limitations.”
(Emphasis supplied.)
After referring to various authorities, the court summarized
the relevant tests which are to be gathered from the Inter-
national Airport Authority of India’s case as follows (at
pages 96-7) : F
“(1) ‘One thing is clear that if the entire share
capital of the corporation is held by Government
it would go a long way towards indicating that the
corporation is an instrumentality or agency of
Government.’ G
(2) ‘Where the financial assistance of the State
is so much as to meet almost entire expenditure of
the corporation, it would afford some indication
of the corporation being impregnated with
governmental character.’
338
(3) ‘It may also be a relevant factor. . . whether
the corporation enjoys monopoly status which is
the State conferred or State protected.’
(4) ‘Existence of deep and pervasive State control
may afford an indication that the Corporation is a
State agency or instrumentality.’
(5) ‘If the functions of the corporation of public
importance and closely related to governmental
functions, it would be a relevant factor in
classifying the corporation as an instrumentality
or agency of Government’.”
The right, title and interest of the Burmah Shell Oil
Storage and Distributing Company of India Limited in
relation to its undertakings in India were transferred to
and vested in the Central Government under section 3 of the
Burmah Shell (Acquisition of Undertakings in India) Act,
1976. Thereafter, under section 7 of the said Act, the
right, title, interest and liabilities of the said company
which had become vested in the Central Government, instead
of continuing so to vest in it, were directed to be vested
in a Government company, as defined by section 617 of the
Companies Act, 1956, namely, Bharat Petroleum. In Som
Prakash Rekhi v. Union of India and another, [1981] 2 S.C.R.
111 this Court held that Bharat Petroleum fell within the
meaning of the expression “the State” used in Article 12.
The following passage (at pages 124-5) from the judgment in
that case is instructive and requires to be reproduced :
“For purposes of the Companies Act, 1956, a
government company has a distinct personality
which cannot be confused with the State. Likewise,
a statutory corporation constituted to carry on a
commercial or other activity is for many purposes
a distinct juristic entity not drowned in the sea
of State, although, in substance, its existence
may be but a projection of the State. What we wish
to emphasise is that merely because a company or
other legal person has functional and jural
individuality for certain purposes and in certain
areas of law, it does not necessarily follow that
for the
339
effective enforcement of fundamental rights under
our constitutional scheme, we should not scan the
real character of that entity; and if it is found
to be a mere agent or surrogate of the State, in
fact owned by the State, in truth controlled by
the State and in effect an incarnation of the
State, constitutional lawyers must not blink at
these facts and frustrate the enforcement of
fundamental rights despite the inclusive
definition of Art. 12 that any authority
controlled by the Government of India is itself
State. Law has many dimensions and fundamental
facts must govern the applicability of fundamental
rights in a given situation.” C
(Emphasis supplied.)
At the first blush it may appear that the case of
S.S.Dhanoa v. Municipal Corporation, Delhi and others,
[1981] 3 S.C.C. 431 runs counter to the trend set in the
authorities cited above but on a closer scrutiny it turns
out not to be so. The facts in that case were that the
Cooperative Store Limited, which was a society registered
under the Bombay Cooperative Societies Act, 1925, had
established and was managing Super Bazars at different
places including at Connaught Place in New Delhi. Under
section 23 of the said Act, the society was a body corporate
by the name under which it was registered, with perpetual
succession and a common seal. The Super Bazars were not
owned by the Central Government but were owned and managed
by the said society, though pursuant to an agreement
executed between the said society and the Union of India,
the Central Government had advanced a loan of rupees forty
lakhs to the said society for establishing and managing
Super Bazars and it also held more than ninety-seven per
cent of the shares of the said society. The appellant who
was a member of the Indian Administrative Service was sent
on deputation as the General Manager of the Super Bazar at
Connaught Place. He along with other officials of the Super
Bazar were prosecuted under the Prevention of Food
Adulteration Act, 1954. He raised a preliminary objection
before the Metropolitan Magistrate, Delhi, before whom he
was summoned to appear that no cognizance of the alleged
offence could be taken by him for want of sanction under
section 197 of the Code of Criminal Procedure, 1973. On his
contention
340
being rejected, he appealed to this Court. Under the said
section 197, when any person who is or was inter alia a
public servant not removable from his office save by or with
the sanction of the Government is accused of any offence
alleged to have been committed by him while acting or
purporting to act in the discharge of his official duty, no
court is to take cognizance of such offence except with the
previous sanction in the case of a person who is employed
or, as the case may be, was at the time of commission of the
alleged offence employed, in connection with the affairs of
the Union or of the Central Government. As stated in the
opening paragraph of the judgment in the said case, the
question before the Court was whether the appellant was a
public servant within the meaning of Clause Twelfth of
section 21 of the Indian Penal Code for purposes of section
197 of the Code of Criminal Procedure. The relevant
provisions of Clause Twelfth of section 21 are as follows:
“21. Public servant. –
The words ‘public servant’ denote a person falling
under any of the descriptions hereinafter
following, namely : –
x x x x x x x
Twelfth. – Every person –
(a) in the service or pay of the Government or
remunerated by fees or commission for the
Performance of any public duty by the Government;
(b) in the service or pay of a local authority, a
corporation established by or under a General,
Provincial or State Act or a Government company as
defined in section 617 of the Companies Act,
1956.”
The Court pointed out that Clause Twelfth did not use the
words “body corporate” and, therefore, the question was
whether the expression “corporation” contained therein taken
in collocation of the words “established by or under a
Central or Provincial or State Act” would bring within its
sweep a cooperative society. The Court said (at page 437) :
341
“In our opinion, the expression ‘corporation’
must, in the context, mean a corporation created
by the legislature and not a body or society
brought into existence by an act of a group of
individuals. A cooperative society is, therefore,
not a corporation established by or under an Act
of the Central or State Legislature.”
The Court then proceeded to point out that a corporation is
an artificial being created by law, having a legal entity
entirely separate and distinct from the individuals who
compose it, with the capacity of continuous existence and
succession. The Court held that corporations established by
or under an Act of Legislature can only mean a body
corporate which owes its existence, and not merely its
corporate status, to the Act. An association of persons
constituting themselves into a company under the Companies
Act or a society under the Societies Registration Act owes
its existence not to the act of Legislature but to acts of
parties, though it may owe its status as a body corporate to
an Act of Legislature. The observation of the Court in that
case with respect to companies were not intended by it to
apply to Government companies as defined in section 617 of
the Companies Act, 1956, for by the express terms of sub-
clause (b) of Clause Twelfth of section 21 of the Indian
Penal Code every person in the service or pay of a
Government company as defined in section 617 of the
Companies Act, 1956, is a public servant. The second part of
the question which the Court was called upon to decide in
that case was whether the appellant can be said to be a
person who was employed in connection with the affairs of
the Union. The Court held that the Super Bazar was not an
instrumentality of the State and, therefore, it could not be
said that the appellant was employed in connection with the
affairs of the Union within the meaning of the section 197
of the Code of Criminal Procedure. This observation was
again made with reference to the argument that the appellant
was employed in connection with the affairs of the Union. He
undoubtedly was not employed in connection with the affairs
of
342
the Union just as a person employed in a corporation is not
and cannot be said to be holding a civil post under the
Union or a State as held by this Court in S.L. Agarwal v.
General Manager, Hindustan Steel Ltd. In S.S. Dhanoa’s case
the Court was not called upon to decide and did not decide
whether a Government company was an instrumentality or
agency of the State for the purposes of Parts III and IV of
the Constitution and thus, “the State” within the meaning of
that expression as used in Article 12 of the Constitution.
The Indian Statistical Institute is a society
registered under the Societies Registration Act, 1860, and
is governed by the Indian Statistical Institute Act, 1959,
under which its control completely vests in the Union of
India. The society is also wholly financed by the Union of
India. In B.S. Minhas v. Indian Statistical Institute and
others, [1983] 4 S.C.C. 582 this Court, following Ajay
Hasia’s case, held that the said society was an “authority”
within the meaning of Article 12 and hence a writ petition
under Article 32 filed against it was competent and
maintainable. In Manmohan Singh Jaitla v. Commissioner,
Union Territory of Chandigarh and others, [1984] Supp.
S.C.C. 540 this Court once again following Ajay Hasia’s case
held that an aided school which received a Government grant
of ninety-five per cent was an “authority” within the
meaning of Article 12 and, therefore, amenable to the writ
jurisdiction both of this Court and the High Court.
In Workmen of Hindustan Steel Ltd. and another v.
Hindustan Steel Ltd. and others, [1984] Supp. S.C.C. 554,
560 the Court held that the hindustan Steel Ltd. was a
public sector undertaking and, therefore, was “other
authority” within the meaning of that expression in Article
12.
In P.K. Ramachandra Iyer and others v. Union of India
and others, [1984] 2 S.C.R. 141 once again following Ajay
Hasia’s case, the Court held that the Indian Council of
Agricultural Research which was a society registered under
the Societies Registration Act was an instrumentality of the
State falling under the expression ‘other authority’ within
the meaning of Article 12. The said Council was wholly
financed by the Government. Its budget was voted upon as
part of the expenses incurred in the Ministry of
Agriculture. The
343
control of the Government of India permeated through all its
activities. Since its inception, it was set up to carry out
the recommendations of the Royal Commission on Agriculture.
According to this Court, these facts were sufficient to make
the said Council an instrumentality of the State.
In A.L. Kalra v. Project and Equipment Corporation of
India Ltd., [1984] 3 S.C.R. 316,319,325 the said corporation
was held to be an instrumentality of the Central Government
and hence falling within Article 12. The Project and
Equipment Corporation of India Ltd. was a wholly owned
subsidiary company of the State Trading Corporation but was
separated in 1976 and thereafter functioned as a Government
of India undertaking. The finding that it was an
instrumentality of the Central Government was, however,
based upon concession made by the said corporation.
In West Bengal State Electricity Board and others v.
Desh Banahu Ghosh and others, [1985] 3 S.C.C. 116 the West
Bengal State Electricity Board was held to be an
instrumentality of the State.
As pointed out earlier, the Corporation which is the
First Appellant in these Appeals is not only a Government
company as defined in section 617 of the Companies Act,
1956, but is wholly owned by three Governments jointly. It
is financed entirely by these three Governments and is
completely under the control of the Central Government, and
is managed by the Chairman and Board of Directors appointed
by the Central Government and removable by it. In every
respect it is thus a veil behind which the Central
Government operates through the instrumentality of a
Government company. The activities carried on by the
Corporation are of vital national importance. The Fifth Five
Year Plan 1974-79 states that the “outlay of Rs.14.73 crores
for the next two years includes development of Rajabagan
Dockyard and operation of the Central Inland Water Transport
Corporation and operation of river services on the Ganga.”
According to the Sixth Five Year Plan, 1980-85, inland water
transport is recognized as the cheapest mode of transport
for certain kinds of commodities provided the points of
origin and destination are both located on the water front;
that it is one of the most energy efficient modes of
transport and has considerable potential in limited areas H
344
which have a net-work of waterways. This Plan further
emphasises that in the North-Eastern Region where other
transport infrastructure is severely lacking and more
expensive, inland water transport has an additional
importance as an instrument of development. The said Plan
goes on to state, “In the Central Sector, an outlay of Rs.45
crores has been made for IWT. The most important programme
relates to the investment proposal of Central Inland Water
Transport Corporation (CIWTC)”. The Annual Plan 1984-85 of
the Government of India Planning Commission states as
follows in paragraph 10.33 :
“Inland Water Transport
Against the approved outlay of Rs.12 crores in
1983-84, the revised expenditure in the Central
Sector is estimated at Rs.10.40 crores. Bulk of
the allocation was for the scheme of Central
Inland Water Transport Corporation (CIWTC) for
acquisition of vessels, development of Rajabagan
Dockyard, creation of infrastructural facilities
etc.”
