LPG Distributors Don't Have Vested Legal Right Over Customer Base, Oil Companies Can Shift Consumers Between Distributors: Kerala High Court

The Kerala High Court has held that LPG distributors do not possess a vested legal right over customer bases built during the course of distributorship operations.Justice M.A. Abdul Hakhim was considering two writ petitions filed by a registered All India Association of LPG Distributors and other individual LPG Distributors in various parts of the State of Kerala.The pleas challenged the “Policy on Customer Transfer – Market Restructuring” issued jointly by Indian Oil Corporation Ltd. (IOCL), Bharat Petroleum Corporation Ltd. (BPCL), and Hindustan Petroleum Corporation Ltd. (HPCL).The Customer Transfer Policy stated that the refill ceiling limits and feasibility refill sale limits per month must be adopted for all the distributors for customer transfer.Petitioners submitted that originally, there was no refill ceiling limit for the LPG Distributors. The ceiling limits were only fixed when there was a shortage of supply of LPG cylinders and this limit would not be insisted upon when the Oil Marketing Companies (OMC) could ensure sufficient supply. It was further submitted that the Companies have persuaded the Distributors to achieve the maximum number of customers to increase their business and this has led to the Distributors infusing higher capital, manpower, and infrastructure to meet the requirements of the customer and to ensure prompt supply of LPG Cylinders. “The Petitioners could attain the customers through their effort and energy over the years. They continued to procure more and more customers, increasing the business of the Oil Marketing Companies on the legitimate expectation that they would be able to continue business with such a customer base forever. It is unreasonable to take away such customers from them for the purpose of attaining refill ceiling limit for new Distributors. It is, in a way, a penalty for the best performing Distributors,” the petitioners argued. It was also submitted that if a substantial portion of their customers are taken away, the petitioners will not be able to sustain itself with the remaining customers as they have invested in the infrastructure that would cater to the present customers. The petitioners argued that the policy was arbitrary, ultra vires the 2016 UGS framework, violative of Articles 14 and 19(1)(g) of the Constitution, and contrary to the doctrines of legitimate expectation and promissory estoppel.The Court held that LPG distributorships operate within a public utility framework where consumer interest takes precedence over commercial profitability. The Court relied on Vembanad Gas Agencies v Union of India and Others [2021:KER:50239], which emphasised the consumer interest in the matter of supply of LPG cylinders as against the profit element and business efficacy of the Distributors. The Court further added that once the Court's Division Bench in Vembanad Gas Agencies upheld the authority of OMCs to transfer customers, the issue could not be reopened indirectly through additional legal grounds.“In Vembanad Gas Agencies (supra), this Court has held that the contract of the subscriber/consumer is with the Oil Marketing Company and the Distributor signs the Subscription Voucher on behalf of the Company, which makes it an agent, insofar as the public utility service of supply of LPG is concerned. LPG is an essential commodity. It is for the Oil Marketing Companies to ensure the prompt supply of LPG cylinders to its subscribers through their distribution system…It is the Oil Marketing Companies which have the expertise to design proper guidelines to ensure the prompt supply of LPG cylinders to protect the interests of the consumers.” Court held. Reliance was also placed on All India L.P.G Distributors Federation v Union of India [2003 (2) KLJ 451], which upheld the right of Oil Marketing Companies to transfer their customers. “An earlier Division Bench Decision in All India L.P.G. Distributors Federation (supra) holding that the appointment of additional distributors in an area, where there is a distributor appointed, resulting in reduction of consumers of the existing dealer, cannot give rise to a valid challenge on the ground of arbitrariness or illegality. This principle squarely applies to the case on hand. Hence, I hold that it is legally permissible for the Oil Marketing Companies to formulate Policy/Guidelines for customer transfer from one Distributor to another Distributor.” the Court held. The Court further held that the distributorship agreements themselves contemplated customer transfers and the refill ceiling limits under the 2016 UGS always existed. It further noted that any temporary tolerance of excess accumulation could not amount to a binding promise. “Admittedly, the Oil Marketing Companies have permitted the Distributors to procure customers crossing the refill ceiling limits and they have enjoyed the same for a considerable length of time. But such permission against Ext.P5 UGS could not be construed as a promise on the part of the...

LPG Distributors Don't Have Vested Legal Right Over Customer Base, Oil Companies Can Shift Consumers Between Distributors: Kerala High Court

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LPG Distributors Don't Have Vested Legal Right Over Customer Base, Oil Companies Can Shift Consumers Between Distributors: Kerala High Court

Anamika MJ

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