Supreme Court restricts refund of transportation charges in GAIL vs. IPCL case

Date of the Judgment: 08 February 2023

Citation: Not Available

Judges: Sanjay Kishan Kaul, J., Abhay S. Oka, J.

Can a public sector company charge another for transportation costs when the latter is required to use its own infrastructure? The Supreme Court of India recently addressed this question in a dispute between GAIL (India) Limited and Indian Petrochemicals Corporation Ltd. (IPCL). The core issue revolved around whether GAIL could levy transportation charges on IPCL when IPCL was mandated to use its own pipelines for gas transport. The Supreme Court, in this judgment, examined the validity of such charges and the maintainability of a writ petition in a contractual dispute. The judgment was delivered by a bench comprising Justices Sanjay Kishan Kaul and Abhay S. Oka.

Case Background

On January 1, 1999, the Ministry of Petroleum and Natural Gas (MoPNG) allocated natural gas to IPCL, specifying that IPCL would lay its own pipelines from Hazira to its Gandhar unit. Following this, IPCL and GAIL entered into a gas supply contract on November 9, 2001. IPCL had invested approximately Rs. 4500 crores in setting up a plant at Gandhar and Rs. 354 crores in laying pipelines between Hazira and Gandhar.

The contract stipulated that GAIL would receive natural gas from ONGC at Hazira and transport it to IPCL’s Gandhar plant via IPCL’s pipelines. The unutilized gas would then be sent back to Hazira through the same pipelines. The dispute arose from GAIL levying ‘loss of transportation charges’ on IPCL, despite IPCL using its own pipelines.

Timeline

Course of Proceedings

IPCL filed a writ petition challenging Clauses 10.01 and 4.04 of the contract in the High Court. The Single Judge ruled in favor of IPCL on September 19, 2006, quashing the clauses and holding them as unfair and unconscionable. Subsequently, IPCL sought a clarification for refund of the charges, which was granted on April 11, 2007. GAIL appealed both orders. The Division Bench upheld the Single Judge’s order on June 17, 2008, leading to GAIL’s appeal to the Supreme Court.

Legal Framework

The core legal issue revolves around the interpretation of clauses 4.04 and 10.01 of the gas supply contract between GAIL and IPCL. Clause 4.04 stipulated that IPCL would pay service charges for manpower deployment and routine maintenance, along with transportation charges for the gas utilized or lost, calculated as the difference in gas measured at the point of delivery and return. Clause 10.01 outlined the price of gas, stating that IPCL would pay transportation charges for the quantity of gas utilized or lost. These clauses were challenged as being contrary to the government pricing orders and the allocation letter issued by MoPNG.

The relevant clauses are:

“4.04 The BUYER, in addition to price of GAS mentioned in Article 10, shall pay to the SELLER Rs. 4,16,700/- (Rupees Four Lakh Sixteen Thousand and Seven Hundred) towards fortnightly service charges on account of deployment of manpower by the SELLER for terminal operation and routine maintenance along with applicable taxes / levies thereon, connected with delivery of Gas at the Point of Onward Delivery and receipt of Gas returned by the BUYER at the Point of Return Delivery… In addition to the above, the BUYER shall also pay to the SELLER transportation charges, as applicable from time to time along the HBJ pipeline system for the quantity of GAS utilized / shrinkage as per formula provided under Article 5.02 or for the difference in quantity of gas measured at the Point of Onward Delivery at Metering Station No. – I (after adjusting the quantity of Gas Bye Passed as mentioned under Article 4.03 hereinabove) and Point of Return Delivery at Metering Station No. – II, whichever is higher.”

“10.01 Present price of 1000 (One Thousand) Standard Cubic meters of GAS w.e.f. 1.10.1997 is applicable as per Government Pricing Order No. L-12015/3/94-GP dated 18.9.1997 (Annexure-IV) after which the SELLER shall have right to fix the price of GAS which may be as per directive, instruction, order, etc. of the Government of India which is likely to be market related in accordance with current policy of liberalisation of the Government of India and the BUYER shall pay to the SELLER such price of GAS. In addition to the above, the BUYER shall also pay to the SELLER transportation charges, as applicable from time to time along the HBJ pipeline system, for the quantity of GAS utilised/ shrinkage.”

