W.P(C) 9178/2009 Page 1 of 25 * IN THE HIGH COURT OF DELHI AT NEW DELHI + Reserved on : 7th May, 2010 Pronounced on: 17th May, 2010 W.P.(C) No.9178/2009 TRACK INNOVATIONS INDIA PVT. LTD. ...... Petitioner Through: Mr. Jayant Bhushan, Senior Advocate with Mr. M.P. Jha, Advocate, Mr. Atul Batra, Advocate and Mr. Arijit Mazumdar, Advocate. VERSUS UNION OF INDIA & ORS. ....Respondents Through: Ms. Geetanjali Mohan, Advocate for the respondents. ALONG WITH 6 OTHER CONNECTED MATTERS; BEING W.P.(C) NO. 44/2009, W.P.(C) NO. 9674/2009, W.P.(C) NO. 9675/2009, W.P.(C) NO.9676/2009, W.P.(C) NO. 9677/2009 & W.P.(C) NO. 10329/2009 CORAM: HON’BLE MR. JUSTICE SANJAY KISHAN KAUL HON’BLE MR. JUSTICE VALMIKI J.MEHTA 1. Whether the Reporters of local papers may be allowed to see the judgment? yes 2. To be referred to the Reporter or not? yes 3. Whether the judgment should be reported in the Digest? yes W.P(C) 9178/2009 Page 2 of 25 % JUDGMENT VALMIKI J. MEHTA, J 1. This judgment will dispose of a batch of writ petitions. The parties have agreed that the civil writ petition No.9178/2009 be treated as the lead case and accordingly, the said case was argued. The issues as raised in the other cases are identical and facts are more or less similar. 2. The following issues have been raised by the petitioner: “A. Price Variation Clause 1. Whether the Price Variation Clause (PVC) as adopted in CS 156 of 2005 was faulty? 2. Whether the Petitioners are entitled to the new PVC as recommended by the Committee on 19.09.2007 B +/-30 Option Clause Whether the Respondent Authorities could have invoked the +/-30 Option Clause at the end of contract period?” The aforesaid issues arise on the basis of the following facts: The petitioner was awarded the contract by the respondent No.3/Indian Railways, being CS 156/05, in the year 2005 for the supply of concrete sleepers by the petitioner to the respondent No.3. The petitioner has stated that for manufacture of the sleepers, respondent No.3 had leased out its land on which the petitioner set up a unit for production of concrete sleepers. Admittedly, the petitioner failed to adhere to the time of performance as required for the supply W.P(C) 9178/2009 Page 3 of 25 of concrete sleepers and after giving one extension without imposition of liquidated damages, subsequent extension was granted subject to imposition of liquidated damages. Petitioner however failed to supply the contracted number of sleepers and hence was in breach. The respondent No.3, Northern Railway, who is the purchaser of the goods, also exercised an option, within the contractually permissible period for purchasing additional 30% sleepers more than the originally contracted for. The petitioner contends that the Price Variation Clause as found in the contract was defective from the beginning and it is alleged to be in the knowledge of the respondents and in spite of the same, the respondent No.3 failed to address the grievance of the petitioner as a result of which the petitioner was caused a loss as the price variation formula provided in the contract failed to compensate the petitioner for increased cost. It is further contended by the petitioner that the option of 30% additional sleepers was arbitrarily and unfairly exercised by the respondent No.3, though the same was exercised within the contractually permissible period, inasmuch as the respondent No.3 ought to have taken notice of the short/limited period remaining for the performance of the balance supply under the contract and also that further considering the production capacity of the petitioner, the option for purchase of additional sleepers ought not to have been exercised. W.P(C) 9178/2009 Page 4 of 25 3. The respondents have vehemently opposed the petition. In the counter affidavit filed by the respondents, it has been contended that the writ petition is not the appropriate remedy with respect to issues pertaining to a contract which has been partly performed after being entered into and with respect to which the petitioner is in breach. It is further contended that issues of arbitrariness and unfairness would not arise with respect to contractual relations, although one of the parties is the „State‟, for the reason that the petitioner entered into the contract with open eyes in a level playing field and the petitioner need not have entered into the contract with the respondent No.3. It is further contended that there were due negotiations with respect to the Price Variation Clause itself and it is only thereafter that the subject contract was entered into under which the petitioner had to supply 4,98,744 sleepers as per the order placed by the respondent No.3. It is contended that the petitioner had in fact offered the quantity of 6,00,000 sleepers to be supplied by January, 2008, however, the order was placed by the respondent No.3 only for 4,98,744 sleepers and subsequently an additional order for 1,49,623 number of sleepers was placed exercising the option clause in the contract which allowed placement of an order for additional quantity of 30% sleepers than as originally ordered. The contractual period was extended upto 10th September, 2008 and then upto to December, 2008. It is stated that the petitioner however only supplied 3.68 lacs sleepers i.e. 74% of the original order and 57% of the total W.P(C) 9178/2009 Page 5 of 25 ordered quantity. The petitioner was hence argued to be clearly in breach. It was further argued that there were a total of 70 suppliers who have supplied 195.75 lacs sleepers and out of the 70 suppliers, 44 suppliers have already completed the original order, 21 suppliers have completed the +30% additional quantity and 15 suppliers have requested for additional quantities after completing the original and +30% order. It is, therefore, contended that if the price variation formula was defective, performance of this type would not have materialized. It is, therefore, contended that if the reliefs as