Supreme Court Upholds Termination of Dealership Contract: Indian Oil Corporation Ltd. vs. M/S. Sathyanarayana Service Station (2023)

Introduction

Date of the Judgment: May 9, 2023

Citation: 2023 INSC 507

Judges: K.M. Joseph, J. and B.V. Nagarathna, J.

Can a contract be terminated by simply giving notice, or does it require acceptance from the other party? The Supreme Court of India recently addressed this question in a dispute between Indian Oil Corporation Ltd. (IOC) and one of its dealers, M/S. Sathyanarayana Service Station, regarding the termination of a dealership agreement. The core issue was whether a notice of termination given by the dealer was valid, and whether the subsequent withdrawal of that notice was legally permissible. The judgment was delivered by a two-judge bench comprising Justice K.M. Joseph and Justice B.V. Nagarathna, with the majority opinion authored by Justice K.M. Joseph.

Case Background

On October 31, 2003, Indian Oil Corporation Ltd. (IOC) entered into a petrol/HSD pump dealership agreement with M/S. Sathyanarayana Service Station. Clause (3) of this agreement stipulated that the agreement would remain in force for fifteen years from October 13, 2003, and would continue for successive five-year periods unless terminated by either party with a three-month written notice. On September 25, 2006, the dealer, M/S. Sathyanarayana Service Station, sent a letter to IOC expressing their intention to withdraw from the dealership due to their relocation to Bangalore for their children’s education. IOC insisted that this request be notarized. The notarized letter was received by IOC on November 16, 2006. The dealer then attempted to withdraw their resignation on December 11, 2006, but IOC rejected this withdrawal, stating that they had already accepted the resignation.

Timeline

Course of Proceedings

The dispute was initially referred to arbitration. The Sole Arbitrator ruled in favor of IOC, stating that the acceptance of the dealer’s resignation on November 22, 2006, legally terminated the contract, and the subsequent withdrawal was invalid. The Principal and Sessions Judge, Mysore, upheld the arbitrator’s award. However, the High Court, in an appeal by the dealer, set aside both the arbitrator’s award and the order of the District Judge, directing that the dealership be restored to M/S. Sathyanarayana Service Station. This High Court order led to the present appeals before the Supreme Court.

Legal Framework

The core of the dispute revolves around Clause (3) of the dealership agreement, which states:

“(3) The Agreement shall remain in force for fifteen year from day of 13th Oct 2003 and continue thereafter for successive periods of five year each until determined by either party by giving three months notice in writing to the other of its intention to termination this agreement and upon the expiration of any such notice this Agreement and the Licence granted as aforesaid shall stand cancelled and revoked but without prejudice to such termination provided that nothing contained in this clause shall to the rights of either party against the other in respect of any matter or thing antecedent to such termination Provided that nothing contained in this clause shall to such prejudice the rights of the Corporation to terminate this Agreement earlier on the happening of the events mentioned in Clause 56 of this Agreement.”

The court also considered Section 5 of the Indian Contract Act, which states that a proposal may be revoked at any time before the communication of its acceptance, but not afterwards.

Arguments

Arguments by IOC:

• The High Court overstepped its limits in overturning an arbitration award.
• The dealer’s conduct and correspondence clearly indicated an intention to terminate the contract.
• The arbitrator’s view that the contract was terminated when IOC accepted the dealer’s resignation was a plausible view and should not have been interfered with.
• The High Court illegally modified the award by ordering the restoration of the dealership.

Arguments by the New Dealer:

• The dealer’s actions were carefully thought out, and there was no coercion involved.
• The arbitrator’s construction of the contract should not be interfered with.
• The new dealer is the wife of a martyr.

Arguments by M/S. Sathyanarayana Service Station:

• Clause (3) of the agreement was not applicable during the first 15 years of the dealership.
• The acceptance of the resignation by IOC was not unambiguous.
• The dealer had withdrawn their resignation before the actual acceptance by IOC.

Innovativeness of the argument: The argument by M/S. Sathyanarayana Service Station that clause (3) was not applicable during the first 15 years of the dealership was a novel interpretation, although it was not raised before the arbitrator, the District Judge, or the High Court.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issues addressed by the court were:

1. Whether the High Court was justified in interfering with the arbitral award.
2. Whether the termination of the dealership agreement was valid.
3. Whether the dealer’s withdrawal of the resignation was legally permissible.

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:

Cases:

• Ssangyong Engineering & Construction Company Limited v. National Highway Authority of India (NHAI) [2019] 15 SCC 131 (Supreme Court of India): This case was cited to emphasize that the construction of a contract is primarily for the arbitrator to decide, unless the arbitrator’s view is not even a possible view to take.
• Punjab State Civil Supplies Corporation Ltd. and Another Versus Ramesh Kumar and Company and Others 2021 SCC ONLINE SC 1056 (Supreme Court of India): This case was cited to highlight that the High Court should not interfere with the arbitrator’s findings of fact based on evidence.
• Project Director, National Highways No. 45 E and 220 National Highways Authority of India v. M. Hakeem and another [2021] 9 SCC 1 (Supreme Court of India): This case was cited to emphasize that a court cannot modify an arbitral award after setting it aside.