Arguments

GAIL’s Submissions:

• GAIL argued that the writ petition was not maintainable as the matter was purely contractual and should have been resolved through arbitration as per Clause 13.1 of the contract.
• The matter did not involve any violation of fundamental rights and lacked the necessary public law element for writ jurisdiction, citing Joshi Technologies International Inc. v. Union of India & Ors. [(2015) 7 SCC 728].
• The petition was barred by limitation, having been filed five years after the contract was signed, and communications between the parties could not extend the limitation period, referencing Lipton India Ltd. & Ors. v. Union of India & Ors [(1994) 6 SCC 524].
• The contract was negotiated between two public sector enterprises with equal bargaining power, and hence the clauses could not be deemed arbitrary or unfair.
• The principle in Central Inland Water Transport Corporation Limited v. Brojonath Ganguly [(1986) 3 SCC 156], which applies to service contracts, should not be applied to commercial contracts.
• GAIL had made a significant investment in the HBJ pipeline, and the transportation charges were necessary to recover costs.
• The Single Judge was functus officio after the judgment of September 19, 2006, and could not direct a refund through a clarification/modification application.
• IPCL would have passed on the transportation charges to its customers, making a refund unjust enrichment.

IPCL’s Submissions:

• IPCL contended that the transportation charges were discriminatory as they were being treated on par with consumers using the HBJ pipeline, despite using their own pipelines.
• The writ jurisdiction was appropriate due to the arbitrary state action violating Article 14, citing ABL International Ltd. & Anr. v. Export Credit Guarantee Corporation of India & Ors. [(2004) 3 SCC 553].
• The ambit of Brojonath Ganguly’s case [(1986) 3 SCC 156] had been expanded to include commercial disputes with unequal bargaining power, referencing Kalpraj Dharamshi & Anr. v. Kotak Investment Advisors Ltd. & Anr. [(2021) 10 SCC 401].
• IPCL had no option but to agree to the terms due to the time constraints and investments made.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court framed the following issues:

1. Whether the writ petition filed by IPCL challenging Clauses 4.04 and 10.01 of the contract was maintainable.
2. Assuming such a petition was maintainable, whether the High Court could have invalidated the aforementioned clauses on the ground of unequal bargaining power and arbitrariness/unfairness.
3. Whether monetary relief in the form of refund could have been granted after the order dated 19.09.2006 was passed.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Authorities

The Supreme Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Joshi Technologies International Inc. v. Union of India & Ors. [(2015) 7 SCC 728]: The Court distinguished this case, stating that the present case involved a public element due to GAIL’s monopolistic position, thus justifying writ jurisdiction.
• Lipton India Ltd. & Ors. v. Union of India & Ors [(1994) 6 SCC 524]: The Court applied the principle of limiting the refund to the period that would have been claimed in a suit, restricting the refund to three years prior to the filing of the writ petition.
• Central Inland Water Transport Corporation Limited v. Brojonath Ganguly [(1986) 3 SCC 156]: The Court expanded the ambit of this case to include commercial disputes where there is a clear case of unequal bargaining power.
• ABL International Ltd. & Anr. v. Export Credit Guarantee Corporation of India & Ors. [(2004) 3 SCC 553]: The Court relied on this case to justify the exercise of writ jurisdiction in contractual matters where there is an element of public law.
• Kalpraj Dharamshi & Anr. v. Kotak Investment Advisors Ltd. & Anr. [(2021) 10 SCC 401]: The Court used this case to support the argument that unequal bargaining power can be a valid ground to challenge contractual clauses.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• The discriminatory nature of the transportation charges levied on IPCL, which was mandated to use its own pipelines.
• The unequal bargaining power between GAIL and IPCL, with GAIL having a monopolistic position.
• The fact that IPCL was in a “Hobson’s choice” situation, with limited options but to accept the contractual terms.
• The violation of Article 14 of the Constitution due to the arbitrary and unfair imposition of transportation charges.

Fact:Law Ratio

The court gave more weight to the legal aspects of the case, particularly the interpretation of Article 14 and the principles of fairness and non-discrimination. However, the factual context of IPCL being mandated to lay its own pipelines and the unequal bargaining power also played a significant role in the court’s decision.

Logical Reasoning

Judgment

The Supreme Court dismissed GAIL’s appeal regarding the maintainability of the writ petition and the quashing of the clauses dealing with loss of transportation charges. However, the Court restricted the refund to a period of three years from the date of filing the writ petition (March 9, 2006), due to IPCL’s delay in approaching the court. The Court also directed that the refund should be made within two months, failing which it would carry an interest of 8% per annum from the date it became due.

