Contractual disputes between State and private party : Jurisdiction of High Court under Article 226 can be invoked only if the nature of the activity involves public law element; SC

Even as it conceded that the distinction between public law and private law element in the contract with State is getting blurred , the Supreme Court case, in a judgment rendered recently has held that if the contract between private party and the State/instrumentality and/or agency of State is under the realm of a private law and there is no element of public law, the normal course for the aggrieved party, is to invoke the remedies provided under ordinary civil law rather than approaching the High Court under Article 226 of the Constitutional of India and invoking its extraordinary jurisdiction.

The appellant, Joshi Technologies International Inc had entered into two production sharing contracts with the Ministry of Petroleum in 1992 for exploration of oil fields in Gujarat and other states. While filing income tax returns, the firm claimed benefit of Section 42 of the Income Tax Act. Such benefits to be claimed are however to be specifically mentioned in the agreement and they must be laid on the table of each House of Parliament.

The tax authorities granted benefits to the firm from 2001-02 when production started. But in 2005-06 they found that there was no such clause in the agreement. The firm claimed that it was an "inadvertent omission", which could be cured by the ministry. The petroleum ministry therefore sought a clarification from the finance ministry, which did not respond. The tax authorities therefore rejected the claim of benefits.

The firm then approached the Delhi High Court which dismissed its petition following which the firm approached the Supreme Court.

A Bench of the Apex Court comprising of Justices A.K. Sikri and Rohinton F. Nariman disallowed the claim of benefits raised by a firm Joshi Technologies International Inc under Section 42 of the Income Tax Act, which is a special provision for deductions and allowances for prospecting mineral oil on the ground that the agreement that was entered into between the firm and the Union Government contained no such clause.

The Apex Court after surveying its various judgments dealing with different situations/aspects relating to the contracts entered into by the State/public Authority with private parties said that there is no absolute bar to the maintainability of the writ petition even in contractual matters or where there are disputed questions of fact or even when monetary claim is raised.

It however added, “At the same time, discretion lies with the High Court which under certain circumstances, can refuse to exercise. It also follows that under the following circumstances, 'normally', the Court would not exercise such a discretion:

(a) the Court may not examine the issue unless the action has some public law character attached to it.

(b) Whenever a particular mode of settlement of dispute is provided in the contract, the High Court would refuse to exercise its discretion under Article 226 of the Constitution and relegate the party to the said made of settlement, particularly when settlement of disputes is to be resorted to through the means of arbitration.

(c) If there are very serious disputed questions of fact which are of complex nature and require oral evidence for their determination.

(d) Money claims per se particularly arising out of contractual obligations are normally not to be entertained except in exceptional circumstances.”

The Court also summarized the following principles in respect of disputes relating to the contracts entered into by the State/public Authority with private parties:

“i) At the stage of entering into a contract, the State acts purely in its executive capacity and is bound by the obligations of fairness.

(ii) State in its executive capacity, even in the contractual field, is under obligation to act fairly and cannot practice some discrimination.

(iii) Even in cases where question is of choice or consideration of competing claims before entering into the field of contract, facts have to be investigated and found before the question of a violation of Article 14 could arise. If those facts are disputed and require assessment of evidence the correctness of which can only be tested satisfactorily by taking detailed evidence, Involving

examination and cross- examination of witnesses, the case could not be conveniently or satisfactorily decided in proceedings under Article 226 of the Constitution. In such cases court can direct the aggrieved party to resort to alternate remedy of civil suit etc.

(iv) Writ jurisdiction of High Court under Article 226 was not intended to facilitate avoidance of obligation voluntarily incurred.

(v) Writ petition was not maintainable to avoid contractual obligation. Occurrence of commercial difficulty, inconvenience or hardship in performance of the conditions agreed to in the contract can provide no justification in not complying with the terms of contract which the parties had accepted with open eyes. It cannot ever be that a licensee can work out the license if he finds it profitable to do so: and he can challenge the conditions under which he agreed to take the license, if he finds it commercially inexpedient to conduct his business.

(vi) Ordinarily, where a breach of contract is complained of, the party complaining of such breach may sue for specific performance of the contract, if contract is capable of being specifically performed. Otherwise, the party may sue for damages.

(vii) Writ can be issued where there is executive action unsupported by law or even in respect of a corporation there is denial of equality before law or equal protection of law or if can be shown that action of the public authorities was without giving any hearing and violation of principles of natural justice after holding that action could not have been taken without observing principles of natural justice.

(viii) If the contract between private party and the State/instrumentality and/or agency of State is under the realm of a private law and there is no element of public law, the normal course for the aggrieved party, is to invoke the remedies provided under ordinary civil law rather than approaching the High Court under Article 226 of the Constitutional of India and invoking its extraordinary jurisdiction.

(ix) The distinction between public law and private law element in the contract with State is getting blurred. However, it has not been totally obliterated and where the matter falls purely in private field of contract, this Court has maintained the position that writ petition is not maintainable. Dichotomy between public law and private law, rights and remedies would depend on the factual matrix of each case and the distinction between public law remedies and private law, field cannot be demarcated with precision. In fact, each case has to be examined, on its facts whether the contractual relations between the parties bear insignia of public element. Once on the facts of a particular case it is found that nature of the activity or controversy involves public law element, then the matter can be examined by the High Court in writ petitions under Article 226 of the Constitution of India to see whether action of the State and/or instrumentality or agency of the State is fair, just and equitable or that relevant factors are taken into consideration and irrelevant factors have not gone into the decision making process or that the decision is not arbitrary.”

The Supreme Court dismissed the appeal of the firm with the observation that "though it may be somewhat harsh on the firm, we come to the irresistible conclusion that it is not entitled to the relief claimed. It availed of the benefit for a few years and acted on the understanding that such a benefit would be given to it, but we have no option but to hold that the contract did not provide for this benefit."

Read the Judgment here.