prayed for by the petitioner are granted, then, it would amount to discriminating against those suppliers who have duly performed their contractual obligations without any breach and as per the contracted price variation formula. It is denied that the price variation formula is in any manner defective and it is further the case of the respondents that loss, if any, has been caused to the petitioner only on account of its own faults including the delays in supply. During the course of arguments, it was also contended by the counsel for the respondents that the cost of manufacture depends upon various aspects and if the costing of the petitioner has lead to any disadvantage, it is only on account of the petitioner itself because other suppliers have not complained to the respondents. Costing, after all, it is contended is a result of innumerable inter- related factors and it cannot be said that the loss has been caused to the petitioner only because of the price variation formula. It is contended that there was no W.P(C) 9178/2009 Page 6 of 25 guarantee by the respondents that the petitioner will make a profit under the contract. It was argued that in a normal commercial venture either a profit or a loss, is but a necessary incident. 4. The counsel for the petitioner has vehemently argued that the price variation formula was defective was admitted by the officials of the respondent No.3 themselves in a report which was prepared before awarding the next contract being CS 160. It is said that in the next contract awarded, the price variation formula was changed and therefore the benefit of the price variation formula should also be given to the existing contract, and more particularly with respect to the +30% variation. The committee report of the respondents which is relied upon by the petitioner is dated 19.9.2007. The respondents have, however, countered that the price variation formula depends upon the extant scenario and it is not necessary that one price variation formula adopted for one contract, should necessarily be adopted for other contracts entered into in different scenarios and the same depends upon the price of raw materials as then prevalent. It has been argued that there was no bar on the petitioner to supply to other private parties after taking due permission of the respondents, meaning thereby, if the petitioner was efficient, it could have after supplying the contracted quantity to the railways, raised its production for supply to other private persons. It is argued that the subject matter of the committee report was not with respect to the existing subject W.P(C) 9178/2009 Page 7 of 25 contract CS 156 of 2005 and in fact it was for another contract and therefore observations in a committee report cannot be taken as a gospel truth which is binding on the railways. It was contended that the issue of costing will be a subject matter in civil proceedings, and in fact in arbitration, as the contract admittedly contains an arbitration clause. It has been argued that since there are disputed questions of facts as to whether or not the petitioner in fact suffered a loss, and which is denied, a writ petition is not an adequate remedy and all the issues will be ultimately decided in the arbitration proceedings. 5. In rejoinder, it was however contended on behalf of the petitioner that merely because there are disputed questions of facts, will not prevent this Court from exercising jurisdiction under Article 226 of Constitution of India once arbitrariness is shown. 6. Mr. Jayant Bhushan, learned senior counsel for the petitioner, has very strenuously, in support of the contentions and the arguments on behalf of the petitioner, relied upon various judgments of the Supreme Court. The first two judgments which are relied upon are the judgments of Central Inland Water Transport Corporation Limited and Another Vs. Brojo Nath Ganguly and Another 1986 (3) SCC 156 and Kumari Shrilekha Vidyarthi and Others Vs. State of U.P. and Others 1991 (1) SCC 212. The aforesaid judgments were referred to for the proposition that Article 14 of the Constitution can also be W.P(C) 9178/2009 Page 8 of 25 invoked in contractual matters. The decision in the case of Sanjana M. Wig (Ms) Vs. Hindustan Petroleum Corpn. Ltd. 2005 (8) SCC 242 was then relied upon in support of the proposition that once Article 14 is invoked, there is no bar to the exercise of jurisdiction by the Court under Article 226, even if the contract contains an arbitration clause. Finally, reliance was placed upon ABL International Ltd. Vs. Export Credit Guarantee Corpn. of India 2004 (3) SCC 553 to contend that disputed questions of facts can be decided in a writ petition. The following paragraphs of the judgment in the case of Kumari Shrilekha Vidyarthi(supra) have been relied upon: “21. The Preamble of the Constitution of India resolves to secure to all its citizens Justice, social, economic and political; and Equality of status and opportunity. Every State action must be aimed at achieving this goal. Part IV of the Constitution contains „Directives Principles of State Policy‟ which are fundamental in the governance of the country and are aimed at securing social and economic freedoms by appropriate State action which is complementary to individual fundamental rights guaranteed in Part III for protection against excesses of State action, to realise the vision in the Preamble. This being the philosophy of the Constitution, can it be said that it contemplates exclusion of Article 14 — non-arbitrariness which is basic to rule of law — from State actions in contractual field when all actions of the State are meant for public good and expected to be fair and just? We have no doubt that the Constitution does not envisage or permit unfairness or unreasonableness in State actions in any sphere of its activity contrary to the professed ideals in the Preamble. In our opinion, it would be alien to the constitutional scheme to accept the argument of exclusion of Article 14 in contractual matters. The scope and permissible grounds of judicial review in such matters and the relief which may be available are different matters but that does not justify the view of its total exclusion. This is more so when the modern trend is also to examine the unreasonableness of a term in such contracts where the bargaining power is unequal so that these are not negotiated contracts but standard form contracts between unequals. 