The Annual Report 1984-85 of the Government of India,
Ministry of Shipping and Transport, states in paragraph
6.1.2. as follows :
“The Inland Water Transport Directorate is an
attached office of this Ministry headed by a Chief
Engineer-cum-Administrator. It has a complement of
technical officers who are charged with the
responsibility for planning of techno-economic
studies on waterways and conducting hydrographic
surveys. The Directorate has a Regional Office at
Patna Two sub-offices of this Regional Office have
also been sanctioned. One of the sub-offices has
been set up at Gauhati and arrangements are under
way to set up the other at Varanasi. The Ministry
has also under its control a public sector under
taking, namely, the Central Inland Water Transport
Corporation which is the only major company in
inland water transport in the country.”
(Emphasis supplied.)
345
As shown by the Statement of Objects and Reasons to the
Legislative Bill, which when enacted became the National
Waterway (Allahabad-Halda Stretch of the Ganga-Bhagirathi-
Hooghly River) Act, 1982 (Act No. 49 of 1982), published in
the Gazette of India Extraordinary, Part II, Section 2,
dated May 6, 1982, at page 15, the Central Government had
set up various committees in view of the advantages in the
mode of inland water transport such as its low cost of
transport, energy efficiency, generation of employment among
weaker sections of the community and less pollution. These
committees had recommended that the Central Government
should declare certain waterways as national waterways and
assume responsibility for their development. A beginning in
respect of this matter was thus made by the enactment of the
said Act No. 49 of 1982. Under the said Act, the said
stretch was declared to be a national waterway and it was
the responsibility of the Central Government to regulate and
develop this national waterway and to secure its efficient
utilization for shipping and navigation. In the Demands for
Grant of the Ministry of Shipping and Transport 1985-86
additional provision was made for an overall increase in
Budget Estimates 1985-86 mainly for equity
participation/investment in the Corporation. The activities
carried on by the Corporation were thus described in the
said Demands for Grant :
“Central Inland Water Transport Corporation –
CIWTC runs river services between Calcutta and
Assam and Calcutta and Bangladesh. It undertakes
movement of oil from Haldia to Budge-
Budge/Paharpur for the Indian Oil Corporation. It
also undertakes lighterage, stevedoring
operations, ship building, ship repairing and
other engineering services. To meet cash losses
over riverine and engineering operations,
construction of vessel and for purchase of
machinery/equipment etc., budget estimates 1985-86
provide Rs. 13.50 crores for loan and Rs. 15.41
crores for equity investment in the Corporation.”
Last year Parliament passed the Inland Waterways Authority
of India Act, 1985. This Act received the assent of the
President on December 30, 1985. Under this act, an Authority
called the
346
Inland Waterways Authority of India is to be constituted and
it is to be a body corporate by the name aforesaid, having
perpetual succession and a common seal, with power, subject
to the provisions of the said Act, to acquire, hold and
dispose of property, both movable and immovable, and to
contract and to sue and be sued by the said name. It is to
consist of a Chairman, a Vice-Chairman and other persons not
exceeding five. The Chairman, Vice-Chairman and the other
persons are to be appointed by the Central Government. The
term of office and other conditions of service of the
members of the Authority are to be prescribed by the rules.
The Central Government has also the power to remove any
member of the Authority or to suspend him pending inquiry
against him. Under the said act, the Authority is, in the
discharge of its functions and duties, to be bound by such
directions on questions of policy as the Central Government
may give in writing to it from time to time.
It may be mentioned that neither the said Act nor Act
No.49 of 1982 appears to have been yet brought into force.
There can thus be no doubt that the Corporation is a
Government undertaking in the public sector. The Corporation
itself has considered that it is a Government of India
undertaking. The complete heading of the said Rules is
“Central Inland Water Transport Corporation Limited (A
Government of India Undertaking) – Service, Discipline
Appeal Rules – 1979”.
In the face of so much evidence it is ridiculous to
describe the Corporation as a trading company as the
Appellants have attempted to do. What has been set out above
is more than sufficient to show that the activities of the
Corporation are of great importance to public interest,
concern and welfare, and are activities of the nature
carried on by a modern State and particularly a modern
Welfare State.
It was, however, submitted on behalf of the Appellants
that even though the cases, out of those referred to above,
upon which the Appellants had relied upon were either
distinguishable or inapplicable for determining the question
whether a Government company was “the State” or not, the
case of A. L. Kalra v. Project and Equipment Corporation of
India
347
Ltd. relied upon by the Respondents was based upon a
concession and there was thus no direct authority on the
point in issue. It was further submitted that all the other
cases in which various bodies were held to be “the State”
under Article 12 were those which concerned either a
statutory authority or a corporation established by a
statute.
It is true that the decision in A.L. Kalra v. Project
and Equipment Corporation of India Ltd. was based upon a
concession made by the respondent corporation but the case
of Workmen of Hindustan Steel Ltd. and another v. Hindustan
Steel Ltd. and others was that of a Government company for
Hindustan Steel Limited is a Government company as defined
by section 617 of the Companies Act as pointed out in
Gurugobinda Basu v. Sankari Prasad Ghosal and others, [1964]
4 S.C.R. 311,315. The case of the Workmen of Hindustan Steel
Ltd. related to a question whether a disciplinary inquiry
was validly dispensed with under Standing Order No. 32 of
the Hindustan Steel Limited. Under that Standing Order,
where a workman had been convicted for a criminal offence in
a court of law or where the General Manager was satisfied,
for reasons to be recorded in writing, that it was
inexpedient or against the interest of security to continue
to employ the workman, the workman may be removed or
dismissed from service without following the procedure for
holding a disciplinary inquiry laid down in Standing Order
No. 31. The order of removal from service of the concerned
workman did not set out any reason for the satisfaction
arrived at by the disciplinary authority but merely stated
that such authority was satisfied that it was no longer
expedient to employ the particular workman any further and
the order then proceeded to remove him from the service of
the company. In these circumstances, this Court held that
the order of removal from service was bad in law. In the
course of its judgment, this Court observed as follows (at
page 560) :
“It is time for such a public sector undertaking
as Hindustan Steel Ltd. to recast S.O. 32 and to
bring it in tune with the philosophy of the
Constitution failing which it being other
authority and therefore a State under Article 12
in an appropriate proceeding, the vires of S.O. 32
will have to be examined. It is not necessary to
do so in the present case because even on the
terms of H
348
S.O. 32 the order made by the General Manager is
unsustainable.”
The only reason given by the Court for holding that
Hindustan Steel Limited was “other authority” and,
therefore, “the State” under Article 12 was the fact that it
was a public sector undertaking. In the entire judgment,
there is no other discussion on this point except what is
stated in the passage quoted above. Thus, to the extent that
there is no authority of this Court in which the question,
namely, whether a Government company is “the State” within
the meaning of Article 12 has been discussed and decided,
the above submission is correct.
Does this, therefore, make any difference? There is a
basic fallacy vitiating the above submission. That fallacy
lies in the assumption which that submission makes that
merely because a point has not fallen for decision by the
Court, it should, therefore, not be decided at any time.
Were this assumption true, the law would have remained
static and would have never advanced. The whole process of
judicial interpretation lies in extending or applying by
analogy the ratio decidendi of an earlier case to a
subsequent case which differs from it in certain essentials,
so as to make the principle laid down in the earlier case
fit in with the new set of circumstances. The sequitur of
the above assumption would be that the Court should tell the
suitor that there is no precedent governing his case and,
therefore, it cannot give him any relief. This would be to
do gross injustice. Had this not been done, the law would
have never advanced. For instance, had Rylands v. Fletcher,
[1868] L.R. 3 H.L. 330 not been decided in the way in which
it was, an owner or occupier of land could with impunity
have brought and kept on his land anything likely to do
mischief if it escaped and would have himself escaped all
liability for the damage caused by such escape if he had not
been negligent. Similarly, but for Donoghue v. Stevention,
[1932] A.C. 562 manufacturers would have been immune from
liability to the ultimate consumers and users of their
products.
What is the position before us? Is it only one case
decided on a concession and another based upon an assumption
that a Government Company is “the State” under Article 12?
349
That is the position in fact but not in substance. As we
have seen, authorities constituted under, and corporations
established by, statutes have been held to be
instrumentalities and agencies of the Government in a long
catena of decisions of this Court. The observations in
several of these decisions, which have been emphasised by us
in the passages extracted from the judgments in those cases,
are general in their nature and take in their sweep all
instrumentalities and agencies of the State, whatever be the
form which such instrumentality or agency may have assumed.
Particularly relevant in this connection are the
observations of Mathew, J., in Sukhdev Singh and others v.
Bhagatram Sardar Singh Raghuvanshi and another, of Bhagwati,
J., in the International Airport Authority’s case and Ajay
Hasia’s case and of Chinnappa Reddy, J., in Uttar Pradesh
Warehousing Corporations case. If there is an
instrumentality or agency of the state which has assumed the
garb of a Government company as defined in section 617 of
the Companies Act, it does not follow that it thereby ceases
to be an instrumentality or agency of the State. For the
purposes of Article 12 one must necessarily see through the
corporate veil to ascertain whether behind that veil is the
face of an instrumentality or agency of the State. The
Corporation, which is the Appellant in these two Appeals
before us, squarely falls within these observations and it
also satisfies the various tests which have been laid down.
Merely because it has so far not the monopoly of inland
water transportation is not sufficient to divest it of its
character of an instrumentality or agency of the State. It
is nothing but the Government operating behind a corporate
veil, carrying out a governmental activity and governmental
functions of vital public importance. mere can thus be no
doubt that the Corporation is “the State” within the meaning
of Article 12 of the Constitution.
We now turn to the second question which falls for
determination in these Appeals, namely, whether an
unconscionable term in a contract of employment entered into
with the Corporation, which is “the State” within the
meaning of the expression in Article 12, is void as being
violative of Article 14. What is challenged under this head
is clause (i) of Rule 9 of the said Rules. This challenge
levelled by the Respondent in each of these two Appeals
succeeded in the High Court. H
350
The first point which falls for consideration on this
part of the case is whether Rule 9(i) is unconscionable. In
order to ascertain this, we must first examine the facts
leading to the making of the said Rules and then the setting
in which Rule 9(i) occurs. To recapitulate briefly, each of
the contesting Respondents was in the service of the Rivers
Steam Navigation Company Limited. Their services were taken
over by the Corporation after the Scheme of Arrangement was
sanctioned by the Calcutta High Court. Under the said Scheme
of Arrangement if their services had not been taken over,
they would have been entitled to compensation payable to
them, either under the Industrial Disputes Act, 1947, or
otherwise legally admissible, by the said company, and the
Government of India was to provide to the said company the
amount of such compensation. Under the letters of
appointment issued to these Respondents, the age of
superannuation was fifty-five. Thereafter, Service Rules
were framed by the Corporation in 1970 which were replaced
in 1979 by new rules namely, the said Rules. The said Rules
did not apply to employees covered by the Industrial
Employment (Standing Orders) Act, 1946, that is, to workmen,
or to those in respect of whom the Board of Directors had
issued separate orders. At all relevant times, these
Respondents were employed mainly in a managerial capacity.
