Supreme Court Upholds Termination of Dealership: Indian Oil Corporation Ltd. vs. T. Natarajan (2018)

Case Background

On August 31, 1989, Indian Oil Corporation Ltd. (IOC) appointed T. Natarajan as a retail dealer for selling petroleum products. A dealership agreement was executed, and Natarajan set up his petrol pump, M/s Lakshmi Service Station, in Tamil Nadu. On August 1, 2008, a Deputy Inspector of Labour (Weights & Measures) inspected Natarajan’s petrol pump, followed by an inspection by an IOC Sales Officer on August 2, 2008. Both inspections revealed that the totalizer wires of an L&T Line DU in the petrol pump were cut, and no totalizer seal was in place.

Based on these findings, IOC issued a show-cause notice to Natarajan on August 27, 2008, asking why his dealership agreement should not be terminated. Natarajan responded, but IOC, not satisfied with his reply, terminated the dealership agreement on March 11, 2009. Aggrieved, Natarajan invoked the arbitration clause in the agreement, leading to a reference to a sole arbitrator.

Timeline

Course of Proceedings

The arbitrator, in his award dated October 14, 2011, acknowledged the breaches committed by Natarajan but suggested a lenient view considering the period the retail outlet had been closed. The arbitrator did not explicitly set aside the termination order. IOC challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996, while Natarajan sought resumption of fuel supply. The High Court dismissed IOC’s application and upheld the award, granting Natarajan liberty to request the continuation of his distributorship.

Natarajan then filed a representation to IOC, which was rejected on March 13, 2013. Natarajan filed a writ petition before the High Court, which was dismissed by a Single Judge on April 17, 2014. The Single Judge upheld the rejection of Natarajan’s representation, stating that the High Court cannot interfere with the administrative decisions of IOC. Natarajan appealed to the Division Bench, which reversed the Single Judge’s order on October 8, 2015, and directed IOC to restore the dealership and resume fuel supply. IOC then appealed to the Supreme Court.

Legal Framework

The case primarily revolves around the interpretation of the arbitral award and the scope of judicial review of administrative decisions under Article 226/227 of the Constitution of India. The Arbitration and Conciliation Act, 1996, particularly Section 34, which deals with setting aside arbitral awards, is also relevant. The dealership agreement between IOC and Natarajan, specifically clause 69, which provides for dispute resolution through arbitration, forms the contractual basis of the dispute.

Arguments

Arguments by the Appellants (Indian Oil Corporation Ltd.):

• The Single Judge’s order, which upheld the termination of the dealership, should not have been overturned by the Division Bench.
• The Division Bench incorrectly assumed that the arbitral award had set aside the termination letter and restored the dealership.
• The arbitrator’s finding was against the respondent, holding that the breaches were made out and required stern action.
• The arbitrator and Single Judge only granted liberty to the respondent to file a representation for reconsideration, not an automatic restoration of dealership.
• Once IOC considered and rejected the representation, the matter should have been considered final.
• The Division Bench acted as an appellate court, which is beyond its writ jurisdiction.

Arguments by the Respondent (T. Natarajan):

• The Division Bench’s order is correct and does not require any interference.
• The arbitral award, in effect, set aside the termination order.
• The High Court was justified in directing the restoration of the dealership.
• IOC’s circulars regarding reconsideration of terminated dealerships were not properly followed.

Submissions Table:

Issues Framed by the Supreme Court

The Supreme Court framed the following key issues for consideration:

1. Whether the Division Bench was right in reversing the decision of the Single Judge (writ court).
2. Whether the Division Bench was right in setting aside the letter dated 13.03.2013 of IOC which terminated the respondent’s dealership.
3. Whether the Division Bench was justified in issuing a mandamus against the IOC to restore the dealership of the respondent and resume supply of fuel to his fuel station.