22. There is an obvious difference in the contracts between private parties and contracts to which the State is a party. Private parties are concerned only with their personal interest whereas the State while exercising its powers and discharging its functions, acts indubitably, as is expected of it, for public good and in public interest. The impact of every State action is also on public interest. This factor alone is sufficient to import at least the minimal requirements of public law obligations and impress with this W.P(C) 9178/2009 Page 9 of 25 character the contracts made by the State or its instrumentality. It is a different matter that the scope of judicial review in respect of disputes falling within the domain of contractual obligations may be more limited and in doubtful cases the parties may be relegated to adjudication of their rights by resort to remedies provided for adjudication of purely contractual disputes. However, to the extent, challenge is made on the ground of violation of Article 14 by alleging that the impugned act is arbitrary, unfair or unreasonable, the fact that the dispute also falls within the domain of contractual obligations would not relieve the State of its obligation to comply with the basic requirements of Article 14. To this extent, the obligation is of a public character invariably in every case irrespective of there being any other right or obligation in addition thereto. An additional contractual obligation cannot divest the claimant of the guarantee under Article 14 of non-arbitrariness at the hands of the State in any of its actions. 24. The State cannot be attributed the split personality of Dr Jekyll and Mr Hyde in the contractual field so as to impress on it all the characteristics of the State at the threshold while making a contract requiring it to fulfil the obligation of Article 14 of the Constitution and thereafter permitting it to cast off its garb of State to adorn the new robe of a private body during the subsistence of the contract enabling it to act arbitrarily subject only to the contractual obligations and remedies flowing from it. It is really the nature of its personality as State which is significant and must characterize all its actions, in whatever field, and not the nature of function, contractual or otherwise, which is decisive of the nature of scrutiny permitted for examining the validity of its act. The requirement of Article 14 being the duty to act fairly, justly and reasonably, there is nothing which militates against the concept of requiring the State always to so act, even in contractual matters. There is a basic difference between the acts of the State which must invariably be in pubic interest and those of a private individual, engaged in similar activities, being primarily for personal gain, which may or may not promote public interest. Viewed in this manner, in which we find no conceptual difficulty or anachronism, we find no reason why the requirement of Article 14 should not extend even in the sphere of contractual matters for regulating the conduct of the State activity. So far as the case of Central Inland Water Transport Corporation Limited(supra) is concerned, the paragraphs which have been relied upon are as under: “83. Yet another theory which has made its emergence in recent years in the sphere of the law of contracts is the test of reasonableness or fairness of a clause in a contract where there is inequality of bargaining power. Lord Denning, MR, appears to have been the propounder, and perhaps the originator —at least in England, of this theory. In Gillespie Brothers & Co. Ltd. v. Roy Bowles Transport Ltd.030 where the question was whether an indemnity clause in a contract, on its true construction, relieved the indemnifier from liability arising to the indemnified from his own negligence, Lord Denning said: (at p. 415- 16) W.P(C) 9178/2009 Page 10 of 25 “The time may come when this process of „construing‟ the contract can be pursued no further. The words are too clear to permit of it. Are the courts then powerless? Are they to permit the party to enforce his unreasonable clause, even when it is so unreasonable, or applied so unreasonably, as to be unconscionable? When it gets to this point, I would say, as I said many years ago: „there is the vigilance of the common law which, while allowing freedom of contract, watches to see that it is not abused‟: John Lee & Son (Grantham) Ltd. v. Railway Executive131 It will not allow a party to exempt himself from his liability at common law when it would be quite unconscionable for him to do so.” (emphasis supplied) In the above case the Court of Appeal negatived the defence of the indemnifier that the indemnity clause did not cover the negligence of the indemnified. It was in Lloyds Bank Ltd. v. Bundy232 that Lord Denning first clearly enunciated his theory of “inequality of bargaining power”. He began his discussion on this part of the case by stating: (at p. 763) “There are cases in our books in which the courts will set aside a contract, or a transfer of property, when the parties have not met on equal terms, when the one is so strong in bargaining power and the other so weak that, as a matter of common fairness, it is not right that the strong should be allowed to push the weak to the wall. Hitherto those exceptional cases have been treated each as a separate category in itself. But I think the time has come when we should seek to find a principle to