No separate orders were issued by the Board of Directors in
their case. These Respondents were, therefore, admittedly
governed by the said Rules. Under Rule 10 of the said Rules,
they were to retire from the service of the Corporation on
completion of the age of fifty-eight years though in
exceptional cases and in the interest of the Corporation an
extension might have been granted to them with the prior
approval of the Chairman-cum-Managing Director and the Board
of Directors of the Corporation. me said Rules, however,
provide four different modes in which the services of the
Respondents could have been terminated earlier than the age
of superannuation, namely, the completion of the age of
fifty-eight years. These modes are those provided in Rule
9(i), Rule 9(ii), sub-clause (iv) of clause (b) of Rule 36
read with Rule 38 and Rule 37. Of these four modes, the
first two apply to permanent employees and the other two
apply to all employees. Rule 6 classifies employees as
either Permanent or Probationary or Temporary or Casual or
Trainee. Clause (i) of Rule 6 defines the expression
“Permanent employee” as meaning “an employee whose services
have been confirmed in
351
writing according to the Recruitment and Promotion Rules”.
Under Rule 9(i) which has been extracted above, the
employment of a permanent employee is to be subject to
termination on three months’ notice in writing on either
side. If the Corporation gives such a notice of termination,
it may pay to the employee the equivalent of three months’
basic pay and dearness allowance, if any, in lieu of notice,
and where a permanent employee terminates the employment
without giving due notice, the Corporation may deduct a like
amount from the amount due or payable to the employee. Under
Rule 11, an employee who wishes to leave the service of the
Corporation by resigning therefrom, is to give to the
Corporation the same notice as the Corporation is required
to give to him under Rule 9, that is, a three months’ notice
in writing. Under rule 9(ii), the services of a permanent
employee can be terminated on the ground of “Services no
longer required in the interest of the Company” (that is,
the Corporation). In such a case, a permanent employee whose
service is terminated under this clause is to be paid
fifteen days’ basic pay and dearness allowance for each
completed year of continuous service in the Corporation and
he is also to be entitled to encashment of leave to his
credit. Rule 36 prescribes the penalties which can be
imposed, “for good and sufficient reasons and as hereinafter
provided” in the said Rules, on an employee for his
misconduct. Clause (a) of Rule 36 sets out the minor
penalties and clause (b) of Rule 36 sets out the major
penalties. Under sub-clause (iv) of clause (b) of Rule 36,
dismissal from service is a major penalty. None of the major
penalties including the penalty of dismissal is to be
imposed except after holding an inquiry in accordance with
the provisions of Rule 38 and until after the inquiring
authority, where it is not itself the disciplinary
authority, has forwarded to the disciplinary authority the
records of the inquiry together with its report, and the
disciplinary authority has taken its decision as provided in
Rule 39. Rule 40 prescribes the procedure to be followed in
imposing minor penalties. Under Rule 43, notwithstanding
anything contained in Rules 38, 39 or 40, the disciplinary
authority may dispense with the disciplinary inquiry in the
three cases set out in Rule 43 and impose upon an employee
either a major or minor penalty. We have reproduced Rule 43
earlier. Rule 45 provides for an appeal against an order
imposing any of the penalties specified in Rule 36. Under
Rule 37, the Corporation has the
352
right to terminate the service of any employee at any time
without any notice if the employee is found guilty of any
insubordination, intemperance or other misconduct or of any
breach of any rules pertaining to service or conduct or non-
performance of his duties. The said Rules do not require
that any disciplinary inquiry should be held before
terminating an employee’s service under rule 37.
Each of the contesting Respondents in these Appeals was
asked to submit his written explanation to the various
allegations made against him. Ganguly, the First Respondent
in Civil Appeal No. 4412 of 1985, gave a detailed reply to
the said show cause notice. Sengupta, the First Respondent
in Civil Appeal No. 4413 of 1985, denied the charges made
against him and asked for inspection of the documents and
copies of statements of witnesses mentioned in the charge-
sheet served upon him to enable him to file his written
statement. Without holding any inquiry into the allegations
made against them, the services of each of them were
terminated by the said letter dated February 26, 1983, under
Rule 9(i). The action was not taken either under Rule 36 or
Rule 37 nor was either of them dismissed after applying to
his case Rule 43 and dispensing with he disciplinary
inquiry.
It was submitted on behalf of the Appellants that there
was nothing unconscionable about Rule 9(i), that Rule 9(i)
was not a nudum pactum for it was supported by mutuality
inasmuch as it conferred an equal right upon both parties to
terminate the contract of employment, that the grounds which
render an agreement void and unenforceable are set out in
the Indian Contract Act, 1872 (Act No. IX of 1872), that
unconscionability was not mentioned in the Indian Contract
Act ,as one of the grounds which invalidates an agreement,
that the power conferred by Rule 9(i) was necessary for the
proper functioning of the administration of the Corporation,
that in the case of the Respondents this power was exercised
by the Chairman-cum-Managing Director of the Corporation,
and that a person holding the highest office in the
Corporation was not likely to abuse the power conferred by
Rule 9(i).
The submissions of the contesting Respondents, on the
other hand, were that the parties did not stand on an equal
S footing and did not enjoy the same bargaining power, that
the
353
contract contained in the service rules was one imposed upon
A these Respondents, that the power conferred by rule 9(i)
was arbitrary and uncanalized as it did not set out any
guidelines for the exercise of that power and that even
assuming it may not be void as a contract; in any event it
offended Article 14 as it conferred an absolute and
arbitrary power upon the Corporation.
As the question before us is of the validity of clause
(i) of Rule 9, we will refrain from expressing any opinion
with respect to the validity of clause (ii) of Rule 9 or
Rule 37 or 40 but will confine ourselves only to Rule 9(i).
The said Rule constitute a part of the contract of
employment between the Corporation and its employees to whom
the said Rules apply, and they thus form a part of the
contract of employment between the Corporation and each of
the two contesting Respondents. The validity of Rule 9(i)
would, therefore, first fall to be tested by the principles
of the law of contracts.
Under section 19 of the Indian Contract Act, when
consent to an agreement is caused by coercion, fraud or
misrepresentation, the agreement is a contract voidable at
the option of the party whose consent was so caused. It is
not the case of either of the contesting Respondents that
there was any coercion brought to bear upon him or that any
fraud or misrepresentation had been practised upon him.
Under section 19A, when consent to an agreement is caused by
undue influence, the agreement is a contract voidable at the
option of the party whose consent was so caused and the
court may set aside any such contract either absolutely or
if the party who was entitled to avoid it has received any
benefit thereunder, upon such terms and conditions as to the
court may seem just. Sub-section (1) of section 16 defines
“Undue influence” as follows :
“16. ‘Undue influence’ defined.
(1) A contract is said to be induced by ‘undue
influence’ where the relations subsisting between
the parties are such that one of the parties is in
a position to dominate the will of the other and
uses that position to obtain an unfair advantage
over the other.”
354
The material provisions of sub-section (2) of section 16 are
as follows :
“(2) In particular and without prejudice to the
generality of the foregoing principle, a person is
deemed to be in a position to dominate the will of
another –
(a) where he holds a real or apparent authority
over the other . . . ”
We need not trouble ourselves with the other sections of the
Indian Contract Act except sections 23 and 24. Section 23
states that the consideration or object of an agreement is
lawful unless inter alia the Court regards it as opposed to
public policy. This section further provides that every
agreement of which the object or consideration is unlawful
is void. Under section 24, if any part of a single
consideration for one or more objects, or any one or any
part of any one of several considerations for a single
object is unlawful, the agreement is void. The agreement is,
however, not always void in its entirety for it is well
settled that if several distinct promises are made for one
and the same lawful consideration, and one or more of them
be such as the law will not enforce, that will not of itself
prevent the rest from being enforceable. The general rule
was stated by Willes, J., in Pickering v. Ilfracombe Ry.
Co., [1868] L.R. 3 C.P. 235 (at page 250) as follows :
“The general rule is that, where you cannot sever
the illegal from the legal part of a covenant, the
contract is altogether void; but where you can
sever them, whether the illegality be created by
statute or by the common law, you may reject the
bad part and retain the good”.
Under which head would an unconscionable bargain fall?
If it falls under the head of undue influence, it would be
voidable but if it falls under the head of being opposed to
public policy, it would be void. No case of the type before
us appears to have fallen for decision under the law of
contracts before any court in India nor has any case on all
fours of a court in any other country been pointed out to
us. The word “unconscionable” is defined in the Shorter
Oxford English Dictionary, Third Edition, Volume II, page
2288, when used
355
with reference to actions etc. as “showing no regard for
conscience; irreconcilable with what is right or
reasonable”. An unconscionable bargain would, therefore, be
one which is irreconcilable with what is right or
reasonable.
Although certain types of contracts were illegal or
void, as the case may be, at Common Law, for instance, those
contrary to public policy or to commit a legal wrong such as
a crime or a tort, the general rule was of freedom of
contract. This rule was given full play in the nineteenth
century on the ground that the parties were the best judges
of their own interests, and if they freely and voluntarily
entered into a contract the only function of the court was
to enforce it. It was considered immaterial that one party
was economically in a stronger bargaining position than the
other; and if such a party introduced qualifications and
exceptions to his liability in clauses which are today known
as “exemption clauses” and the other party accepted them,
then full effect would be given to what the parties agreed.
Equity, however, interfered in many cases of harsh or
unconscionable bargains, such as, in the law relating to
penalties, forfeitures and mortgages. It also interfered to
asset aside harsh or unconscionable contracts for salvage
services rendered to a vessel in distress, or unconscionable
contracts with expectant heirs in which a person, usually a
money-lender, gave ready cash to the heir in return for the
property which he expects to inherit and thus to get such
property at a gross undervalue. It also interfered with
harsh or unconscionable contracts entered into with poor and
ignorant persons who had not received independent advice
(See Chitty on Contracts, Twenty-fifth Edition, Volume I,
paragraphs 4 and 516). F
Legislation has also interfered in many cases to
prevent one party to a contract from taking undue or unfair
advantage of the other. Instances of this type of
legislation are usury laws, debt relief laws and laws
regulating the hours of work and conditions of service of
workmen and their unfair discharge from service, and control
orders directing a party to sell a particular essential
commodity to another.
In this connection, it is useful to note what Chitty
has to say about the old ideas of freedom of contract in
modern times. The relevant passages are to be found in
Chitty on Contracts, Twenty-fifth Edition, Volume I, in
paragraph 4, and are as follows :
356
“These ideas have to a large extent lost their
appeal today. ‘Freedom of contract,’ it has been
said, ‘is a reasonable social ideal only to the –
extent that equality of bargaining power between
contracting parties can be assumed, and no injury
is done to the economic interests of the community
at large.’ Freedom of contract is of little value
when one party has no alternative between
accepting a set of terms proposed by the other or
doing without the goods or services offered. Many
contracts entered into by public utility
undertakings and others take the form of a set of
terms fixed in advance by one party and not open
to discussion by the other. These are called
‘contracts d’adhesion’ by French lawyers. Traders
frequently contract, not on individually
negotiated terms, but on those contained in a
standard form of contract settled by a trade
association. And the terms of an employee’s
contract of employment may be determined by
agreement between his trade union and his
employer, or by a statutory scheme of ”
employment. Such transactions are nevertheless ?
contracts notwithstanding that freedom of contract
is to a great extent lacking.
