Case Comment: Delhi Cloth & Gen. Mills v. Union of India
By: Ritwik Tyagi
Tags: Case Comments, Analysis, Law

Introduction

The case of Delhi Cloth and General Mills v. Union of India[1] was primarily concerned with the legal position over the doctrine of promissory estoppel in administrative law. At the time of hearing of this case, the doctrine had not been so firmly established in India, or any other jurisdiction for that matter. Promissory estoppel, although being applied and enforced by courts, was at various stages of development in different countries. Numerous positions of courts of other countries such as England and Australia are also discussed in subsequent sections of this paper. Let us first discuss the position as to estoppel in India, and the related developments.

The doctrine of promissory estoppel is not restricted in scope of application to just administrative law, but is also widely used in the realm of contract laws and service laws, to name a few. Justice Bhagwati had, in the M.P. Sugar Mills[2] case, recognised that wide applicability of this doctrine in the following remark, “the doctrine is potentially so fruitful and pregnant with such vast possibilities for growth that it might upset existing doctrines which are almost looked upon reverentially and which have held the field for a long number of years.” Thus, it becomes abundantly clear how important this doctrine was considered as by the judiciary.

The beginning of the doctrine is traced back primarily to the High Trees case, which has been discussed in detail later on. Essentially, the doctrine of promissory estoppel is based upon the notion of equity, which is always to be upheld while rendering justice. Therefore, the doctrine is quite useful in situations where following the letter of the law would result in undue disruptions and inequity between parties. In terms of administrative law, the doctrine has been embedded into jurisprudence as a safeguard against arbitrary and discretionary exercises of power by the government, or other public bodies. The doctrine serves as an important measure to prevent the executive from functioning upon its whims and fancies.

The meaning of the doctrine was adequately summed in the M.P. Sugar Mills case as “where one party by his words or conduct, makes to the other a clear and unequivocal promise which is intended to create a legal relationship to arise in the future, knowing or intending that it would be acted upon by the other party to whom the promise is made, and it is, in fact, so acted upon by the other party, the promise would be binding and subsequently the party making the promise would not be allowed to go back upon it.[3]”

Statutorily, the definition of the term estoppel is to be found only in section 115 of the Indian Evidence Act, 1872, which defines it as follows: “When one person has, by his declaration, act or omission, intentionally caused or permitted another person to believe a thing to be true and to act upon such belief, neither he nor his representative shall be allowed, in any suit or proceeding between himself and such person or his representative, to deny the truth of that thing.” As per this definition, the essential ingredients of estoppel are, first, that there must be a representation by one party to another; and second, the other party must believe in and act upon this representation.

There have been several other interesting judicial interpretations of the term estoppel by Indian courts. In Depuru Veeraraghava Reddy v. Depuru Kamalamma[4], it was held that estoppel, though a part of evidence law, is also substantive rule of law which helps to create or defeat rights which would not exist but for the doctrine. In Ekkari Ghosh v. Chittarlekha Ghoshami[5], the court stated that estoppel is a rule of evidence which prevents one party from denying the existence of a fact which he represented as existing and upon which representation another person has been induced to act to this detriment. The position of Indian law regarding the doctrine of estoppel in administrative law has been discussed in the coming sections.

Analysis

Facts & Background

The factual background of this case is quite an interesting one. The appellant company was endeavouring to set up a fertilizer factory in the town of Kota, an industrially backward area in Rajasthan. The main ingredient required for manufacturing Urea and other fertilizers was Naphtha, which was to be sourced from the Indian Oil Corporation’s Koyali Refinery. Since the distance between the refinery and the proposed factory was around five-hundred and twenty kilometres, the company had requested the Railway Board, by way of a letter dated September 5, 1966, to offer a concessional freight rate (equivalent to Clause 62.5-B of the tariff) to them for transporting the Naphtha. They asked for a reduction of around forty-three percent in the normal tariff that was charged for the category of goods in which Naphtha was classified into (Clause 110-B). In the letter, the company put forth that if such a concession is not offered to them, it would put them in a disadvantageous position as against those factories which are located near ports and refineries.

