Supreme Court Upholds Denial of Refund for Quashed 2G Licenses: Loop Telecom vs. Union of India (2022)

LEGAL ISSUE: Whether a telecom company is entitled to a refund of entry fees after its 2G licenses were quashed due to an illegal government policy. CASE TYPE: Telecom Law, Contract Law, Constitutional Law. Case Name: Loop Telecom and Trading Limited vs. Union of India. Judgment Date: March 3, 2022.

Date of the Judgment: March 3, 2022

Citation: (2022) INSC 174

Judges: Dr. Dhananjaya Y Chandrachud, J., Surya Kant, J., Vikram Nath, J.

Can a telecom company claim a refund of entry fees after its licenses were cancelled due to a flawed government policy? The Supreme Court of India recently addressed this complex issue in a case involving Loop Telecom and the Union of India. The core question was whether the quashing of 2G licenses due to an illegal “First Come First Serve” policy entitled the telecom company to a refund of the entry fee it had paid. The judgment was delivered by a three-judge bench comprising Dr. Dhananjaya Y Chandrachud, J., Surya Kant, J., and Vikram Nath, J.

Case Background

Loop Telecom applied for Unified Access Service Licenses (UASL) for twenty-one service areas on September 3, 2007. After receiving a Letter of Intent, they paid the required Entry Fee of ₹1.1 crore per circle and provided Performance and Financial Bank Guarantees. The UASL agreements were signed on March 3, 2008, and became effective from January 25, 2008. These agreements specified a 20-year license validity and a one-time, non-refundable Entry Fee.

However, on February 2, 2012, the Supreme Court of India, in the case of Centre for Public Interest Litigation v. Union of India, declared the government’s “First Come First Serve” policy for allocating 2G spectrum illegal, leading to the quashing of all licenses granted under this policy, including Loop Telecom’s. Subsequently, on May 25, 2012, Loop Telecom filed a petition before the Telecom Disputes Settlement and Appellate Tribunal (TDSAT), seeking a refund of ₹1454.94 crores, including interest, which represented the Entry Fee paid for the licenses. Loop Telecom ceased operations on June 1, 2012, after porting out all its subscribers.

Timeline:

Course of Proceedings

The TDSAT initially dismissed Loop Telecom’s petition on September 16, 2015, stating that the quashing of licenses by the Supreme Court did not equate to the UASL agreements becoming void under Section 65 of the Indian Contract Act, 1872. The TDSAT also noted that the agreements did not become void under Sections 23 and 56 of the Indian Contract Act. Additionally, the TDSAT invoked the principle of in pari delicto potio rest condition defendentis, suggesting that a refund was not possible until the possibility of Loop Telecom being equally at fault was eliminated. At the time, Loop Telecom was facing criminal charges related to the grant of UASLs.

After being acquitted of criminal charges on December 21, 2017, Loop Telecom filed a second petition before the TDSAT. However, the TDSAT dismissed this second petition on December 11, 2018, stating that it was a second attempt for the same relief and that the Supreme Court had only granted liberty to approach the Supreme Court, not the TDSAT. The appellant then filed a second set of civil appeals before the Supreme Court and also sought revival of the first set of civil appeals which were withdrawn earlier.

Legal Framework

The case primarily revolves around the interpretation and application of the following legal provisions:

• Section 56 of the Indian Contract Act, 1872: This section deals with the doctrine of frustration of contract, which occurs when a contract becomes impossible or unlawful to perform due to unforeseen circumstances. “A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful.”
• Section 65 of the Indian Contract Act, 1872: This section outlines the obligation of a person who has received an advantage under a void agreement or a contract that becomes void, requiring them to restore the advantage or compensate the person from whom they received it. “When an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it, or to make compensation for it, to the person from whom he received it.”
• Section 14 of the Telecom Regulatory Authority of India Act, 1997: This section establishes the Telecom Disputes Settlement and Appellate Tribunal (TDSAT) and defines its jurisdiction, including the power to adjudicate disputes between a licensor and a licensee. “adjudicate any dispute — (i) between a licensor and a licensee; (ii) between two or more service providers; and (iii) between a service provider and a group of consumers”
• Section 4(1) of the Indian Telegraph Act, 1885: This section grants the Central Government the exclusive privilege of carrying on telecommunication activities. The proviso to this section allows the government to grant licenses to other persons, making such licenses contractual in nature.