Where freedom of contract is absent, the
disadvantages to consumers or members of the
public have to some extent been offset by
administrative procedures for consultation, and by
legislation. Many statutes introduce terms into
contracts which the parties are forbidden to
exclude, or declare that certain provisions in a
contract shall be void. And the courts have
developed a number of devices for refusing to
implement exemption clauses imposed by the
economically stronger party on the weaker,
although they have not recognised in themselves
any general power (except by statute) to declare
broadly that an exemption clause will not be
enforced unless it is reasonable. Again, more
recently, certain of the judges appear to have
recognised the possibility of relief from
contractual obligations on the ground of
‘inequality of bargaining power.”
358
What the French call “contracts d’adhesion’, the American
call A “adhesion contracts” or “contracts of adhesion.” An
“adhesion contract” is defined in Black’s Law Dictionary,
Fifth Edition, at page 38, as follows :
“‘Adhesion contract’. Standardized contract form
offered to consumers of goods and services on
essentially ‘take it or leave it’ basis without
affording consumer realistic opportunity to
bargain and under such conditions that consumer
cannot obtain desired product or services except
by acquiescing in form contract. Distinctive
feature of adhesion contract is that weaker party
has no realistic choice as to its terms. Not every
such contract is unconscionable.”
The position under the American Law is stated in
“Reinstatement of the Law – Second” as adopted and
promulgated by the American Law Institute, Volume II xx
which deals with the law of contracts, in section 208 at
page 107, as follows : D
“$ 208. Unconscionable Contract or Tern
If a contract or term thereof is unconscionable at
the time the contract is made a court may refuse
to enforce the contract, or may enforce the
remainder of the contract without the
unconscionable term, or may so limit the
application of any unconscionable term as to avoid
any unconscionable result.”
In the Comments given under that section it is stated at
page 107 :
“Like the obligation of good faith and fair
dealing (S 205), the policy against unconscionable
contracts or terms applies to a wide variety of
types of conduct. The determination that a
contract or term is or is not unconscionable is
made in the light of its setting, purpose and
effect. Relevant factors include weaknesses in the
contracting process like those involved in more
specific rules as to contractual capacity, fraud
and other invalidating causes; the policy also
overlaps with rules which render particular
bargains or terms unenforceable on grounds of
public policy. Policing
358
against unconscionable contracts or terms has
sometimes been accomplished by adverse
construction of language, by manipulation of the
rules of offer and acceptance or by determinations
that the clause is contrary to public policy or to
the dominant purpose of the contract’. Uniform
Commercial Code $ 2-302 Comment 1. . . . A bargain
is not unconscionable merely because the parties
to it are unequal in bargaining position, nor even
because the inequality results in an allocation of
risks to the weaker party. But gross inequality of
bargaining power, together with terms unreasonably
favourable to the stronger party, may confirm
indications that the transaction involved elements
of deception or compulsion, or may show that the
weaker party had no meaningful choice, no real
alternative, or did not in fact assent or appear
to assent to the unfair terms.”
(Emphasis supplied.)
There is a statute in the United States called the Universal
Commercial Code which is applicable to contracts relating to
sales of goods. Though this statutes is inapplicable to
contracts not involving sales of goods, it has proved very
influential in, what are called in the United States, L
“non-sales” cases. It has many times been used either by
analogy or because it was felt to embody a general accepted
social attitude of fairness going beyond its statutory
application to sales of goods. In the Reporter’s Note to the
said section 208, it is stated at page 112 :
“It is to be emphasized that a contract of
adhesion is not unconscionable per se, and that
all unconscionable contracts are not contracts of
adhesion. Nonetheless, the more standardized the
agreement and the less a party may bargain
meaningfully, the more susceptible the contract or
a term will be to a claim of unconscionability.”
(Emphasis supplied.)
The position has been thus summed up by John R. Pedan in
“The Law of Unjust Contracts” published by Butterworths in
1982, at pages 28-29 :
359
“. . . Unconscionability represents the end of a A
cycle commencing with the Aristotelian concept of
justice and the Roman law iaesio enormis, which in
turn formed the basis for the medieval church’s
concept of a just price and condemnation of usury.
These philosophies permeated the exercise, during
the seventeenth and eighteenth centuries, of the
Chancery court’s discretionary powers under which
it upset all kinds of unfair transactions. Subse
quently the movement towards economic
individualism in the nineteenth century hardened
the exercise of these powers by emphasizing the
freedom of the parties to make their own contract.
While the principle of pacta sunt servanda held
dominance, the consensual theory still recognized
exceptions where one party was overborne by a
fiduciary, or entered a contract under duress or
as the result of fraud. However, these exceptions
were limited and had to be strictly proved.
It is suggested that the judicial and legislative
trend during the last 30 years in both civil and
common law jurisdictions has almost brought the
wheel full circle. Both courts and parliaments
have provided greater protection for weaker
parties from harsh contracts. In several
jurisdictions this included a general power to
grant relief from unconscionable contracts,
thereby providing a launching point from which the
courts have the opportunity to develop a modern
doctrine of unconscionability. American decisions
on article 2.302 of the UCC have already gone some
distance into this new arena
The expression “laesio enormis” used in the above passage
refers to “laesio ultra dimidium vel enormis” which in Roman
law meant the injury sustained by one of the parties to an
onerous contract when he had been overreached by the other
to the extent of more than one-half of the value of the
subject-matter, as for example, when a vendor had not
received half the value of property sold, or the purchaser
had paid more then double value. The maxim “pacta sunt
servanda” referred to in the above passage means “contracts
are to be kept”
360
It would appear from certain recent English cases that
the courts in that country have also begun to recognize the
possibility of an unconscionable bargain which could be
brought about by economic duress even between parties who
may not in economic terms be situate differently (see, for
instance, occidental worldwide Investment Corpn. v. Skibs
A/S Avanti, [1976] 1 Lloyd’s Rep. 293, North ocean Shipping
Co. Ltd. v. Hyundai Construction Co. Ltd., [1979] Q.B. 705,
Pao On v. Lau Yin Long [1980] A.C. 614 and Universe
Tankships of Monrovia v. International Transport Workers
Federation, [1981] 1 C.R. 129, reversed in [1981] 2 W.L.R.
803 and the commentary on these cases in Chitty on
Contracts, Twenty-fifth Edition, Volume I, paragraph 486).
Another jurisprudential concept of comparatively modern
origin which has affected the law of contracts is the theory
of “distributive justice”. According to this doctrine,
distributive fairness and justice in the possession of
wealth and property can be achieved not only by taxation but
also by regulatory control of private and contractual
transactions even though this might involve some sacrifice
of individual liberty. In Lingappa Pochanna Appelvar v.
State of Maharashtra & Anr., [1985] 1 S.C.C. 479 this Court,
while upholding the constitutionality of the Maharashtra
Restoration of Lands to Scheduled Tribes Act, 1974, said (at
page 493) :
“The present legislation is a typical illustration
of the concept of distributive justice, as modern
jurisprudence know it. Legislators, Judges and
administrators are now familiar with the concept
of distributive justice. Our Constitution permits
and even directs the State to administer what may
be termed ‘distributive justice’. The concept of
distributive justice in the sphere of law-making
connotes, inter alia, the removal of economic
inequalities and rectifying the injustice
resulting from dealings or transactions between
unequals in society. Law should be used as an
instrument of distributive justice to achieve a
fair division of wealth among the members of
society based upon the principle : ‘From each
according to his capacity, to each according to
his needs’. Distributive justice comprehends more
than achieving lessening of inequalities by
differential taxation, giving debt relief or
distribution of property owned by
361
one to many who have none by imposing ceiling on
holdings, both agricultural and urban, or by
direct A regulation of contractual transactions by
forbidding certain transactions and, perhaps, by
requiring others. It also means that those who
have been deprived of their properties by
unconscionable bargains should be restored their
property. All such laws may take the form of
forced redistribution of wealth as a means of
achieving a fair division of material resources
among the members of society or there may be
legislative control of unfair agreements.”
(Emphasis supplied.)
When our Constitution states that it is being enacted
in order to give to all the citizens of India “JUSTICE,
social, economic and political”, when clause (1) of Article
38 of the Constitution directs the State to strive to
promote the welfare of the people by securing and protecting
as effectively as it may a social order in which social,
economic and political justice shall inform all the
institutions of the national life, when clause (2) of
Article 38 directs the State, in particular, to minimize the
inequalities in income, not only amongst individuals but
also amongst groups of people residing in different areas or
engaged in different vocations, and when Article 39 directs
the State that it shall, in particular, direct its policy
towards securing that the citizens, men and women equally,
have the right to an adequate means of livelihood and that
the operation of the economic system does not result in the
concentration of wealth and means of production to the
common detriment and that there should be equal pay for
equal work for both men and women, it is the doctrine of
distributive justice which is speaking through these words
of the Constitution.
Yet another theory which has made its emergence in
recent years in the sphere of the law of contracts is the
test of reasonableness or fairness of a clause in a contract
where there is inequality of bargaining power. Lord Denning,
M.R., appears to have been the propounder, and perhaps the
originator – at least in England, of this theory. In
Gillespie Brothers & Co. Ltd. v. Roy Bowles Transport Ltd.,
[1973] 1 Q.B. 400 where the question was whether an
indemnity clause in a contract, on its true construction,
relieved the
362
indemnifier from liability arising to the indemnified from
his own negligence, Lord Denning said (at pages 415-6) :
“The time may come when this process of
‘construing’ the contract can be pursued no
further. The words are too clear to permit of it.
Are the courts then powerless? Are they to permit
the party to enforce his unreasonable clause, even
when it is so unreasonable, or applied so
unreasonably, as to be unconscionable? When it
gets to this point, I would say, as I said many
years ago :
‘there is the vigilance of the common law which,
while allowing freedom of contract, watches to see
that it is not abused’ : John Lee & Son (Grantham)
Ltd. v. Railway Executive [1949] 2 All. E.R. 581,
584. It will not allow a party to exempt himself
from his liability at common law when it would be
quite unconscionable for him to do so.”
(Emphasis supplied.)
In the above case the Court of Appeal negatived the defence
of the indemnifier that the indemnity clause did not cover
the negligence of the indemnified. It was in Lloyds Bank
Ltd. v. Bundy, [1974] 3 All E.R. 757 that Lord Denning first
clearly enunciated his theory of “inequality of bargaining
power”. He began his discussion on this part of the case by
stating (at page 763) :
“There are cases in our books in which the courts
will set aside a contract. Or a transfer of
property, when the parties have not met on equal
terms, when the one is so strong in bargaining
power and the other so weak that, as a matter of
common fairness, it is not right that the strong
should be allowed to push the weak to the wall.
Hitherto those exceptional cases have been treated
each as a separate category in itself. But I think
the time has come when we should seek to find a
principle to unite them. I put on one side
contracts or transactions which are voidable for
fraud or misrepresentation or mistake. All those
are governed by settled principles. I go only to
those where there has been inequality of
bargaining
363
power such as to merit and intervention of the
court.”
(Emphasis supplied.)