The Railway Board, in its reply to the company by a letter dated November 5, 1966, agreed to offer a concessional rate of clause 85-B (Special). However, the letter went on to state that since the factory had not actually been set-up and the rate had been quoted beforehand, the company would have to approach the Railway Board once again to review the freight rate once the goods start moving. In pursuance of this condition, the appellants wrote another letter to the Board on June 5, 1967, once the factory was almost ready for operation, requesting them once again to charge the rate of 62.5-B, rather than 85-B (Special). The Board, however, refused to accept the request. The company then wrote another letter on May 31, 1968 to apprise the Board that the transport of goods would begin from June/July, 1968 and to request them agree to charge the rate of 85-B (Special), as the Board had communicated earlier. This request of the company was also rejected.

Subsequently, the Board wrote another letter on July 11, 1968 which informed the company that if they could produce any data for a period of one year showing their cost of production, which would establish that the production of fertilizers in Kota was proving to be uneconomical and the provision of a concessional rate on transport would change the equation, then the Railway Board would reconsider its decision on the charges. What this meant was that the Board would be willing to change its stance on the freight charges in the scenario that the company proves that the concession offered to them would make the functioning of the factory in Kota economical.

The next event in this factual matrix was the filing of a complaint under section 41(1)(a) and (b) of the Indian Railways Act, 1890 on April 19, 1969 before the Railway Rates Tribunal, Madras. The company raised three primary contentions: first, that the rate charged by the Railway for transport of goods was unreasonable under section 41(1)(b) of the Act; second, that the Railway was showing undue preference in respect of other traffic, hence acting contrary to section 28 of the Act; and third, that the Board was estopped from rolling back on the decision to charge a concessional rate of 85-B (Special) that they had communicated earlier, as the company had invested a large amount of capital in setting up the factory on the basis of this decision.

On its part, the Railway Board maintained that the price quotation that they had provided was provisional in character and it had been made sufficiently clear that the rate would be subject to review once the goods actually started moving. The letter of the Board had also explicitly mentioned that the company would have to approach them once again for the purpose of confirming the rates later on. Moreover, it was the Board’s contention that the company did not proceed to construct the factory solely on the basis of their freight charge quotation as they had reserved their right to review the charges. Upon finding that the transport of chemicals like Naphtha had already been given a low rate in order to promote the fertiliser industry, a further concession was not required.

The Tribunal considered these issues and came to the following conclusions: one, that the rate charged was not unreasonable; two, the Railway was not acting in contravention of section 28 of the Railways Act as no preferential treatment was given to any one; and three, on the issue of estoppel, the Tribunal found that the letter was not the basis of the company proceeding to set up a factory in Kota. Further, the Tribunal held that even if the assurance given in the letter did form the basis for setting up a factory, then the withdrawal of such assurance had not caused any adverse impacts upon the interests of the company.

Decision/Reasoning

The issues for consideration before the Court were as follows:

Whether the Railway Board was bound to give the concessional rate offered by them in the letter dated November 5,1966?

Whether the rate charged for transport of Naphtha was unreasonable?

Whether the Railways was contravening the provisions of section 28 of the Railways Act?

With respect to third question, the Court affirmed the Tribunal’s view that the company had produced absolutely no evidence to prove that the Railways had acted in an unreasonable manner by giving preference to some traffic over other. The Court, relying upon the precedent set in the case of Rajgarh Jute Mills Ltd. v. Eastern Railway[6] that the party raising a grievance against the Railways under section 28 must themselves establish that they had been subject to undue preference, found no reason to disagree with the Tribunal. The Court also noted that, in fact, even the counsel for the appellant company did not seriously dispute the findings on this particular issue.

