Supreme Court Upholds Challenge to GAIL’s Transportation Charges: GAIL vs. IPCL (2023)

Introduction

Date of the Judgment: 08 February 2023

Citation: 2023 INSC 103

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

Can a public sector undertaking charge another entity for transportation costs when that entity 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 “loss of transportation charges” on IPCL, despite IPCL being mandated to use its own pipelines for gas transportation. The Supreme Court bench comprising Justices Sanjay Kishan Kaul and Abhay S. Oka delivered the judgment.

Case Background

The dispute arose from a contract between GAIL (Gas Authority of India Limited), a public sector undertaking involved in gas services, and IPCL (Indian Petrochemicals Corporation Limited), a petrochemical manufacturer. In 1999, the Ministry of Petroleum and Natural Gas (MoPNG) allocated natural gas to IPCL, stipulating that IPCL must lay its own pipelines to transport the gas from Hazira to its Gandhar Unit. Following this, IPCL invested approximately Rs. 4500 crores in setting up a plant at Gandhar and Rs. 354 crores in laying down pipelines between Hazira and Gandhar.

The contract between GAIL and IPCL was signed on 09.11.2001. As per the contract, GAIL received natural gas from ONGC at Hazira, which was then transported to IPCL’s Gandhar plant through IPCL’s pipelines. The unutilized gas was sent back to Hazira using the same pipelines. However, GAIL charged IPCL for “loss of transportation charges,” as per clauses 4.04 and 10.01 of the contract, which became the subject matter of the dispute. IPCL challenged these clauses in 2006, after having paid Rs. 134 crores in such charges.

Timeline:

Course of Proceedings

IPCL filed a writ petition under Article 226 of the Constitution of India challenging clauses 4.04 and 10.01 of the contract. The Single Judge of the High Court ruled in favor of IPCL on 19.09.2006, quashing the clauses and holding them to be contrary to pricing orders and unfair. The Single Judge also directed GAIL to refund the loss of transportation charges through an order dated 11.04.2007. GAIL appealed these orders before the Division Bench of the High Court, which upheld the Single Judge’s decision on 17.06.2008. Subsequently, GAIL appealed to the Supreme Court.

Legal Framework

The core of the legal framework revolves around the interpretation of the contract clauses in light of the government’s pricing orders and the constitutional principles of fairness and non-discrimination under Article 14 of the Constitution of India. The key clauses under scrutiny were:

• Clause 4.04: This clause stipulated that IPCL would pay GAIL service charges for manpower deployment and routine maintenance, along with transportation charges for gas utilized or lost, calculated based on measurements at the delivery and return points. “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…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…”
• Clause 10.01: This clause detailed the price of gas and included a provision for transportation charges along the HBJ pipeline system. “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.”

The government pricing orders dated 30.01.1987, 31.12.1991, 18.09.1997, 30.09.1997 and 20.06.2005, fixed the price of natural gas. The allocation letter by MoPNG mandated that IPCL transport gas through its own pipelines, which was a key factor in the dispute.

Arguments

GAIL’s Arguments:

• GAIL contended 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. They argued that there was no violation of Fundamental Rights and that the writ petition was an attempt to bypass the law of limitation.
• GAIL argued that the contract was negotiated between two public sector enterprises with equal bargaining power. They stated that the clauses were mutually agreed upon and could not be considered arbitrary or unfair.
• GAIL justified the levy of transportation charges by stating that it had made a significant investment in the HBJ pipeline and had limited opportunities to recover its costs. They argued that the allotment of gas to IPCL pre-supposed the imposition of such transportation costs.
• GAIL claimed that the Single Judge became functus officio after the judgment on 19.09.2006 and thus could not direct a refund through a clarification/modification application. They argued that a refund would result in unjust enrichment for IPCL.
• GAIL relied on Joshi Technologies International Inc. v. Union of India & Ors. (2015) 7 SCC 728 to argue that a public law element was necessary for the exercise of writ jurisdiction and Lipton India Ltd. & Ors. v. Union of India & Ors (1994) 6 SCC 524 to argue that communications between the parties could not extend the limitation period.

IPCL’s Arguments:

• IPCL argued that the writ jurisdiction was appropriate as GAIL’s actions were discriminatory and violated Article 14 of the Constitution. IPCL contended that it was being unfairly treated on par with consumers using the HBJ pipeline, despite using its own pipelines.
• IPCL argued that GAIL had a monopolistic position in gas supply at the time of the contract and that IPCL had limited time to enter into the contract due to its investment in the gas cracker plant. They contended that this resulted in unequal bargaining power.
• IPCL argued that the clauses were contrary to government pricing orders and that the recovery of “loss of transportation charges” was arbitrary and unfair, as they were mandated to use their own pipelines as per the allocation letter.
• IPCL relied on ABL International Ltd. & Anr. v. Export Credit Guarantee Corporation of India & Ors. (2004) 3 SCC 553 to argue that writ jurisdiction could be exercised in contractual matters and that monetary relief could be granted. They also relied on Kalpraj Dharamshi & Anr. v. Kotak Investment Advisors Ltd. & Anr. (2021) 10 SCC 401 to argue that bargaining capacity should be considered in commercial disputes.