He then referred to various categories of cases and
ultimately deduced therefrom a general principle in these
words (at page 765 ) :
“Gathering all together, I would suggest that
through all these instances there runs a single
thread. They rest on ‘inequality of bargaining
power’. By virtue of it, the English law gives
relief to one who, without independent advice,
enters into a contract on terms which are very
unfair or transfers property for a consideration
which is grossly inadequate, when his bargaining
power is grievously impaired by reason of his own
needs or desires, or by his own ignorance or
infirmity, coupled with undue influences or
pressures brought to bear on him by or for the
benefit of the other. When I use the word ‘undue’
I do not mean to suggest that the principle
depends on proof of any wrongdoing. The one who
stipulates for an unfair advantage may be moved
solely by his own self-interest, unconsciou6 of
the distre66 he is bringing to the other. I have
also avoided any reference to the will of the one
being ‘dominated’ or ‘overcome’ by the other. One
who is in extreme need may knowingly consent to a
most improvident bargain, solely to relieve the
straits in which he finds hlmself. Again, I do not
mean to suggest that every transaction is saved by
independent advice. But the absence of it may be
fatal. With these explanations, I hope this
principle will be found to reconcile the cases.”
(Emphasis supplied.)
Though the House of Lords does not yet appear to have
unanimously accepted this theory, the observations of Lord
Diplock in A. Schroeder Nusic Publishing Co. Ltd. v.
Macaulay (Formerely Instone), [1974] 1 W.L.R. 1308 are a
clear pointer towards this direction. In that case a song
writer had entered into an agreement with a music publisher
in the standard form whereby the publishers engaged the song
writer’s exclusive services during the term of the
agreement, which was five H
364
years. Under the said agreement, the song writer assigned to
the publisher the full copyright for the whole world in his
musical compositions during the said term. By another term
of the said agreement, if the total royalties during the
term of the agreement exceeded Rs. 5,000 the agreement was
to stand automatically extended by a further period of five
years. Under the said agreement, the publisher could
determine the agreement at any time by one month’s written
notice but no corresponding right was given to the song
writer. Further, while the publisher had the right to assign
the agreement, the song writer agreed not to assign his
rights without the publisher’s prior written consent. The
song writer brought an action claiming, inter alia, a
declaration that the agreement was contrary to public policy
and void. Plowman, J., who heard the action granted the
declaration which was sought and the Court of Appeal
affirmed his judgment. An appeal filed by the publishers
against the judgment of the Court of Appeal was dismissed by
the House of Lords. The Law Lords held that the said
agreement was void as it was in restraint of trade and thus
contrary to public policy. In his speech Lord Diplock
however, outlined the theory of reasonableness or fairness
of a bargain. The following observations of his on this part
of the case require to be reproduced in extenso (at pages
1315-16) :
“My Lords, the contract under consideration in
this appeal is one whereby the respondent accepted
restrictions upon the way in which he would
exploit his earning power as a song writer for the
next ten years. Because this can be classified as
a contract in restraint of trade the restrictions
that the respondent accepted fell within one of
those limited categories of contractual promises
in respect of which the courts still retain the
power to relieve the promisor of his legal duty to
fulfil them. In order to determine whether this
case is one in which that power ought to be
exercised, what your Lordships have in fact been
doing has been to assess the relative bargaining
power of the publisher and the song writer at the
time the contract was made and to decide whether
the publisher had used his superior bargaining
power to exact from the song writer promises that
were
365
unfairly onerous to him. Your Lordships have not A
been concerned to inquire whether the public have
in fact been deprived of the fruit of the song
writer’s talents by reason of the restrictions,
nor to assess the likelihood that they would be so
deprived in the future if the contract were
permitted to run its full course.
It is, in my view, salutary to acknowledge that in
refusing to enforce provisions of a contract
whereby one party agrees for the benefit of the
other party to exploit or to refrain from
exploiting his own earning power, the public
policy which the court is implementing is not some
19th century economic theory about the benefit to
the general public of freedom of trade, but the
protection of those whose bargaining power is weak
against being forced by those whose bargaining
power is stronger to enter into bargains that are
unconscionable. Under the influence of Bentham and
of laissez-faire the courts in the 19th century
abandoned the practice of applying the public
policy against unconscionable bargains to
contracts generally, as they had formerely done to
any contract considered to be usurious; but the
policy survived in its application to penalty
clauses and to relief against forfeiture and also
to the special category of contracts in restraint
of trade. If one looks at the reasoning of 19th
century judges in cases about contracts in
restraint of trade one finds lip service paid to
current economic theories, but if one looks at
what they said in the light of what they did, one
finds that they struck down a bargain if they
thought it was unconscionable as between the
parties to it and upheld it if they thought that
it was not.
So I would hold that the question to be answered
as respects a contract in restraint of trade of
the kind with which this appeal is concerned is :
“Was the bargain fair?” The test of fairness is,
no doubt, whether the restrictions are both
reasonably necessary for the protection of the
legitimate
366
interests of the promisee and commensurate with
the benefits secured to the promisor under the
contract. For the purpose of this test all the
provisions of the contract must be taken into
consideration.”
(Emphasis supplied.)
Lord Diplock then proceeded to point out that there are two
kinds of standard forms of contracts. The first is of
contracts which contain standard clauses which “have been
settled over the years by negotiation by representatives of
the commercial interests involved and have been widely
adopted because experience has shown that they facilitate
the conduct of trade”. He then proceeded to state, “If
fairness or reasonableness were relevant to their
enforceability the fact that they are widely used by parties
whose bargaining power is fairly matched would raise a
strong presumption that their terms are fair and
reasonable.” Referring to the other kind of standard form of
contract Lord Diplock said (at page 1316) :
“The same presumption, however, does not apply to
the other kind of standard form of contract. This
is of comparatively modern origin. It is the
result of the concentration of particular kinds of
business in relatively few hands. The ticket cases
in the 19th century provide what are probably the
first examples. The terms of this kind of standard
form of contract have not been the subject of
negotiation between the parties to it, or approved
by any organisation representing the interests of
the weaker party. They have been dictated by that
party whose bargaining power, either exercised
alone or in conjunction with others providing
similar goods or services, enables him to say: ‘If
you want these goods or services at all, these are
the only terms on which they are obtainable. Take
it or leave it’.
To be in a position to adopt this attitude towards
a party desirous of entering into a contract to
obtain goods of services provides a classic
instance of superior bargaining power.”
(Emphasis supplied.)
367
The observations of Lord Denning, M.R., in Levison and
another v. Patent Steam Carpet Co. Ltd., [1978] 1 Q.B. 69
are also useful and require to be quoted. These observations
are as follows (at page 79) :
” In such circumstances as here the Law Commission
in 1975 recommended that a term which exempts the stronger
party from his ordinary common law liability should not be
given effect except when it is reasonable: see The Law
Commission and the Scottish Law Commission Report, Exemption
Clauses, Second Report (1975) (August 5, 1975), Law Com. No.
69 (H. C. 605), pp. 62, 174; and there is a bill now before
Parliament which gives effect to the test of reasonableness.
This is a gratifying piece of law reform: but I do not think
we need wait for that bill to be passed into law. You never
know what may happen to a bill. meanwhile the common law has
its own principles ready to hand. In Gillespie Bros. & Co.
Ltd. v. Roy Bowles Transport Ltd., [1973] Q.B. 400, 416, I
suggested that an exemption or limitation clause should not
be given effect if it was unreasonable, or if it would be
unreasonable to s apply it in the circumstances of the case.
I see no reason why this should not be applied today, at any
rate in contracts in standard forms where there is
inequality of bargaining power.”
The Bill referred to by Lord Denning in the above
passage, when enacted, became the Unfair Contract Terms Act,
1977. This statute does not apply to all contracts but only
to certain classes of them. It also does not apply to
contracts entered into before the date on which it came into
force, namely, February 1, 1978; but subject to this it
applies to liability for any loss or damage which is
suffered on or after that date. It strikes at clauses
excluding or restricting liability in certain classes of
contracts and torts and introduces in respect of clauses of
this type the test of reasonableness and prescribes the
guidelines for determining their reasonableness. The
detailed provisions of this statute do not concern us but
they are worth a study.
368
In photo Production Ltd. v. Securicor Transport Ltd.,
[1980] A.C. 827 a case before the Unfair Contract Terms Act,
1977, was enacted, the House of Lords upheld an exemption
clause in a contract on the defendants’ printed form
containing standard conditions. The decision appears to
proceed on the ground that the parties were businessmen and
did not possess unequal bargaining power. The House of Lords
did not in that case reject the test of reasonableness or
fairness of a clause in a contract where the parties are not
equal in bargaining position. On the contrary, the speeches
of Lord Wilberforce, Lord Diplock and Lord Scarman would
seem to show that the house of Lords in a fit case would
accept that test. Lord Wilberforce in his speech, after
referring to the Unfair Contract Terms Act, 1977, said (at
page 843) :
“This Act applies to consumer contracts and those
based on standard terms and enables exception
clauses to be applied with regard to what is just
and reasonable. It is significant that Parliament
refrained from legislating over the whole field of
contract. After this Act, in commercial matters
generally, when the parties are not of unequal
bargaining power, and when risks are normally
borne by insurance, not only is the case for
judicial intervention undemonstrated, but there is
everything to be said, and this seems to have been
Parliament’s intention, for leaving the parties
free to apportion the risks as they think fit and
for respecting their decisions.”
(Emphasis supplied.)
Lord Diplock said (at page 850-51) :
“Since the obligations implied by law in a
commercial contract are those which, by judicial
consensus over the years or by Parliament in
passing a statute, have been regarded as
obligations which a reasonable business an would
realise that he was accepting when he entered into
a contract of a particular kind, the court’s view
of the reasonableness of any departure from the
implied obligations which would be involved in
construing the express words of an exclusion
clause in one sense that they are capable of
bearing rather than
369
another, is a relevant consideration in deciding
what meaning the words were intended by the
parties to bear.”
(Emphasis supplied.)
Lord Scarman, while agreeing with Lord Wilberforce,
described (at page 853) the action out of which the appeal
before the I House had arisen as “a commercial dispute
between parties well able to look after themselves” and then
added, “In such a situation what the parties agreed
(expressly or impliedly) is what matters; and the duty of
the courts is to construe their contract according to its
tenor.”
As seen above, apart from judicial decisions, the
United States and the United Kingdom have statutorily
recognized, at 1 least in certain areas of the law of
contracts, that there can i be unreasonableness (or lack of
fairness, if one prefers that phrase) in a contract or a
clause in a contract where there is inequality of bargaining
power between the parties although arising out of
circumstances not within their control or as a result of
situations not of their creation. Other legal systems also
permit judicial review of a contractual transaction entered
into in similar circumstances. For example, i section 138(2)
of the German Civil Code provides that a , transaction is
void “when a person” exploits “the distressed q situation,
inexperience, lack of judgmental ability, or grave weakness
of will of another to obtain the grant or promise of
pecuniary advantages . . . which are obviously
disproportionate to the performance given in return.” The
position according to the French law is very much the same.
Should then our courts not advance with the times?