On the second issue, i.e. of unreasonableness of freight charges, the court again noted that the onus to prove the same rests with the company making such allegations. The appellants produced certain documents which showed that the Railways had levelled certain surplus working costs for transporting their goods. However, the Court did not go into the documents and opined that even if the Railways was earning some surplus, it was not a ground for holding the charges unreasonable. Since the Railways was run as a commercial undertaking and it had to offset the losses incurred in transporting essential commodities at lower costs, it would be justifiable for the Railways to charge higher freight rates on other commodities. With regards to the wide disparity of rates between crude oil and Naphtha, although being quite comparable in characteristics, the Court concluded that while Naphtha had been classified as a dangerous commodity by the Railways, crude oil was not and thus, the extra amount of precaution required for transporting a dangerous commodity was responsible for the higher charges.

Image Source — The Saturday Evening Post

The most important debate in this case, however, was with respect to the doctrine of promissory estoppel. The Tribunal had earlier rejected the claim of the company that the Board was bound by the estoppel arising out of their letter of November 5, 1966. It was held that the assurances given in the letter were not the sole basis for the company to have set up its factory in Kota and since there was no adverse impact upon the company of the withdrawal of the assurances, there could not be an estoppel. The Supreme Court, however, did not find itself in consonance with the reasoning applied by the Tribunal to arrive at this conclusion. The Court disagreed with the Tribunal’s observations specifically with regards to the requirement of adverse impact on the company for establishing estoppel.

Therefore, while the Court affirmed the findings of the Tribunal on all counts, it differed in the rationale used to arrive at those findings in the question relating to the presence of an estoppel. The reasoning applied by the Supreme Court has been discussed in the subsequent section. The final decision of the Court was that the company had sufficient notice of the fact that the rates quoted by the Board in its letter were not final, and were necessarily subject to review at a later point in time when the goods would actually start moving. Hence, no estoppel could be said to have arisen in favour of the appellants, and the company’s appeal failed.

The Supreme Court went on to trace the position of law with regards to the doctrine of promissory estoppels. The Court observed that in the formative years of the doctrine, it was the accepted position that for an estoppel to apply, the party claiming it must show that he/she was induced into taking such actions which caused detrimental impact to their interests. This is precisely the position which the Tribunal applied in the present case by stating that the company had not suffered any material injury on account of the withdrawal of the assurances given by the Board. However, this position has changed substantially over the years.

The current position of law relating to estoppel stipulates that the complainant must only be able to show that he/she acted upon such assurances made by the other party, and whether or not he/she suffered from any detriment on account of the withdrawal of those assurances is immaterial. Therefore, in a nutshell, the only requirement is that the complainant must have relied upon the assurances made by the other person. The Supreme Court in this case stated, “The alteration of position is the only indispensable requirement of the doctrine. It is not necessary to prove any further damage, detriment or injury to the person asserting the estoppel.” This means that it must only be shown that the position of the complainant was altered on the basis of the assurances.

Critical Analysis

The Court relied upon the authority of Lord Denning in the case Central London Property Trust Ltd. v. High Trees House Ltd.[7], wherein it was stated that “A promise intended to be binding, intended to be acted upon, and in fact acted upon is binding.” The High Trees principle, as it is widely known now, is that the promisor is bound because he/she led the promisee to commit him/her-self to alter the position. If the promisee has acted upon the promise, the promisor is precluded from receding from the promise. Lord Denning further elucidated upon this principle in his writings[8] as follows, “Where one party deliberately promises to waive, modify or discharge his strict legal rights, intending the other party to act on the faith of promise, and the other party actually does act on it, then it is contrary, not only to equity but also to good faith, to allow the promisor to go back on his promise. It should not be necessary for the other party to show that he acted to his detriment in reliance on the promise. It should be sufficient that he acted on it.”

Also relied upon was the decision of Dixon, J. in the case of Grundt v. Great Boulder Pty. Gold Mines Ltd.[9], where it was stated that “It is often said simply that the party asserting the estoppel must have been induced to act to his detriment. Although substantially such a statement is correct and leads to no misunderstanding, it does not bring out clearly the basal purpose of the doctrine. That purpose is to avoid or prevent a detriment to the party asserting the estoppel by compelling the opposite party to adhere to the assumption upon which the former acted or abstained from acting. This means that the real detriment or harm from which the law seeks to give protection is that which would flow from the change of position if the assumption were deserted that led to it. So long as the assumption is adhered to, the party who altered his situation upon the faith of it cannot complain.”