These provisions are examined in the context of the constitutional principles of fairness and equality, particularly Article 14 of the Constitution, which was violated by the “First Come First Serve” policy.

Arguments

Appellant (Loop Telecom) Arguments:

• Refund Entitlement: Loop Telecom argued that it was entitled to a refund of its Entry Fee because its licenses were quashed by the Supreme Court due to the flawed “First Come First Serve” policy, which was deemed arbitrary and illegal.

• Frustration of Contract: They contended that the quashing of licenses amounted to a frustration of contract under Section 56 of the Indian Contract Act, entitling them to restitution under Section 65. The licenses were quashed not due to their fault but due to the government’s culpability.

• Actus Curiae Neminem Gravabit: Loop Telecom invoked the principle that no person should be prejudiced by an act of the court.

• Acquittal: They argued that the substratum of TDSAT’s decision, which disallowed the claim due to pending criminal proceedings, was wiped off by their acquittal.

• Discriminatory Set-Off Policy: Loop Telecom challenged the government’s set-off policy, which granted a set-off of Entry Fee only to those who participated in the fresh round of auctions, arguing it was discriminatory and violated Article 14 of the Constitution.

• Admission of Debt: They argued that the set-off policy was an admission by the government that a refund of the Entry Fee was due.

• Applicability of Contract Act: Loop Telecom argued that the license was contractual in nature and hence, the provisions of the Indian Contract Act would apply. They had no knowledge of the flawed policy and hence, should be entitled to restitution.

Respondent (Union of India) Arguments:

• Non-Refundable Entry Fee: The Union of India argued that the Entry Fee was explicitly non-refundable as per the UASL guidelines and agreements. The fee was a one-time charge for participating in the process of obtaining a license and was not related to the actual operation of the license.

• CPIL Judgment: They argued that the Supreme Court’s judgment in CPIL, which quashed the licenses, did not grant any refund of the Entry Fee and that the matter was closed.

• TDSAT Jurisdiction: The Union of India contended that the TDSAT lacked jurisdiction to entertain the claim for refund, as the licenses were quashed and Loop Telecom was no longer a licensee. They further argued that the appellant had withdrawn its earlier appeals before the Supreme Court and hence, could not approach the TDSAT.

• Set-Off Policy Justification: The government justified the set-off policy as a one-time concession to ensure uninterrupted telecom services and encourage participation in the fresh auctions, benefiting the public exchequer. The policy was uniformly applied and not discriminatory.

• Acquittal Irrelevant: They argued that the acquittal of Loop Telecom’s promoters had no bearing on the refund of the Entry Fee as the Supreme Court had found the grant of licenses to be “stage-managed” and violative of public law principles.

• In Pari Delicto: The government argued that Loop Telecom was equally at fault for benefiting from the flawed policy and was therefore not entitled to restitution under the principle of in pari delicto.

Submissions Table:

Innovativeness of the Argument: The appellant’s argument that the set-off policy was an admission of debt and that they should not be penalized for not participating in the subsequent auction was innovative, but it was ultimately not accepted by the Court.

Issues Framed by the Supreme Court

The Supreme Court framed the following key issues for consideration:

1. Whether the TDSAT had the jurisdiction to entertain the claim for a refund of the Entry Fee.
2. Whether the appellant is entitled to claim a refund of the Entry Fee based on the doctrine of frustration and the principle of restitution.
3. Whether the policy of set-off adopted by the Union Government was discriminatory.