Should they still continue to cling to outmoded concepts and
outworn ideologies? Should we not adjust our thinking caps
to match the fashion of the day? Should all jurisprudential
development pass us by, leaving us floundering in the
sloughs of nineteenth-century theories? Should the strong be
permitted to push the weak to the wall? Should they be
allowed to ride roughshod over the weak? Should the courts
sit back and watch supinely while the strong trample under
foot the rights of the weak? We have a Constitution for our
country. Our judges are bound by their oath to “uphold the
Constitution and the laws”. The Constitution was enacted to
secure to all the citizens of
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this country social and economic justice. Article 14 of the
Constitution guarantees to all persons equality before the
law and the equal protection of the laws. The principle
deducible from the above discussions on this part of the
case is in consonance with right and reason, intended to
secure social and economic justice and conforms to the
mandate of the great equality clause in Article 14. This
principle is that the courts will not enforce and will, when
called upon to do so, strike down an unfair and unreasonable
contract, or an unfair and unreasonable clause in a
contract, entered into between parties who are not equal in
bargaining power. It is difficult to give an exhaustive list
of all bargains of this type. No court can visualize the
different situations which can arise in the affairs of men.
One can only attempt to give some illustrations. For
instance, the above principle will apply where the
inequality of bargaining power is the result of the great
disparity in the economic strength of the contracting
parties. It will apply where the inequality is the result of
circumstances, whether of the creation of the parties or
not. It will apply to situations in which the weaker party
is in a position in which he can obtain goods or services or
means of livelihood only upon the terms imposed by the
stronger party or go without them. It will also apply where
a man has no choice, or rather no meaningful choice, but to
give his assent to a contract or to sign on the dotted line
in a prescribed or standard form or to accept a set of rules
as part of the contract, however unfair, unreasonable and
unconscionable a clause in that contract or form or rules
may be. This principle, however, will not apply where the
bargaining power of the contracting parties is equal or
almost equal. This principle may not apply where both
parties are businessmen and the contract is a commercial
transaction. In today’s complex world of giant corporations
with their vast infra-structural organizations and with the
State through its instrumentalities and agencies entering
into almost every branch of industry and commerce, there can
be myriad situations which result in unfair and unreasonable
bargains between parties possessing wholly disproportionate
and unequal bargaining power. These cases can neither be
enumerated nor fully illustrated. The court must judge each
case on its own facts and circumstances.
It is not as if our civil courts have no power under
the existing law. Under section 31(1) of the Specific Relief
Act,
371
1963 (Act No. 47 of 1963), any person against whom an
instrument is void or voidable, and who has reasonable
apprehension that such instrument, if left outstanding, may
cause him serious injury, may sue to have it adjudged void
or voidable, and the court may in its discretion, so adjudge
it and order it to be delivered up and cancelled. B
Is a contract of the type mentioned above to be
adjudged voidable or void? If it was induced by undue
influence, then under section 19A of the Indian Contract
Act, it would be voidable. It is, however, rarely that
contracts of the types to which the principle formulated by
us above applies are induced by undue influence as defined
by section 16(1) of the Indian Contract Act, even though at
times they are between parties one of whom holds a real or
apparent authority over the other. In the vast majority of
cases, however, such contracts are entered into by the
weaker party under pressure of circumstances, generally
economic, which results in inequality of bargaining power.
Such contracts will not fall within the four corners of the
definition of “undue influence” given in section 16(1).
Further, the majority of such contracts are in a standard or
prescribed form or consist of a set of rules. They are not
contracts between individuals containing terms meant for
those individuals alone, Contracts in prescribed or standard
forms or which embody a set of rules as part of the contract
are entered into by the party with superior bargaining power
with a large number of persons who have far less bargaining
power or no bargaining power at all. Such contracts which
affect a large number of persons or a group or groups of
persons, if they are unconscionable, unfair and
unreasonable, are injurious to the public interest. To say
that such a contract is only voidable would be to compel
each person with whom the party with superior bargaining
power had contracted to go to court to have the contract
adjudged voidable. This would only result in multiplicity of
litigation which no court should encourage and would also
not be in the public interest. Such a contract or such a
clause in a contract ought, therefore, to be adjudged void.
While the law of contracts in England is mostly judge-made,
the law of contracts in India is enacted in a statute,
namely, the Indian Contract Act, 1872. In order that such a
contract should be void, it must fall under one of the
relevant sections of the Indian Contract Act. The only
relevant provision in the Indian Contract Act which can
apply is section 23 when it states that
372
“The consideration or object of an agreement is lawful,
unless . . . the court regards it as . . . Opposed to public
policy.”
The Indian Contract Act does not define the expression
“public policy” or “opposed to public policy”. From the very
nature of things, the expressions “public policy”, “opposed
to public policy” or “contrary to public policy” are
incapable of precise definition. Public policy, however, is
not the policy of a particular government. It connotes some
matter which concerns the public good and the public
interest. The concept of what is for the public good or in
the public interest or what would be injurious or harmful to
the public good or the public interest has varied from time
to time. As new concepts take the place of old, transactions
which were once considered against public policy are now
being upheld by the courts and similarly where there has
been a well-recognized head of public policy, the courts
have not shirked from extending it to new transactions and
changed circumstances and have at times not even flinched
from inventing a new head of public policy. There are two
schools of thought – “the narrow view” school and “the broad
view” school. According to the former, courts can not create
new heads of public policy whereas the latter countenances
judicial law-making in this area. The adherents of “the
narrow view” school would not invalidate a contract on the
ground of public policy unless that particular ground had
been well-established by authorities. Hardly ever has the
voice of the timorous spoken more clearly and loudly than in
these words of Lord Davey in Janson v. Uriefontein
Consolidated Mines Limited [1902] A.C. 484, 500 “Public
policy is always an unsafe and treacherous ground for legal
decision.” That was in the year 1902. Seventy-eight years
earlier, & Burros, J., in Richardson v. Mellish, [1824] 2
Bing. 229, 252; s.c. 130 E.R. 294, 303 and [1824-34] All
E.R. Reprint 258, 266, described public policy as “a very
unruly horse, and when once you get astride it you never
know where it will carry you.” The Master of the Rolls, Lord
Denning, however, was not a-man to shy away from
unmanageable horses and in words which conjure up before our
eyes the picture of the young Alexander the Great taming
Bucephalus, he said in Enderyby Town Football Club Ltd. v.
Football Association Ltd., [1971] Ch. 591, 606.
“With a good man in the saddle, the unruly horse can be kept
in control. It can jump over obstacles.” Had the timorous
always held the field, not only the doctrine of public
policy
373
but even the Common Law or the principles of Equity would
never have evolved. Sir William Holdsworth in his “History
of English Law”, Volume III, page 55, has said :
“In fact, a body of law like the common law, which
has grown up gradually with the growth of the
nation, necessarily acquires some fixed
principles, and if it is to maintain these
principles it must be able, on the ground of
public policy or some other like ground, to
supress practices which, under ever new disguises,
seek to weaken or negative them.
It is thus clear that the principles governing public policy
must be and are capable, on proper occasion, of expansion or
modification. Practices which were considered perfectly
normal at one time have today become obnoxious and
oppressive to public conscience. If there is no head of
public policy which D covers a case, then the court must in
consonance with public conscience and in keeping with public
good and public interest declare such practice to be opposed
to public policy. Above all, in deciding any case which may
not be covered by authority our courts have before them the
beacon light of the Preamble to the Constitution. Lacking
precedent, the court can always be guided by that light and
the principles underlying the Fundamental Rights and the
Directive Principles enshrined in our Constitution.
The normal rule of Common Law has been that a party who
seeks to enforce an agreement which is opposed to public
policy will be non-suited. The case of A. Schroeder Music
Publishing Co. Ltd. v. Macaulay, however, establishes that
where a contract is vitiated as being contrary to public
policy, the party adversely affected by it can sue to have
it declared void. The case may be different where the
purpose of the contract is illegal or immoral. In Kedar Nath
Motani and others v. Prahlad Rai and others, [1960] 1 S.C.R.
861 reversing the High Court and restoring the decree passed
by the trial court declaring the appellants’ title to the
lands in suit and directing the respondents who were the
appellants’ benamidars to restore possession, this Court,
after discussing the English and Indian law on the subject,
said (at page 873):
“The correct position in law, in our opinion, is
374
that what one has to see is whether the illegality
goes so much to the root of the matter that the
plaintiff cannot bring his action without relying
upon the illegal transaction into which he had
entered. If the illegality be trivial or venial,
as stated by Willistone and the plaintiff is not
required to rest his case upon that illegality,
then public policy demands that the defendant
should not be allowed to take advantage of the
position. A strict view, of course, must be taken
of the plaintiff’s conduct, and he should not be
allowed to circumvent the illegality by restoring
to some subterfuge or by mis-stating the facts.
If, however, the matter is clear and the
illegality is not required to be pleaded or proved
as part of the cause of action and the plaintiff
recanted before the illegal purpose was achieved,
then, unless it be of such a gross nature as to
outrage the conscience of the Court, the plea of
the defendant should not prevail.”
The types of contracts to which the principle
formulated by us above applies are not contracts which are
tainted with illegality but are contracts which contain
terms which are so unfair and unreasonable that they shock
the conscience of the court. They are opposed to public
policy and require to be adjudged void.
We will now test the validity of Rule 9(i) by applying
to it the principle formulated above. Each of the contesting
Respondents was in the service of the Rivers Steam
Navigation Company Limited and on the said Scheme of
arrangement being sanctioned by the Calcutta High Court, he
was offered employment in the Corporation which he had
accepted. Even had these Respondents not liked to work for
the Corporation, they had not much of a choice because all
that they would have got wag “all legitimate and legal
compensation payable to them either under the Industrial
Disputes Act or otherwise legally admissible”. These
Respondents were not covered by the Industrial Disputes Act
for they were not workmen but were officers of the said
company. It is, therefore, difficult to visualize what
compensation they would have been entitled to get unless
their contract of employment with their previous employers
contained any provision in that behalf. So far as
375
the original terms of employment with the Corporation are
concerned, they are contained in the letters of appointment
issued to the contesting Respondents. These letters of
appointment are in a stereotype form. Under these letters of
appointment, the Corporation could without any previous
notice terminate their service, if the Corporation was
satisfied on medical evidence that the employee was unfit
and was likely for a considerable time to continue to be
unfit for the discharge of his duties. The Corporation could
also without any previous notice dismiss either of them, if
he was guilty of any insubordination, intemperance or other
misconduct, or of any breach of any rules pertaining to his
service or conduct or non-performance of his duties. The
above terms are followed by asset of terms under the heading
“Other Conditions”. One of these terms stated that “You
shall be subject to the service rules and regulations
including the conduct rules”. Undoubtedly, the contesting
Respondents accepted appointment with the Corporation upon
these terms. They had, however, no real choice before them.
Had they not accepted the appointments, they would have at
the highest received some compensation which would have been
probably meagre and would certainly have exposed themselves
to the hazard of finding another job.
It was argued before us on behalf of the contesting
Respondents that the term that these Respondents would be
subject to the service rules and regulations including the
conduct rules, since it came under the heading “Other
Conditions” which followed the clauses which related to the
termination of service, referred only to service rules and
regulations other than those providing for termination of
service and, therefore, Rule 9(i) did not apply to them. It
is unnecessary to decide this question in the view which we
are inclined to take with respect to the validity of Rule
9(i).
The said Rules as also the earlier rules of 1970 were
accepted by the contesting Respondents without demur. Here
again they had no real choice before them. They had risen
higher in the hierarchy of the Corporation. If they had
refused to accept the said Rules, it would have resulted in
termination of their service and the consequent anxiety,
harassment and uncertainty of finding alternative
employment.