The said passage has also been quoted, with approval, by Bhagwati, J. in Motilal Padampat Sugar Mills Co. Ltd. v. State of U.P.[10], as “We do not think that in order to invoke the doctrine of promissory estoppel it is necessary for the promisee to show that he suffered detriment as a result of acting in reliance on the promise.” This was reiterated in the case of Union of India v. Godfrey Philips India Ltd[11].

Thus, the Court noted that the doctrine of promissory estoppel cannot be manipulated in such a manner that will effectively burden public bodies to carry out assurances which are contrary to law. Moreover, since the doctrine is based upon the principle of equity, it cannot and must not be given effect to if it is unjust and inequitable. Coming back to the facts of the matter, the Court noted that it isn’t just one assurance which could have led to the setting up of the factory, rather the company had obtained certain other representations from the Rajasthan government for power supply at concessional rates, and for exemption from payment of tax for a period of time. All of these assurances could have been wholly or partially responsible for the setting up of the factory and it is not necessary to show that it was only the letter from the Railway Board which motivated the decision to do so.

Hammering the final nail into the coffin, the Court made it clear that attention should be paid to the whole of the representation for ascertaining whether an estoppel is made out. It is necessary that this representation must be clearly made in an unambiguous manner, as explained in Halsbury’s Laws of England[12]. Upon going through the letter of the Board, it was concluded by the Court that the representation was not a clear or plain one, rather, it had several strings attached to it in the form of the requirement of a further review. Thus, there was no estoppel.

A case[13] that had arisen in the then Presidency of Bombay, in which the action of the Government in going back on its promise was challenged, can be considered as the first one concerning promissory estoppel in India. On the assurance of the government, the Municipal Corporation had vacated a site of certain municipal stables which obstructed the construction of an arterial road and had entered into possession of another piece of land offered by the government and constructed stables on the same at an expense. Twenty-four years later the government served a notice requesting them to deliver possession of the land within six months and to pay rent at the rate of Rs. 12000 per month until that time. The plea of the Municipal Corporation that the events “had created an equity in favour of the Municipality” was upheld, with the Court holding that the municipality had given the old land and proceeded to the new ground in the firm belief that they had an absolute right against the Government.

Conclusion

Therefore, the case of Delhi Cloth and General Mills v. Union of India was instrumental in solidifying the jurisprudence relating to promissory estoppels in India, which was until then a very developing area of law. The Supreme Court corrected the misleading position adopted by the Railway Tribunal, although the Tribunal had arrived at the same conclusion as the apex court. The Court clarified that a claim for estoppel does not require the complainant to prove the fact that he/she suffered any detriment to their interests by acting upon the promise or assurance made by the other party. Rather, it is enough to merely show that the complainant had indeed acted upon the representation made by the other party and such actions had sufficiently altered their position. Whether or not the resiling of the other party from the assurance made earlier results in any harm or loss is irrelevant for determining estoppel.

It can be said that this decision carried a lot of impact on the law, as the doctrine of estoppel is in an indispensable part of several areas of law, such as the law of contract and the law of evidence, along with administrative law.

Footnotes

[1] (1988) 1 SCC 86.

[2] AIR 1979 SC 618.

[3] Ibid.

[4] AIR 1951 Mad. 403.

[5] AIR 1958 Cal. 447.

[6] 1959 SCR 236.

[7] (1956) 1 All. ER 256.

[8] A.T. DENNING, Recent Developments in the Doctrine of Consideration, Modern Law Review, 1952, vol. 15, pg. 5.

[9] (1938) 59 CLR 641 (Aus).

[10] (1979) 2 SCC 409.

[11] (1985) 4 SCC 369.

[12] 4th Ed., Vol. 16, p. 1071, para 1595.

[13] Municipal Corporation of Bombay v. The Secretary of State, I.L.R. 29 Bom. 580.