Supreme Court Invalidates GAIL's Condition Imposed On IPCL, Says Writ Jurisdiction Can Be Applied When Contractual Terms Are Arbitrary

Factual Background

The Ministry of Petroleum and Natural Gas, Government of India, allocated 0.85 MMSCMD of natural gas to M/s. Indian Petrochemicals Corporation Ltd. (IPCL), in 1999, subject to certain conditions enumerated in the allocation letter. In 2001, IPCL entered a gas supply contract with M/s. Gas Authority of India Limited (GAIL). As per the terms of the contract IPCL laid down its own pipelines, and those pipelines alone were utilised for carrying gas; GAIL levied a charge for ‘loss of transportation charges’ for pipelines laid down by GAIL, even when it was not using them. IPCL assailed the recovery of ‘loss of transportation charges’ as arbitrary and unfair. In this respect Clauses in the contract were challenged on the ground of unequal bargaining power. In view of the same, IPCL claimed refund of the ‘loss of transportation charges’. The Single Judge of the High Court quashed the impugned clauses. GAIL was also to refund the loss of transportation charge to IPCL. In appeal, the Division Bench upheld the order of the Single Judge.

Analysis by the Supreme Court

The first issue addressed by the Court was that of maintainability. Considering the fact that GAIL is a Public Sector Undertaking and would be covered by the definition of ‘State’ in Article 12 of the Constitution, it held that the writ petition before the High Court was maintainable. It noted that there is merit in GAIL’s contention that at the time of entering into the contract GAIL enjoyed a monopolistic position in supply of natural gas. Accordingly, it observed -

“...writ jurisdiction can be exercised when the State, even in its contractual dealings, fails to exercise a degree of fairness or practices any discrimination.”

Adjudicating on the validity of the clauses under which GAIL had levied the loss of transportation cost, the Court noted it was arbitrary, unfair, unjust and in violation of Article 14 of the Constitution of India that IPCL was charged for loss of transportation charges even when it was mandatory for it to lay down its own pipelines and not to transport the gas through HBJ pipeline. Moreso, when by stipulation the price of natural gas is fixed by the Ministry. It was observed that IPCL was being treated at par with other commercial entities who were using pipelines laid down by GAIL. It was also taken note of that IPCL has already incurred heavy expenditure on infrastructure and thus, signing the contract with GAIL was Hobson's choice.

“In fact, the contractual exercise of providing such a clause runs contrary to every commercial and common sense and is manifestly arbitrary, as IPCL is not being charged under any general terms but for a specific purpose. This purpose cannot exist in the contract in view of the master authority, i.e., the Union of India, providing to the contrary.”

The Court refused to accept that the charges had to be paid even though IPCL was not using the pipelines laid down by GAIL merely because GAIL had laid down the pipe for all users generally.

The Apex Court upheld the order of the High Court. Considering there was delay in approaching the High Court, the Apex Court directed that the refund would be restricted to a period of three years prior to the date of filing of the writ petition. GAIL was directed to refund within a period of two months, failing which, an interest of 8% p.a. would be charged.

Case details

M/s. Gas Authority of India Limited v. M/s. Indian Petrochemicals Corporation Ltd. And Ors.| 2023 LiveLaw (SC) 88| Civil Appeal Nos. 3504-3505 of 2010| 8 Feb 2023| Justice S.K.Kaul and Justice A.S. Oka

For Appellant(s) Mr. Sanjeev K. Kapoor, Adv. Mr. Snehal Kakrania, Adv. Mr. Prateek Kumar, Adv. Mr. Rohit Ghosh, Adv. Mr. Sanyat Lodha, AOR;

For Respondent(s) M/S. Khaitan & Co., AOR

Constitution of India - Article 226 -Writ jurisdiction can be exercised when the State, even in its contractual dealings, fails to exercise a degree of fairness or practices any discrimination - Para 19

Constitution of India - Article 14- Supreme Court holds the condition imposed by GAIL on IPCL to be arbitrary- the contractual exercise of providing such a clause runs contrary to every commercial and common sense and is manifestly arbitrary, as IPCL is not being charged under any general terms but for a specific purpose. This purpose cannot exist in the contract in view of the master authority, i.e., the Union of India, providing to the contrary - Para 21