Rule 9(i) confers upon the Corporation the power to
376
terminate the service of a permanent employee by giving him
three months’ notice in writing or in lieu thereof to pay
him the equivalent of three months’ basic pay and dearness
allowance. A similar regulation framed by the West Bengal
State Electricity Board was described by this Court in West
Bengal State Electricity Board and others v. Desh Bandhu
Ghosh and others (at page 118) as
“. . . a naked ‘hire and fire’ rule, the time for
banishing which altogether from employer-employee
relationship is fast approaching. Its only
parallel is to be found in the Henry VIII clause
so familiar to administrative lawyers.”
As all lawyers may not be familiar with administrative law,
we may as well explain that “the Henry VIII clause” is a
provision occasionally found in legislation conferring
delegated legislative power, giving the delegate the power
to amend the delegating Act in order to bring that Act into
full operation or otherwise by Order to remove any
difficulty, and at times giving power to modify the
provisions of other Acts also. The Committee on Ministers’
Powers in its report submitted in 1932 (Cmd. 4060) pointed
out that such a provision had been nicknamed “the Henry VIII
clause” because “that King is regarded popularly as the
impersonation of executive autocracy”. m e Committee’s
Report (at page 61) criticised these clauses as a temptation
to slipshod work in the preparation of bills and recommended
that such provisions should be used only where they were
justified before Parliament on compelling grounds.
Legislation enacted by Parliament in the United Kingdom
after 1932 does not show that this recommendation had any
particular effect.
No apter description of Rule 9(i) can be given than to
call it “the Henry VIII Clause”. It confers absolute and
arbitrary power upon the Corporation. It does not even state
who on behalf of the Corporation is to exercise that power.
It was submitted on behalf of the Appellants that it would
be the Board of Directors. me impugned letters of
termination, however, do not refer to any resolution or
decision of the Board and even if they did, it would be
irrelevant to the validity of Rule 9(i). m ere are no
guidelines whatever laid down to indicate in what
circumstances the power given by Rule
377
9(i) is to be exercised by the Corporation. No opportunity
whatever of a hearing is at all to be afforded to the
permanent employee whose service is being terminated in the
exercise of this power. It was urged that the Board of
Directors would not exercise this power arbitrarily or
capriciously as it consists of responsible and highly placed
persons. This submission ignores the fact that however
highly placed a person may be, he must necessarily possess
human frailties. It also overlooks the well-known saying of
Lord Acton, which has now almost become a maxim, in the
Appendix to his “Historical Essays and Studies”, that “Power
tends to corrupt, and absolute power corrupts absolutely.”
As we have pointed out earlier, the said Rules provide for
four different modes in which the services of a permanent
employee can be terminated earlier than his attaining the
age of superannuation, namely, Rule 9(i), Rule 9(ii), sub-
clause (iv) of clause (b) of Rule 36 read with Rule 38 and
Rule 37. Under Rule 9(ii) the termination of service is to
be on the ground of “Services no longer required in the
interest of the Company.” Sub-clause (iv) of clause (b) of
Rule 36 read with Rule 38 provides for dismissal on the
ground of misconduct. Rule 37 provides for termination of
service at any time without any notice if the employee is
found guilty of any of the acts mentioned in that Rule. Rule
9(i) is the only Rule which does not state in what
circumstances the power conferred by that Rule is to be
exercised. Thus even where the Corporation could proceed
under Rule 36 and dismiss an employee on the ground of
misconduct after holding a regular disciplinary inquiry, it
is free to resort instead to Rule 9(i) in order to avoid the
hassle of an inquiry. Rule 9(i) thus confers an absolute,
arbitrary and unguided power upon the Corporation. It
violates one of the two great rules of natural justice – the
audi alteram partem rule. It is not only in cases to which
Article 14 applies that the rules of natural justice come
into play. As pointed out in Union of India etc.
v. Tulsiram Patel etc.. [1985] 3 S.C.C. 398 (at page 463),
“The principles of natural justice are not the creation of
Article 14. Article 14 is not their begetter but their
constitutional guardian.” That case has traced in some
detail the origin and development of the concept of
principles of natural justice and of the audi alteram partem
rule (at pages 463 – 480). They apply in diverse situations
and not only to cases of State action. As pointed out by 0.
Chinnappa Reddy, H
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J., in Swadeshi Cotton Mills v. Union of India, [1981] 2
S.C.R. 533, 591 they are implicit in every decision-making
function, whether judicial or quasi-judicial or
administrative. Undoubtedly, in certain circumstances the
principles of natural justice can be modified and, in
exceptional cases, can even be excluded as pointed out in
Tulsiram Patel’s case. Rule 9(i), however, is not covered by
any of the situations which would justify the total
exclusion of the audi alteram partem rule .
The power conferred by Rule 9(i) is not only arbitrary
but is also discriminatory for it enables the Corporation to
discriminate between employee and employee. It can pick up
one employee and apply to him clause (i) of Rule 9. It can
pick up another employee and apply to him clause (ii) of
Rule 9. It can pick up yet another employee and apply to him
sub-clause (iv) of clause (b) of Rule 36 read with Rule 38
and to yet another employee it can apply Rule 37. All this
the Corporation can do when the same circumstances exist as
would justify the Corporation in holding under Rule 38 a
regular disciplinary inquiry into the alleged misconduct of
the employee. Both the contesting Respondents had, in fact,
been asked to submit their explanation to the charges made
against them. Sengupta had been informed that a disciplinary
inquiry was proposed to be held in his case. The charges
made against both the Respondents were such that a
disciplinary inquiry could easily have been held. It was,
however, not held but instead resort was had to Rule 9(i).
The Corporation is a large organization. It has offices
in various parts of West Bengal, Bihar and Assam, as shown
by the said Rules, and possibly in other States also. me
said Rules form part of the contract of employment between
the Corporation and its employees who are not workmen. These
employees had no powerful workmen’s Union to support them.
They had no voice in the framing of the said rules they had
no choice but to accept the said Rules as part of their
contract of employment. m ere is gross disparity between the
Corporation and its employees, whether they be workmen or
officers. m e Corporation can afford to dispense with the
services of an officer. It will find hundreds of others to
take his place but an officer cannot afford to lose his job
because if he does so, there are not hundreds of jobs
waiting for him. A clause such as clause (i) of Rule 9 is
against
379
right and reason. It is wholly unconscionable. It has been A
entered into between parties between whom there is gross
inequality of bargaining power. Rule 9(i) is term of the
contract between the Corporation and all its officers. It
affects a large number of persons and it squarely falls
within the principle formulated by us above. Several
statutory authorities have a clause similar to Rule 9(i) in
their contracts of employment. As appears from the decided
cases, the West Bengal State Electricity Board and Air India
International have it. Several Government companies apart
from the Corporation (which is the First Appellant before
us) must be having it. There are 970 Government companies
with paid-up capital of Rs.16,414.9 crores as stated in the
written arguments submitted on behalf of the Union of India.
The Government and its agencies and instrumentalities
constitute the largest employer in the country. A clause
such as Rule 9(i) in a contract of employment affecting
large sections of the public is harmful and injurious to the
public interest for it tends to create a sense of insecurity
in the minds of those to whom it applies and consequently it
is against public good. Such a clause, therefore, is opposed
to public policy and being opposed to public policy, it-is
void under section 23 of the Indian Contract act.
It was, however, submitted on behalf of the Appellants
that this was a contract entered into by the Corporation
like any other contract entered into by it in the course of
its trading activities and the Court, therefore, ought not
to interfere with it. It is not possible for us to equate
employees with goods which can be bought and sold. It is
equally not possible for us to equate a contract of
employment with a mercantile transaction between two
businessmen and much less to do so when the contract of
employment is between a powerful employer and a weak
employee.
It was also submitted on behalf of the Appellants that
Rule 9(i) was supported by mutuality inasmuch as it
conferred an equal right upon both the parties, for under it
just as the employer could terminate the employee’s service
by giving him three months’ notice or by paying him three
months’ basic pay and dearness allowance in lieu thereof,
the employee could leave the service by giving three months’
notice and when he failed to give such notice, the
Corporation could deduct an
380
equivalent amount from whatever may be payable to him. It is
true that there is mutuality in clause 9(i) – the same
mutuality as in a contract between the lion and the lamb
that both will be free to roam about in the jungle and each
will be at liberty to devour the other. When one considers
the unequal position of the Corporation and its employees,
the argument of mutuality becomes laughable.
The contesting Respondents could, therefore, have filed
a civil suit for a declaration that the termination of their
service was contrary to law on the ground that the said Rule
9(i) was void. In such a suit, however, they would have got
a declaration and possibly damages for wrongful termination
of service but the civil court could not have ordered
reinstatement as it would have amounted to granting specific
performance of a contract of personal service. As the
Corporation is “the State”, they, therefore, adopted the far
more efficacious remedy of filing a writ petition under
Article 226 of the _ Constitution.
As the Corporation is “the State” within the meaning of
Article 12, it was amenable to the writ jurisdiction of the
High Court under Article 226. It is now well-established
that an instrumentality or agency of the State being “the
State” under Article 12 of the Constitution is subject to
the Constitutional limitations, and its actions are State
actions and must be judged in the light of the Fundamental
Rights guaranteed by Part III of the Constitution (see, for
instance, Sukhdev Singh and others v. Bbagatram Sardar Singh
Raghuvanshi and another, The International Airport
Authority’s Case and Ajay Hasia’s Case). The actions of an
instrumentality or agency of the State must, therefore, be
in conformity with Article 14 of the Constitution. The
progression of the judicial concept of Article 14 from a
prohibition against discriminatory class legislation to an
invalidating factor for any discriminatory or arbitrary
State action has been traced in Tulsiram Patel’s Case (at
pages 473-476). The principles of natural justice have now
come to be recognized as being a part of the Constitutional
guarantee contained in Article 14. In Tulsiram Patel’s Case
this Court said (at page 476) :
“The principles of natural justice have thus come
to be recognized as being a part of the guarantee
contained in Article 14 because of the new and
381
dynamic interpretation given by this Court to the
concept of equality which is the subject-matter of
that Article. Shortly put, the syllogism runs
thus: violation of a rule of natural justice
results in arbitrariness which is the same as
discrimination; where discrimination is the result
of State action, it is violation of Article 14;
therefore, a violation of a principle of natural
justice by a State action is a violation of
Article 14. Article 14, however, is not the sole
repository of the principles of natural justice.
What it does is to guarantee that any law or State
action violating them will be struck down. The
principles of natural justice, however, apply not
only to legislation and State action but also
where any tribunal, authority or body of men, not
coming within the definition of ‘State’ in Article
12, is charged with the duty of deciding a
matter.”
As pointed out above, Rule 9(i) is both arbitrary and
unreasonable and it also wholly ignores and sets aside the
audi alteram partem rule it, therefore, violates Article 14
of the Constitution.
On behalf of the Appellants reliance was placed upon
the case of Radhakrishna Agarwal and others v. State of
Bihar and others, [1977] 3 S.C.R. 249. The facts in that
case were that a contract, called a “lease”, to collect and
exploit Sal seeds from a forest area was entered into
between the State of Bihar and the appellants in that case.
