SUPREME COURT UPHOLDS TERMINATION OF DEALERSHIP AGREEMENT BY HPCL DUE TO DEALER’S VIOLATION OF TERMS

A two-Judge Bench of the Hon’ble Supreme Court comprising of Justice J.K. Maheshwari and Justice Sanjay Karol passed a Judgment dated 17-05-2024 in the matter of M/s. Hindustan Petroleum Corporation Limited & Ors. vs. Dharamnath Singh & Ors., Civil Appeal Nos. 6509-6510 of 2024 and observed that when cancelling a dealership agreement, it must be done strictly following the rules and guidelines established for that purpose.  Moreover, when conducting a sampling test, the dealer must be given prior notice to ensure that they or their representative can be present.

FACTS:

i) That the aforesaid Appeal was filed before the Apex Court by one, M/s. Hindustan Petroleum Corporation Limited & Ors (Appellants) against one Dharamnath Singh & Ors (Respondents), who challenged the decision of the Hon’ble High Court of West Bengal, Calcutta (High Court) in FMA 653-654 of 2012 which, vide, Impugned Order dated 05.05.2015 (Impugned Order), upheld the Order of the Learned Single Judge of High Court in W.P.No.22993(W) of 2007, whereby the action of the Appellants in terminating the license of the instant Respondent, was quashed and set aside.

ii) The Appellants appointed the Respondent as a dealer for petrol, diesel, motor oil, grease, and other related products through a Dealership Agreement dated 01.02.1997.

iii) On 18.08.2007, certain officials from SGS India (Third Party Agency), claiming to be an Agency appointed by the Appellants, arrived at the Respondent’s petrol pump and collected samples of High-Speed Diesel (HSD) and Motor Spirit (MS) which was found to be sub-standard.

iv) Further, on 20.08.2007, the Appellant issued a show cause notice to the Respondent, asking for a response to the alleged irregularities within 7 days. Furthermore, based on the Preliminary Test Report, the Senior Sales Officer of the Durgapur Sales Area informed the Respondent of the immediate suspension of supply.

v) Later on, The Appellants’ authorities conducted a Joint Marker Test, and the sample also failed this re-test, as evidenced by the Analysis Report. However, the Respondent questioned the Agency’s authority to collect samples at the Regional Office of the Appellants. Despite this, the officers conducted the Marker Test on the samples.

vi) Aggrieved by the suspension of supply, the Respondent filed a Writ Petition WP-22993-2007 before the High Court, same was allowed by the High Court in the favour of Respondent herein.

vii) Aggrieved by the vide, Order dated 30.08.2011, of the Ld. Single Judge of the High Court the Appellant filed a First Miscellaneous Appeal (FMA-653-654 2012) before the Division Bench of the High Court.

HIGH COURT (SINGLE JUDGE)

The Learned Single Judge allowed the Writ Petition filed by the Respondent and observed:

“…there are specific provisions under Clause 7 of the 2005 of the Control Order that authorize Gazetted Officers of both the Central and State Governments, police officers not below the rank of Deputy Superintendent of Police, or authorized officers of the Company to collect and test samples. However, the respondent authorities did not follow this procedure. Only the aforesaid officers have the competence to collect and test the samples. Since the respondents did not adhere to the procedure, there is a clear violation of the applicable rules and regulations”.

Further, the learned Single Judge observed that the actions taken by the Respondent authorities in suspending the supply and cancelling the dealership of the Writ Petitioner are contrary to law, arbitrary, and violate the principles of natural justice.”

HIGH COURT (DIVISION BENCH)

On Appeal, the Ld. Division Bench relied on the Judgment of this Court in Allied Motors Limited v. Bharat Petroleum Corporation Ltd (2012) 2 SCC 1. It was held that the Agency had “absolutely no authority to take samples or to make any seizure of any product” in violation of Clause 7 of the Control Order and Section 100 of the Code of Criminal Procedure, 1973 (Cr. P.C.) (Persons in charge of closed place to allow search)

Further, the Bench affirmed that while the Appellants could appoint agents for administrative convenience, these agents could not flout legal provisions, as they had in this case.

Therefore, the Division Bench upheld the order of the Learned Single Judge.

SUPREME COURT:

Dissatisfied with the opinion of both the Court Orders dated 30.08.2011 of Ld. Single Judge of the High Court and Impugned Order dated 05.05.2015 of the Division Bench of the same High Court the Appellant filed a Civil Appeal before the Apex Court.

ISSUE:

I) The issue before the Supreme Court is whether the termination of the Respondent’s Dealership Agreement by the Appellants was lawful and in compliance with the procedural requirements under the Control Order and the terms of the Dealership Agreement. Specifically, the Court must determine if the sampling and testing of the petroleum products conducted by a third-party agency (SGS India) were valid.

II) Whether the subsequent actions taken by the Appellant, including the issuance of a show cause notice and suspension of supply, were justified. Additionally, the Court needs to consider if the procedural safeguards, such as proper notice and adherence to natural justice principles, were followed in the termination process.

OBSERVATION:

1) The Appellants rely heavily on the Judgment in Indian Oil Corporation Ltd. v. R.M. Service Centre (2019) 19 SCC 662, which clarified that the Control Order issued under Section 3 of the of the Essential Commodities Act, 1955 (Act) regulates the production, supply, distribution, trade, and commerce of certain commodities, including high-speed diesel and motor spirit. Violating this Control Order can lead to criminal prosecution and penalties. The procedures for search and seizure outlined in Clause 7 and Section 100 of the Code only apply if someone is being prosecuted for violating the Control Order. In this case, the dealer is not being prosecuted for such violations, so the sampling procedures required under the Control Order are not relevant.

2) The dealer entered into an agreement on 20.12.1995 and is bound by the Guidelines issued by Public Sector Oil Marketing Companies. These Guidelines provide specific procedures for drawing and testing samples, including time frames to streamline operations, which are not necessarily related to the product’s quality or result. The High Court’s strict interpretation of these timelines was incorrect.

3) The Supreme Court’s observation emphasizes that anyone who contravenes the Control Order is liable to be punished, and specific charges must be made to prosecute someone for violating the search and seizure provisions. In this case, the prosecution was based solely on violating the terms of the agreement between the parties, not the Control Order.

4) Furthermore, in Hindustan Petroleum Corporation Limited v. Super Highway Services (2010) 3 SCC 321, the Apex Court stressed that cancelling a Dealership Agreement is serious and must be done fairly, following all relevant rules and guidelines. The dealer must be given prior notice of tests to ensure their presence, as required by natural justice. In this case, the Respondents’ issue was with the sample collection process by SGS India, not with the lack of notice or other procedural violations.

5) The Court also reviewed Harbanslal Sahnia v. Indian Oil Corporation (2003) 2 SCC 107, which allows for Writ Petitions in contractual matters when the termination is irrelevant or baseless. However, maintainability is not an issue here.

CONCLUSION:

Based on aforementioned facts, the Supreme Court allowed the Appeals, and the decisions of the lower courts are overturned. Further, the Bench observed that the termination of the Respondent’s Dealership Agreement was valid, as it was based solely on violations of the dealership agreement terms, not on the Control Order. The procedural requirements under the Control Order were not applicable since the Respondent was not being prosecuted under it. The Court held that there is no violation of natural justice principles in the termination process.

 

Sakshi Raghuvanshi

Senior Legal Associate

The Indian Lawyer