Treatment of the Issue by the Court

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

Authorities

The Supreme Court did not cite any specific cases or books in this judgment. The legal provisions considered were:

• Section 34 of the Arbitration and Conciliation Act, 1996: This section deals with the procedure for setting aside an arbitral award.
• Article 226/227 of the Constitution of India: These articles confer the High Courts with the power to issue writs for enforcement of fundamental rights and other purposes.
• Clause 69 of the Dealership Agreement: This clause provides for dispute resolution through arbitration.

Authority Table:

Judgment

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

How each authority was viewed by the Court?

• Section 34 of the Arbitration and Conciliation Act, 1996*: The Court noted that the challenge to the arbitral award was dismissed by the High Court, and the award was upheld.
• Article 226/227 of the Constitution of India*: The Court held that the High Court’s writ jurisdiction was exceeded by the Division Bench by acting as an appellate court.
• Clause 69 of the Dealership Agreement*: The Court noted that this clause was invoked by the respondent to refer the matter to arbitration.

What weighed in the mind of the Court?

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

• The correct interpretation of the arbitral award, which did not set aside the termination order but only granted liberty to file a representation.
• The scope of the High Court’s writ jurisdiction, which does not allow it to act as an appellate court over administrative decisions.
• The discretion of IOC as a principal to decide on the restoration of the dealership.
• The fact that the IOC’s decision was based on valid reasons and did not involve any arbitrariness.

Sentiment Analysis of Reasons Given by the Supreme Court:

Fact:Law Ratio:

The Supreme Court emphasized that the arbitrator had found breaches on the part of the respondent, and the liberty granted to file a representation did not mean that the termination order was set aside. The Court also highlighted that the High Court’s writ jurisdiction does not extend to substituting its own decision for that of an administrative body unless there is evidence of arbitrariness. The Court stated that the Division Bench erroneously assumed that the award was in favor of the respondent, which was not the case.

The Court stated:

“The Arbitrator, in clear terms, held against the respondent that he committed breaches of the dealership agreement and as a result of this categorical finding, the Arbitrator, in substance, upheld the letter of termination of dealership calling for stern action against the respondent.”

The Court also stated:

“In our opinion, it was solely within the discretion of the IOC – they being the principal to decide as to whether the respondent’s dealership should be restored or not and, if so, on what grounds.”

Further, the Court observed:

“The Division Bench proceeded on entirely wrong assumption that since the award was in respondent’s favour, the IOC had to simply issue a consequential order in compliance thereof directing the IOC to revive the respondent’s dealership and restore the supply of fuel to the respondent.”

Logical Reasoning:

Key Takeaways

• An arbitral award that does not explicitly set aside a termination order cannot be interpreted as having done so.
• The High Court’s writ jurisdiction is limited and does not allow it to act as an appellate court over administrative decisions unless there is evidence of arbitrariness.
• A principal has the discretion to decide on the restoration of a dealership, and the court cannot substitute its own decision.
• Liberty to file a representation does not guarantee a favorable outcome.
• Dealership agreements must be strictly adhered to, and breaches can lead to termination.

Directions

The Supreme Court set aside the impugned order of the Division Bench and restored the order of the Single Judge, dismissing the writ petition filed by the respondent.

Development of Law

The ratio decidendi of this case is that the High Court cannot interfere with the administrative decisions of a company like IOC unless there is arbitrariness and that the interpretation of an arbitral award has to be strictly in terms of what is stated in the award and not what is implied. This judgment reinforces the principle that the High Court cannot act as an appellate authority in writ jurisdiction and that the interpretation of an arbitral award has to be strict.

Conclusion

The Supreme Court allowed the appeal filed by Indian Oil Corporation Ltd., setting aside the Division Bench’s order and restoring the Single Judge’s decision. The Court held that the Division Bench had misinterpreted the arbitral award and exceeded its writ jurisdiction by directing the restoration of the dealership. The judgment reinforces the principle that the High Court cannot act as an appellate authority in writ jurisdiction and that the interpretation of an arbitral award has to be strict.