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

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?

• The Court distinguished Joshi Technologies International Inc. v. Union of India & Ors. (2015) 7 SCC 728, stating that while a public law element is necessary, it was present in this case due to GAIL’s status as a ‘State’ and the discriminatory nature of the charges.
• The Court relied on Lipton India Ltd. & Ors. v. Union of India & Ors (1994) 6 SCC 524 to restrict the refund period to three years prior to the filing of the writ petition.
• The Court expanded the scope of Central Inland Water Transport Corporation Limited v. Brojonath Ganguly (1986) 3 SCC 156 to include commercial disputes where there is unequal bargaining power.
• The Court used ABL International Ltd. & Anr. v. Export Credit Guarantee Corporation of India & Ors. (2004) 3 SCC 553 to support the exercise of writ jurisdiction in contractual matters and the grant of monetary relief.
• The Court referred to Kalpraj Dharamshi & Anr. v. Kotak Investment Advisors Ltd. & Anr. (2021) 10 SCC 401 to highlight the importance of considering bargaining power in commercial disputes.
• The Court held that Article 14 of the Constitution of India was violated due to the discriminatory nature of the charges levied by GAIL.

What weighed in the mind of the Court?

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

• Unequal Bargaining Power: The Court recognized that GAIL, as a monopolistic public sector undertaking, held a position of power over IPCL, which had no choice but to agree to the contract terms due to the significant investment it had already made.
• Arbitrariness and Unfairness: The Court found the imposition of transportation charges on IPCL, which was mandated to use its own pipelines, to be arbitrary and unfair. This was seen as a violation of the principle of non-discrimination enshrined in Article 14 of the Constitution.
• Violation of Pricing Orders: The Court noted that the charges were contrary to the government’s pricing orders, which fixed the price of natural gas, and that IPCL was being treated unfairly compared to other consumers using GAIL’s HBJ pipeline.
• Public Interest: The Court emphasized that GAIL, being a public sector undertaking, was expected to act fairly and not exploit its position. The Court was also concerned about the implications of such unfair practices on other entities that may be in a similar situation.

Sentiment Analysis Table

Fact:Law Ratio Table

The Court’s reasoning was a blend of factual analysis (the specific circumstances of the contract and IPCL’s situation) and legal analysis (the interpretation of Article 14 and the principles of fairness and non-discrimination).

Logical Reasoning:

The Court considered alternative interpretations but rejected them, emphasizing the need to uphold fairness and non-discrimination in dealings involving public sector undertakings. The final decision was reached by considering the specific facts of the case, the relevant legal principles, and the public interest.

The court’s decision was based on the following reasons:

• GAIL’s status as a ‘State’ under Article 12 of the Constitution made it subject to public law principles.
• The contract clauses were deemed to be the result of unequal bargaining power, as IPCL had limited options due to the allocation letter and its investment.
• The levy of transportation charges was arbitrary and unfair, as IPCL was mandated to use its own pipelines.
• The charges violated the principle of non-discrimination under Article 14 of the Constitution.

“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.”

“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.”

“This purpose cannot exist in the contract in view of the master authority, i.e., the Union of India, providing to the contrary.”

Key Takeaways

• Public sector undertakings must act fairly and cannot exploit their monopolistic positions in contractual dealings.
• Contract clauses that are arbitrary, unfair, or the result of unequal bargaining power can be challenged in writ proceedings.
• Entities that are mandated to use their own infrastructure cannot be charged for services they do not utilize.
• The principle of non-discrimination under Article 14 of the Constitution applies to contractual dealings involving public sector undertakings.
• Monetary relief can be granted in writ proceedings, but the period of limitation may be considered.

Directions

The Supreme Court directed GAIL to refund the loss of transportation charges to IPCL for a period of three years prior to the date of filing the writ petition (09.03.2006). The refund was to be made within two months, failing which it would carry an interest of 8% per annum from the date it became due.

Development of Law

The ratio decidendi of this case is that a public sector undertaking cannot levy charges for services that are not utilized, especially when the other party is mandated to use its own infrastructure. The judgment also clarifies that writ jurisdiction can be exercised in contractual matters involving public sector undertakings where there is a public element, unequal bargaining power, or a violation of Article 14 of the Constitution. This case also reinforces the principle that entities cannot be discriminated against and must be treated fairly in contractual dealings with public sector undertakings. There is no change in the previous positions of law, but this case clarifies the application of existing principles in a specific context.

Conclusion

The Supreme Court dismissed GAIL’s appeal, upholding the High Court’s decision to quash the clauses that imposed “loss of transportation charges” on IPCL. The Court held that GAIL, being a public sector undertaking, could not levy such charges when IPCL was mandated to use its own pipelines. The Court also directed GAIL to refund the charges for a period of three years prior to the filing of the writ petition. This judgment reinforces the principles of fairness, non-discrimination, and equal bargaining power in contractual dealings involving public sector undertakings.