unite them. I put on one side contracts or transactions which are voidable for fraud or misrepresentation or mistake. All those are governed by settled principles. I go only to those where there has been inequality of bargaining power, such as to merit the intervention of the court.” (emphasis supplied) He then referred to various categories of cases and ultimately deduced therefrom a general principle in these words: (at p. 765) “Gathering all together, I would suggest that through all these instances there runs a single thread. They rest on „inequality of bargaining power‟. By virtue of it, the English law gives relief to one who, without independent advice, enters into a contract on terms which are very unfair or transfers property for a consideration which is grossly inadequate, when his bargaining power is grievously impaired by reason of his own needs or desires, or by his own ignorance or infirmity, coupled with undue influences or pressures brought to bear on him by or for the benefit of the other. When I use the word „undue‟ I do not mean to suggest that the principle depends on proof of any wrongdoing. The one who stipulates for an unfair advantage may be moved solely by his own self-interest, unconscious of the distress he is bringing to the other. I have also avoided any reference to the will of the one being „dominated‟ or „overcome‟ by the other. One who is in extreme need may knowingly consent to a most improvident bargain, solely to relieve the straits in which he finds himself. Again, I do not mean to suggest that every transaction is saved by independent advice. But the absence of it may be fatal. With these explanations, I hope this principle will be found to reconcile the cases.” (emphasis supplied) 88. As seen above, apart from judicial decisions, the United States and the United Kingdom have statutorily recognised, at least in certain areas of the law of contracts, that there can be unreasonableness (or lack of fairness, if one prefers that phrase) in a contract or a W.P(C) 9178/2009 Page 11 of 25 clause in a contract where there is inequality of bargaining power between the parties although arising out of circumstances not within their control or as a result of situations not of their creation. Other legal systems also permit judicial review of a contractual transaction entered into in similar circumstances. For example, Section 138(2) of the German Civil Code provides that a transaction is void “when a person” exploits “the distressed situation, inexperience, lack of judgmental ability, or grave weakness of will of another to obtain the grant or promise of pecuniary advantages ... which are obviously disproportionate to the performance given in return”. The position according to the French law is very much the same. 89. Should then our courts not advance with the times? Should they still continue to cling to outmoded concepts and outworn ideologies? Should we not adjust our thinking caps to match the fashion of the day? Should all jurisprudential development pass us by, leaving us floundering in the sloughs of 19th century theories? Should the strong be permitted to push the weak to the wall? Should they be allowed to ride roughshod over the weak? Should the courts sit back and watch supinely while the strong trample underfoot the rights of the weak? We have a Constitution for our country. Our judges are bound by their oath to “uphold the Constitution and the laws”. The Constitution was enacted to secure to all the citizens of this country social and economic justice. Article 14 of the Constitution guarantees to all persons equality before the law and the equal protection of the laws. The principle deducible from the above discussions on this part of the case is in consonance with right and reason, intended to secure social and economic justice and conforms to the mandate of the great equality clause in Article 14. This principle is that the courts will not enforce and will, when called upon to do so, strike down an unfair and unreasonable contract, or an unfair and unreasonable clause in a contract, entered into between parties who are not equal in bargaining power. It is difficult to give an exhaustive list of all bargains of this type. No court can visualize the different situations which can arise in the affairs of men. One can only attempt to give some illustrations. For instance, the above principle will apply where the inequality of bargaining power is the result of the great disparity in the economic strength of the contracting parties. It will apply where the inequality is the result of circumstances, whether of the creation of the parties or not. It will apply to situations in which the weaker party is in a position in which he can obtain goods or services or means of livelihood only upon the terms imposed by the stronger party or go without them. It will also apply where a man has no choice, or rather no meaningful choice, but to give his assent to a contract or to sign on the dotted line in a prescribed or standard form or to accept a set of rules as part of the contract, however unfair, unreasonable and unconscionable a clause in that contract or form or rules may be. This principle, however, will not apply where the bargaining power of the contracting parties is equal or almost equal. This principle may not apply where both parties are businessmen and the contract is a commercial transaction. In today‟s complex world of giant corporations with their vast infrastructural organizations and with the State through its instrumentalities and agencies entering into almost every branch of industry and commerce, there can be myriad situations which result in unfair and unreasonable bargains between parties possessing wholly disproportionate and unequal bargaining power. These cases can neither be enumerated nor fully illustrated. The court must judge each case on its own facts and circumstances.” W.P(C) 9178/2009 Page 12 of 25 7. The counsel