Treatment of the Issue by the Court

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

Authorities

Cases Relied Upon by the Court:

Legal Provisions Considered by the Court:

Judgment

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

How each authority was viewed by the Court?

• The Supreme Court relied heavily on its earlier judgment in Centre for Public Interest Litigation v. Union of India [(2012) 3 SCC 1]* to establish that the appellant was a beneficiary of an arbitrary process.
• The Court distinguished Union of India v. Karam Chand Thapar and Bros. (Coal Sales) Ltd. [(2004) 3 SCC 504]*, stating that the set-off policy was not an admission of debt.
• The Court affirmed the contractual nature of the license based on Union of India v. AUSPI [(2011) 10 SCC 534]*, but held that the principle of restitution could not be applied.
• The Court relied on Cellular Operators Association of India v. Union of India [(2003) 3 SCC 186]* and Union of India v. TATA Teleservices (Maharashtra Ltd) [(2007) 7 SCC 517]* to discuss the scope of TDSAT’s powers but ultimately held that it did not have jurisdiction in this case.
• The Court used Satyabrata Ghose v. Mugneeram Bangur & Co. [1954 SCR 310]* to explain the doctrine of frustration but held that the appellant was not entitled to relief under it.
• The Court relied on Tarsem Singh v. Sukhminder Singh [1998 (3) SCC 471]* to hold that a void contract cannot be split up.
• The Court referred to its earlier decisions in Vedanta Ltd. v. The Goa Foundation & Ors. [Review Petition (Civil) Diary No. 18447 of 2020]*, and T P Moideen Koya v. Government of Kerala [(2004) 8 SCC 106]* to disapprove of forum shopping and vexatious litigation.
• The Court distinguished the facts of the present case from S Tel Pvt. Ltd. v. Union of India [2015 SCC OnLine TDSAT 1]*, stating that in the present case, the appellant was in pari delicto.
• The Court used Kuju Collieries Ltd. v. Jharkhand Mines Ltd. [(1974) 2 SCC 533]*, Inmani Appa Rao v. Gollapalli Ramalingamurthi [(1962) 3 SCR 739]* and Narayanamma v. Govindappa [2019 (19) SCC 42]* to explain the principle of in pari delicto and its application to claims for restitution.
• The Court relied on R K Garg v. Union of India [(1981) 4 SCC 675]* to hold that courts must give free play to decisions of economic policy.
• The Court referred to Holman v. Johnson [(1775) 1 Cowp 341, 343; 98 ER 1120, 1121]* and Patel v. Mirza [[2016] 3 WLR 399]* to explain the principle of ex turpi causa non oritur actio.

What weighed in the mind of the Court?

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

• The appellant’s complicity: The Court emphasized that Loop Telecom was a beneficiary of the flawed “First Come First Serve” policy, which was designed to favor a select group of private entities. This complicity was a key factor in denying the claim for restitution.
• The principle of in pari delicto: The Court held that Loop Telecom was equally at fault with the government, and therefore, the principle of in pari delicto prevented them from claiming restitution.
• The nature of the entry fee: The Court noted that the entry fee was explicitly non-refundable as per the UASL guidelines and agreements.
• Lack of jurisdiction: The Court determined that the TDSAT did not have the jurisdiction to entertain the claim for refund, as it was intrinsically linked to the Supreme Court’s earlier decision in CPIL.
• Policy considerations: The Court upheld the validity of the set-off policy as a valid economic decision aimed at ensuring service continuity and encouraging participation in fresh auctions.

Sentiment Analysis of Reasons Given by the Supreme Court:

Fact:Law Ratio:

The Court’s decision was more influenced by legal principles and precedents than the factual aspects of the case.

Logical Reasoning:

Ratio Decidendi

The core legal principle (ratio decidendi) of the judgment is that a party who has benefited from an illegal government policy and is therefore in pari delicto with the government, cannot claim restitution of the entry fee paid under the policy, even if the policy is subsequently quashed by the court.