Legal Provisions:

• Clause (3) of the Dealership Agreement: This clause allowed either party to terminate the agreement by giving a three-month notice.
• Section 5 of the Indian Contract Act: This section states that a proposal may be revoked at any time before the communication of its acceptance, but not afterwards.

Judgment

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

How each authority was viewed by the Court?

• Ssangyong Engineering & Construction Company Limited v. National Highway Authority of India (NHAI) [2019] 15 SCC 131*: The Supreme Court followed this case to emphasize that the arbitrator’s interpretation of the contract should not be interfered with unless it is an impossible view.
• Punjab State Civil Supplies Corporation Ltd. and Another Versus Ramesh Kumar and Company and Others 2021 SCC ONLINE SC 1056*: The Supreme Court followed this case to highlight that the High Court should not interfere with the arbitrator’s findings of fact based on evidence.
• Project Director, National Highways No. 45 E and 220 National Highways Authority of India v. M. Hakeem and another [2021] 9 SCC 1*: The Supreme Court followed this case to clarify that courts cannot modify arbitral awards after setting them aside.

The Supreme Court held that the High Court had erred in interfering with the arbitral award. The Court stated that the arbitrator’s view was a plausible one and that the High Court should not have re-evaluated the evidence. The Supreme Court also noted that the High Court had acted illegally in modifying the award by ordering the restoration of the dealership. The Court emphasized that the dealer’s letter of September 25, 2006, was indeed a notice of termination under Clause (3) of the agreement. The Court also held that the acceptance of the notice by IOC on November 22, 2006, was valid, and the subsequent withdrawal by the dealer was not permissible under Section 5 of the Indian Contract Act.

What weighed in the mind of the Court?

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

• The limited scope of judicial interference in arbitral awards.
• The plausible interpretation of the contract by the arbitrator.
• The clear intention of the dealer to terminate the contract.
• The valid acceptance of the termination notice by IOC.
• The legal principle that a proposal cannot be revoked after acceptance.

The Court’s reasoning was based on a combination of factual analysis and legal principles. The Court emphasized the importance of upholding the arbitrator’s decision, unless it was based on an impossible interpretation of the contract. The Court also relied on the legal principle that a proposal cannot be revoked after acceptance, which was crucial in determining the validity of the dealer’s withdrawal of the resignation.

The Supreme Court considered the alternative interpretation that the termination notice required explicit acceptance, but ultimately rejected it, stating that even if acceptance was required, it had been communicated by IOC. The court also considered the argument that the termination clause was not applicable during the first 15 years of the agreement, but rejected this as well, stating that it was not raised before the lower courts.

The Court’s decision was that the High Court had erred in interfering with the arbitral award and that the termination of the dealership was valid. The Court set aside the High Court’s order and restored the arbitral award.

“Clause 3 of the Memorandum of agreement does not specifically mention a time limit for withdrawal of resignation.”

“Since the Respondents have communicated their acceptance of the resignation of the Claimant vide their letter dated 22.11.2006, the Claimant’s subsequent letter dated 11.12.2006 requesting for withdrawing the resignation letter is not in accordance with law.”

“It is beyond the pale of any doubt that the Court cannot, after setting aside the award, proceed to grant further relief by modifying the award.”

Key Takeaways

• Arbitral awards should not be interfered with unless they are based on an impossible interpretation of the contract.
• A termination notice under a contract can be valid even if it is termed as a resignation.
• Once a termination notice is accepted, it cannot be unilaterally withdrawn.
• Courts cannot modify arbitral awards after setting them aside.

This judgment reinforces the principle that courts should respect the decisions of arbitrators and should not interfere with them unless there is a clear error of law. The judgment also clarifies that the acceptance of a termination notice is crucial in determining the validity of the termination of a contract.

Directions

The Supreme Court set aside the impugned judgment of the High Court and restored the arbitral award. The parties were directed to bear their respective costs.

Development of Law

The ratio decidendi of this case is that a termination notice under a contract is valid if it adheres to the terms of the contract, and once the notice is accepted, it cannot be unilaterally withdrawn. This judgment reinforces the limited scope of judicial interference in arbitral awards and clarifies the legal implications of accepting a termination notice. There is no change in the previous positions of law but the Supreme Court has affirmed the position of law regarding the limited scope of judicial interference in arbitral awards.

Conclusion

In conclusion, the Supreme Court allowed the appeals filed by Indian Oil Corporation Ltd. and the new dealer, setting aside the High Court’s order and restoring the arbitral award. The Court held that the termination of the dealership agreement was valid and that the dealer’s attempt to withdraw the resignation was not legally permissible. This judgment underscores the importance of adhering to contractual terms and the limited scope of judicial interference in arbitral awards.