SUPREME COURT DECIDES UPON THE MAINTAINABILITY OF WRIT PETITION IN CASE OF DISPUTES ARISING OUT OF COMMERCIAL CONTRACTS

In a recent case of M/S. Gas Authority of India Limited vs M/S. Indian Petrochemicals Corp. Ltd. & Ors. Civil Appeal Nos. 3504-3505 of 2010, a two Judge Bench of the Supreme Court comprising of Justice Sanjay Kishan Kaul and Justice Abhay S. Oka passed a Judgment dated 08-02-2023 and made observations regarding maintainability of writ petition in case of disputes arising out of commercial contracts.

Facts

i) In the present case, the Ministry of Petroleum and Natural Gas, Government of India issued a Letter of Allocation of Natural Gas dated 01-01-1999 to the Respondent, M/s Indian Petrochemicals Corporation Ltd (IPCL) subject to the conditions that (i) a gas supply contract would have to be executed with the Appellant, M/s Gas Authority of India Limited (GAIL) within 60 days of issue of the said Letter and (ii) the pipelines would have to be laid by IPCL itself that would transport semi-rich gas from Hazira, Gujarat to IPCL Unit at Gandhar, Gujarat and to transport the lean gas back to Hazira.

ii) Accordingly, (a) IPCL entered into a Gas Contract dated 09-11-2001 with GAIL, whereby, (a) GAIL would procure natural gas from the producer, Oil and Natural Gas Corporation (ONGC), (b) the said gas would be supplied to IPCL at Hazira, (c) the gas would be measured at the Metering Station at Hazira, (d) then the gas would be transported from Hazira to IPCL’s plant at Gandhar using IPCL’s own pipelines, where IPCL would use the gas for its own consumption and (e) then the unutilised gas would be sent back to Hazira using IPCL’s pipelines.

iii) It is pertinent to note here that IPCL had set up and installed the said plant by investing Rs. 4500 Crores (approx.) and also set up its pipelines of about 97 kms set up between Hazira and Gandhar by investing Rs. 354 Crores (approx.), so that IPCL can obtain the gas from GAIL uninterruptedly and without having to incur and pay any transportation charges to GAIL. Further, the cost of maintenance of the plant and the pipelines was agreed to be borne by IPCL.

iv) But GAIL insisted on adding a clause in the Gas Contract about payment of charges by IPCL under ‘loss of transportation charges’ to GAIL, as IPCL did not use GAIL’s pipelines for transportation of gas (Clause). IPCL was aggrieved of the fact that it is not liable to pay the transportation charges to GAIL, as IPCL was using its own pipelines to obtain and transport the gas from GAIL.

v) As per IPCL, GAIL enjoys a kind of monopoly in the market so far as supply of natural gas is concerned and hence, there was a highly imbalanced bargaining power between both the Parties. As a result, IPCL had no other option but to sign the said Gas Contract having unfair terms.

High Court- Single Judge

Thus, the Respondent- IPCL filed a Writ Petition under Article 226 of the Constitution of India 1950 before the High Court of Gujarat at Ahmedabad in Special Civil Application No. 4887 of 2006 against the Appellant-GAIL, thereby challenging the unreasonable, unfair and unconscionable clauses in the Gas Contract, which is also against the Pricing Policy of allocation of natural gas of the Ministry of Petroleum and Natural Gas and also against the Public Policy and violative of Article 14 of the Constitution.

A Single Judge Bench of the High Court passed an Order dated 19-09-2006 in Special Civil Application No. 4887 of 2006 and held that IPCL was compelled to sign the Gas Contract having unreasonable terms, as they could not afford to lose the supply of natural gas. Further, the Clause in the Gas Contract that compelled IPCL to pay transportation charges, was held unreasonable and violative of Article 14, as GAIL is not entitled to charge transportation charges from IPCL, much less under the head of ‘loss of transportation charges’. As a result, the Writ Petition was allowed, despite existence of arbitration clause, as unfair and irrational clauses in a contract were held amenable to judicial review.

The Single Judge Bench of the High Court also passed an Order dated 11-04-2007 in Misc. Civil Application No.270 / 2007 and directed GAIL to refund the transportation charges to IPCL.

High Court- Division Bench

Aggrieved by the Orders dated 19-09-2006 and 11-04-2007 of the Single Judge Bench of the High Court, GAIL filed Letters Patent Appeals (LPAs) before the High Court in LPA No. 1622/2006 and LPA No.1012/2007. The Division Bench of the High Court passed a Common Order and Judgment dated 17-06-2008 and upheld the Single Judge Bench Orders.

Supreme Court

Aggrieved by the Common Order and Judgment dated 17-06-2008 of the High Court-Division Bench, GAIL filed an Appeal before the Supreme Court on the grounds that the Writ Petition was not maintainable and that the High Court erred in invalidating the Clauses of the Gas Contract as there was unequal bargaining power between the Parties.

The Apex Court, vide Judgment dated 08-02-2023, made the following observations:

1. That IPCL was mandated by the Ministry of Petroleum and Natural Gas, vide Letter of Allocation of Natural Gas dated 01-01-1999, to build its own plant and pipelines and thus, IPCL had incurred huge expenditure for setting up and installing the same.
2. Further, there was a time constraint for IPCL, as the said Letter of Allocation also mandated that a gas supply contract be executed with GAIL within 60 days of issue of such Letter.
3. That GAIL is a Public Sector Undertaking (PSU) and qualifies under the definition of ‘State’ under Article 12 of the Constitution and also enjoys a monopolistic position in respect of supply of natural gas in India.
4. Hence, when GAIL insisted on adding the unfair Clause in the Gas Contract that IPCL has to pay the charges to GAIL under ‘loss of transportation charges’, it clearly established (i) that knowing that IPCL was in a tough situation, GAIL exercised an unequal bargaining power at the time of signing the Gas Contract and (ii) that IPCL had no other option but to enter into the Gas Contract with GAIL. Further, although IPCL had taken up this issue with GAIL several times, prior to and post entering into the said Contract, but the dispute remained unresolved between the Parties.
5. Further, by incorporating the head ‘loss of transportation charges’ in the Gas Contract, IPCL, which was using its own pipelines, was being wrongly treated at par with other commercial entities who were carrying the gas using GAIL’s pipelines and were thus, paying transportation charges to GAIL. The said Clause is thus held to be unfair, discriminatory, arbitrary and violative of Article 14 of the Constitution.

Therefore, based on the aforesaid observations, the Supreme Court held that the Writ Petition was maintainable against GAIL, as writ jurisdiction can be exercised when the State, even in its contractual dealings, fails to exercise a degree of fairness or practices any discrimination. The Apex Court further directed GAIL to refund the transportation charges for a period of three years from the date of filing of the Writ Petition. As a result, the Appeal(s) filed by GAIL was dismissed to the extent of that the Writ Petition was held maintainable and that the particular Clause in the Contract was held as unreasonable.

Harini Daliparthy

Senior Associate

The Indian Lawyer