The Court held that the doctrine of frustration of contract and the principle of restitution under Section 65 of the Indian Contract Act do not apply to parties who are equally at fault. The Court emphasized that Loop Telecom was a beneficiary of the flawed policy and therefore was not entitled to a refund.

The judgment also clarified that the TDSAT does not have jurisdiction to entertain claims for refunds arising from the quashing of licenses by the Supreme Court. Such claims can only be agitated before the Supreme Court itself.

Obiter Dicta

The following observations made by the Court are considered obiter dicta:

• The set-off policy adopted by the Union Government was a valid economic decision aimed at ensuring continuity of services and encouraging participation in fresh auctions.
• The entry fee was a one-time, non-refundable charge for participating in the process of obtaining a license and was not related to the actual operation of the license.
• The Court disapproved of forum shopping and vexatious litigation and reiterated that binding judgments of the Supreme Court cannot be diluted by approaching lower courts again for the same relief.

Dissenting Opinion (if any)

There was no dissenting opinion in this case. The judgment was delivered by a unanimous three-judge bench.

Conclusion

The Supreme Court’s judgment in the Loop Telecom case is a significant ruling in telecom law and contract law. It clarifies that a party who has benefited from an illegal government policy cannot claim restitution of the entry fee paid under the policy, even if the policy is subsequently quashed by the court. The Court emphasized the principle of in pari delicto and held that such claims cannot be entertained under Section 65 of the Indian Contract Act.

The judgment also highlights the importance of policy decisions in economic matters and the need for courts to respect such decisions unless they are demonstrably arbitrary or discriminatory. The Court upheld the set-off policy adopted by the Union Government and reiterated that the TDSAT does not have jurisdiction to entertain claims for refunds arising from the quashing of licenses by the Supreme Court.

This case serves as a reminder that the doctrine of restitution is not available to parties who are equally at fault and that the courts will not intervene to protect parties who have knowingly benefited from an illegal process.

Implications

The judgment has several implications:

• Precedent for similar cases: The ruling sets a precedent for similar cases involving the refund of fees paid under government policies that are subsequently declared illegal. It clarifies that the principle of in pari delicto will be a significant factor in determining whether restitution is warranted.
• Impact on telecom companies: The judgment has implications for telecom companies that have benefited from flawed government policies. It signals that they cannot expect to be compensated for the consequences of such policies if they were also complicit in the process.
• Government policy: The ruling provides guidance to the government on the formulation of economic policies. It suggests that such policies should be fair and transparent and should not favor a select group of private entities.
• TDSAT jurisdiction: The judgment clarifies the limitations of the TDSAT’s jurisdiction and confirms that claims for refunds arising from Supreme Court orders must be agitated before the Supreme Court itself.
• Contract law: The judgment reiterates the importance of contractual terms and the non-refundable nature of certain fees. It also emphasizes that the doctrine of frustration of contract does not apply when a party is equally at fault.

Future Policy Implications:

• Transparency: The government should ensure transparency in the allocation of resources and licenses to avoid arbitrary and discriminatory policies.
• Due Diligence: Companies should exercise due diligence before participating in government schemes and should be aware of the legal implications of such participation.
• Clarity in Contracts: Contracts should clearly specify the terms and conditions of participation, including the non-refundable nature of fees and the consequences of policy changes.
• Fairness: The government should formulate policies that are fair and equitable and do not favor a select group of private entities.

Future Legal Implications:

• In Pari Delicto: The principle of in pari delicto will be a significant factor in future cases involving restitution claims.
• Restitution: The courts will be reluctant to grant restitution to parties who have benefited from illegal policies and are equally at fault.
• TDSAT Jurisdiction: The TDSAT’s jurisdiction will continue to be limited to disputes arising from the terms of licenses and will not extend to claims arising from Supreme Court orders.

Final Thoughts: The Loop Telecom judgment is a landmark case that reinforces the importance of fairness, transparency, and accountability in government policies. It also highlights the limitations of contract law in protecting parties who have knowingly benefited from an illegal process.