Under one of the clauses of the said contract, the rate of
royalty could be revised at the expiry of every three years
in consultation with the lessee and was to be binding on the
lessee. The State unilaterally revised the rate of royalty
payable by the appellants and thereafter cancelled the
lease. The Patna High Court dismissed the writ petition
filed by the appellants and the appellants’ appeal to this
Court was also dismissed. In that case it was held that when
a State acts purely in its executive capacity, it is bound
by the obligations which dealings of the State with
individual citizens import into every transaction entered
into in exercise of its constitutional powers, but this is
only at the time of entry into the field of consideration of
persons with whom the Government could contract, and after
the
382
State or its agents have entered into the field of ordinary
contract the relations are no longer governed by the
constitutional provisions but by the legally valid contract
which determines rights and obligations of the parties inter
se. The court then added (at page 255) :
“No question arises of violation of Article 14 or
of any other constitutional provision when the
State or its agents, purporting to act within this
field, perform any act. In this sphere, they can
only claim rights conferred upon them by contract
and are bound by the terms of the contract only
unless some statute steps in and confers some
special statutory power or obligation on the State
in the contractual field which is apart from
contract.”
We fail to see what relevance that decision has to the
case before us. Employees of a large organization form a
separate and distinct class and we are unable to equate a
contract of employment in a stereotype form entered into by
“The State” with each of such employees with the “lease”
executed in Radhakrishna Agarwal’s Case. Further, the
contract or the lease between the parties in that case was a
legally valid contract. In that case what the appellants
were doing was to complain of a breach of contract committed
by the State of Bihar acting through its officers. The
contesting Respondents are not complaining of any breach of
contract but their contention is that Rule 9(i) which is a
term of their contract of employment is void. They are not
complaining that the action of termination of their service
is in breach of Rule 9(i). Their complaint is not merely
with respect to the State action taken under Rule 9(i) but
also with respect to the action of the State in entering
into a contract of employment with them which contains such
a clause or rather forcing upon them a contract of
employment containing such a clause. As we have held
earlier, Rule 9(i) is void even under the ordinary law of
contracts.
We must now turn to two decisions of the Bombay High
Court as each party has relied strongly upon one of them,
namely, S.S. Muley v. J.R.D. Tata and others, [1980] Lab. &
Ind. Cases 11; s.c. [1979] 2 Ser. L.R. 438 and Manohar P.
Kharkhar and
383
another v. Raghuraj and another, [1981] 2 Lab. L.J. 459
commonly known as the “Makalu” Case as it related to certain
cables which were damaged in an aircraft named ‘Makalu’
belonging to Air India International. The decision in
Muley’s Case was relied upon by the Respondents while the
decision in Makalu’s Case was relied upon by the Appellants.
Both the cases related to Regulation 48 of the Air India
Employees’ Service Regulations framed by Air India
International. Air India International is a corporation
established under the Air Corporations Act, 1953 (Act No.27
of 1953) and it is indisputably “The State” within the
meaning of Article 12 of the Constitution. Under Clause (a)
of the said Regulation 48, the services of a permanent
employee can be terminated “without assigning any reason” by
giving him thirty days’ notice in writing or pay in lieu of
notice. In both these cases, the services of the concerned
employees were terminated under Regulation 48(a). The said
Regulations also provided for dismissal of an employee who
was found guilty of misconduct in a disciplinary inquiry
held according to the procedure prescribed in the said
Regulations. In Muley’s Case a learned Single Judge of the
Bombay High Court, Sawant, J., held the said Regulation
48(a) to be void as infringing Article 14 of the
Constitution. In West Bengal State Electricity Board’s Case
this Court stated (at page 119), “The learned Judge struck
down Regulation 48(a) and we agree with his reasoning and
conclusion.” The reasoning upon which Sawant, J., reached
his conclusion was that there was no guidance given anywhere
in the impugned Regulation for the exercise of the power
conferred by it, that it placed untrammelled power in the
hands of the authorities, that it was an arbitrary power
which was conferred and it did not make any difference that
it was to be exercised by high ranking officials. In the
Makalu Case a contrary view was taken by a Division Bench of
the Bombay High Court. The Division Bench rightly held that
the employees of a statutory corporation did not enjoy the
protection conferred by Article 311(2). It, however, further
held that the phrase “without assigning any reason” used in
the said Regulation 48 only meant a disclosure of the
reasons to the employee concerned. After going into the
facts which had been pleaded by Air India International to
justify the termination of the service of the petitioners in
that case, the Division Bench held that the impugned orders
were justified. It further held that Regulation 48 was not a
one-sided regulation since under Regulation 49 the employee
was also permitted to resign
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without assigning any reason by giving the notice prescribed
therein. The Division Bench applied to the said Regulation
48 the analogy of the ordinary law of master and servant
under which no servant can claim any security of tenure. It
also brought in it the analogy of the right to compulsorily
retire an employee where a provision in that behalf is made
in the Service Rules. The Division Bench further held that
it was difficult to conceive of any authority, which was
“the State” under Article 12 of the Constitution and bound
by the constitutional guarantees contained in Part III of
the Constitution, terminating the services of its employees
without reason or arbitrarily. It further held that the
existence of relevant reasons was a sine qua non for
exercising the power under Regulation 48. It went on to
state that because of the complexity of modern
administration and the unpredictable exigencies which may
arise in the course thereof, it was necessary for an
employer to be vested with powers such as those conferred by
Regulation 48. The Division Bench took great pains to
discern in some of the sections of the Air Corporations Act
guidelines for the exercise of the power conferred by
Regulation 48. According to the Division Bench, the choice
of Air India International to proceed under Regulation 48
would have to be dictated for the purpose of the needs and
exigencies of its administration and if that power was
exercised arbitrarily, the court would strike down the
action taken under Regulation 48.
We were invited by Learned Counsel for the Appellants
to peruse the judgment in that case and we did so with
increasing astonishment. Though the said judgment bears the
date September 18, 1981, we were unable to make out whether
it was a judgment given in the year 1981 or in the year 1881
or even earlier. We find ourselves wholly unable to agree
with the view taken by the Division Bench. Apart from the
factual aspects of the case, as to which we say nothing, we
find every single conclusion reached by the Division Bench
and the reasons given in support thereof to be wholly
erroneous. The Division Bench overlooked that it was not
dealing with a case of a non-speaking order but with the
validity of a regulation. The meaning given by it to the
expression “without assigning any reason” was wrong and
untenable. Starting with this wrong premise, it has gone
from one wrong premise to another. In the light of what we
have said earlier about the principles of
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public policy evolved, and tested by the principle which we
have formulated, the said Regulation 48(a) could never have
been sustained. In West Bengal State Electricity Board’s
Case, a three-Judge Bench of this Court said as follows (at
page 119) :
“The learned counsel for the appellant relied upon
Manohar P. Kharkhar v. Raghuraj to contend that
Regulation 48 of the Air India Employees’ Service
Regulations was valid. It is difficult to agree
with the reasoning of the Delhi High Court that
because of the complexities of modern
administration and the unpredictable exigencies
arising in the course of such administration it is
necessary for an employer to be vested with such
powers as those under Regulation 48. We prefer the
reasoning of Sawant, J. of the Bombay High Court
and that of the Calcutta High Court in the
judgment under appeal to the reasoning of the
Delhi High Court.”
The mention of the Delhi High Court in the above passage is
a slip of the pen, for it was the Bombay High Court which
decided the case. We are in respectful agreement with what
has been stated in the above passage. The Makalu Case was
wrongly decided and requires to be overruled. We are,
however, informed that an appeal against that judgment is
pending in this Court and rather than overrule it here, we
leave it to the Bench which hears that appeal to reverse it.
We would like to observe here that as the definition of
“the State” in Article 12 is for the purposes of both Part
III and Part IV of the Constitution, State actions,
including actions of the instrumentalities and agencies of
the State, must not only be in conformity with the
Fundamental Rights guaranteed by Part III but must also be
in accordance with the Directive Principles of State Policy
prescribed by Part IV. Clause (a) of Article 39 provides
that the State shall, in particular, direct its policy
towards “securing that the citizens, men and women, equally
have the right to adequate means of livelihood.” Article 41
requires the State, within the limits of its economic
capacity and development, to “make effective provision for
securing the right to work”. An adequate means of livelihood
cannot be secured to the citizens by taking away without any
reason the means of livelihood. The
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mode of making “effective provision for securing the right
to work” cannot be by giving employment to a person and then
without any reason throwing him out of employment. The
action of an instrumentality or agency of the State, if it
frames a service rule such as clause (a) of Rule 9 or a rule
analogous thereto would, therefore, not only be violative of
Article 14 but would also be contrary to the Directive
Principles of State Policy contained in clause (a) of
Article 39 and in Article 41.
The Calcutta High Court was, therefore, right in
quashing the impugned orders dated February 26, 1983,
terminating the services of the contesting Respondents and
directing the Corporation to reinstate them and to pay them
all arrears of salary. The High Court was, however, not
right in declaring clause (i) of Rule 9 in its entirety as
ultra vires Article 14 of the Constitution and in striking
down as being void the whole of that clause. What the
Calcutta High Court overlooked was that Rule 9 also confers
upon a permanent employee the right to resign from the
service of the Corporation. By entering into a contract of
employment a person does not sign a bond of slavery and a
permanent employee can not be deprived of his right to
resign. A resignation by an employee would, however,
normally require to be accepted by the employer in order to
be effective. It can be that in certain circumstances an
employer would be justified in refusing to accept the
employee’s resignation as, for instance, when an employee
wants to leave in the middle of a work which is urgent or
important and for the completion of which his presence and
participation are necessary. An employer can also refuse to
accept the resignation when there is a disciplinary inquiry
pending against the employee. In such a case, to permit an
employee to resign would be to allow him to go away from the
service and escape the consequences of an adverse finding
against him in such an inquiry. There can also be other
grounds on which an employer would be justified in not
accepting the resignation of an employee. The Corporation
ought to make suitable provisions in that behalf in the said
Rules. Therefore, while the judgment of the High Court
requires to be confirmed, the declaration given by it
requires to be suitably modified.
In the result, both these Appeals fail and are
dismissed but the order passed by the Calcutta High Court is
modified by
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substituting for the declaration given by it a declaration
that clause (i) of Rule 9 of the “Service, Discipline &
Appeal Rules – 1979” of the Central Inland Water Transport
Corporation Limited is void under section 23 of the Indian
Contract Act, 1872, as being opposed to public policy and is
also ultra vires Article 14 of the Constitution to the
extent that it confers upon the Corporation the right to
terminate the employment of a permanent employee by giving
him three months’ notice in writing or by paying him the
equivalent of three months’ basic pay and dearness allowance
in lieu of such notice.
By interim orders passed in the Petitions for Special
Leave to Appeal filed by the Corporation, we had granted
pending the disposal of those Petitions a stay of the order
of the Calcutta High Court in so far as it directed the
reinstatement of the contesting Respondents. At that stage
the Corporation had undertaken to pay to the said
Respondents all arrears of salary and had also undertaken to
pay thereafter their salary from month to month before the
tenth day of each succeeding month until the disposal of the
said Petitions. We hereby vacate the stay order of
reinstatement passed by us and direct the Corporation
forthwith to reinstate the First Respondent in each of these
Appeals and to pay to him within six weeks from today all
arrears of salary and allowances payable to him, if any
still unpaid.
The First Appellant in both these Appeals, namely, the
Central Inland Water Transport Corporation Limited, will pay
to the First Respondent in each of these Appeals the costs
of the respective Appeals. The other parties to these
Appeals and the Intervener will bear and pay their own costs
of the Appeals.
S.R. Appeals dismissed.
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