The Court emphasized the discriminatory nature of the charges, stating, “In our view, it would be extremely unfair and unjust, apart from being an arbitrary action in violation of Article 14 of the Constitution of India that IPCL is charged for loss of transportation charges when it is mandated to lay down its own pipelines and not to transport the gas through the HBJ pipeline.”

The Court also addressed the issue of unequal bargaining power, noting, “On a conspectus of the above factors, it can be said that GAIL exercised an unequal bargaining power at the time of signing the contract.”

Regarding the refund, the Court clarified, “Further, we may note that the direction for refund vide order dated 11.04.2007 arose as a consequence of quashing of the clauses. It was in the nature of a sequitur and, thus, we do not find any reason to interfere with the same.”

Key Takeaways

• Public sector undertakings cannot impose arbitrary or discriminatory charges, especially when there is unequal bargaining power.
• Writ petitions can be maintainable in contractual disputes involving public sector undertakings if there is a public element and a violation of Article 14.
• Refunds in such cases can be restricted based on the principle of limitation, even if the contractual clauses are quashed.
• The principle of unequal bargaining power can be applied in commercial disputes involving public sector undertakings.

Directions

The Supreme Court directed that the refund should be made within a period of two months from the date of the judgment, failing which it will carry an interest of 8% per annum from the date it became due.

Development of Law

The ratio decidendi of this case is that public sector undertakings cannot impose discriminatory charges on other entities, especially when there is unequal bargaining power and a violation of Article 14. This case expands the ambit of Central Inland Water Transport Corporation Limited v. Brojonath Ganguly [(1986) 3 SCC 156] to include commercial disputes, reinforcing the principle that contractual clauses can be invalidated if they are found to be arbitrary, unfair, or discriminatory. It also clarifies that writ jurisdiction can be exercised in contractual matters where there is a public law element involved.

Conclusion

The Supreme Court’s judgment in the GAIL vs. IPCL case provides significant clarity on the limits of contractual freedom for public sector undertakings. The Court upheld the quashing of clauses that imposed discriminatory transportation charges on IPCL, while also emphasizing the need for fairness and non-discrimination in contractual dealings. The decision reinforces the principle that even in commercial contracts, public sector entities must act in a manner that is just and equitable, and that writ jurisdiction can be invoked to address such issues. The restriction on the refund period also highlights the importance of timely legal action.

Category

Parent Category: Contract Law

Child Categories:

• Writ Jurisdiction
• Public Sector Undertakings
• Unequal Bargaining Power
• Article 14, Constitution of India
• Arbitrary Charges
• Limitation Act
• Section 13.1, Contract Act
• Section 4.04, Contract Act
• Section 10.01, Contract Act

Parent Category: Constitution of India

Child Categories:

• Article 14, Constitution of India

FAQ

Q: Can a public sector company charge another company for transportation costs when the latter is using its own infrastructure?

A: No, the Supreme Court has ruled that it is discriminatory for a public sector company to levy transportation charges on another company when the latter is mandated to use its own pipelines. This is especially true when the company has no option but to use its own infrastructure.

Q: What is “unequal bargaining power” in a contract?

A: Unequal bargaining power refers to a situation where one party in a contract has significantly more power or influence than the other. This can result in unfair or unreasonable terms being imposed on the weaker party. The Supreme Court has recognized that this can be a valid ground to challenge contractual clauses.

Q: Can a writ petition be filed in contractual disputes?

A: Yes, a writ petition can be filed in contractual disputes involving public sector undertakings if there is a public element involved and if the actions of the undertaking are arbitrary or discriminatory. The Supreme Court has clarified that the writ jurisdiction can be exercised in such cases to ensure fairness and non-discrimination.

Q: What is the limitation period for claiming a refund in contractual disputes?

A: The Supreme Court has ruled that refunds in contractual disputes should be limited to a period of three years prior to the filing of the writ petition. This is based on the principle of limitation, which states that legal action must be taken within a specific time period.

Q: What does it mean when a court says a party had a “Hobson’s choice”?

A: A “Hobson’s choice” means that a party had no real alternative but to accept the terms offered. In this case, IPCL had to accept GAIL’s terms or give up the contract, making it a situation of limited options.