Supreme Court Upholds Termination of Fuel Dealership for Adulteration: Indian Oil Corporation Ltd. vs. M/S. R.M. Service Centre (2019) INSC 942 (07 November 2019)

Date of the Judgment: 07 November 2019
Citation: (2019) INSC 942
Judges: L. Nageswara Rao, J., Hemant Gupta, J.
Can a fuel dealership be terminated for failing quality tests, even if there are minor procedural delays in sample testing? The Supreme Court of India addressed this question in a recent case concerning the termination of a fuel dealership due to adulteration and stock variations. The Court examined whether the oil company was justified in terminating the dealership based on the test results and the Marketing Discipline Guidelines, 2012. The judgment was delivered by a two-judge bench comprising Justice L. Nageswara Rao and Justice Hemant Gupta, with the majority opinion authored by Justice Hemant Gupta.

Case Background

The case revolves around the termination of a retail fuel dealership owned by M/S. R.M. Service Centre (referred to as ‘the dealer’) by Indian Oil Corporation Ltd. (‘the Corporation’). The dealership, located in Assam, was authorized to sell motor spirit (petrol), high-speed diesel, motor oil, and grease. On 6th May 2013, a joint inspection revealed discrepancies in the stock of high-speed diesel, along with missing density information for one of the tanks. Samples were collected from Tank No. 2, with one sent for testing, one retained by the Field Survey Officer, and one given to the dealer.

The initial test report indicated that the diesel samples failed to meet required specifications. The dealer requested a retest of the umpire sample, which was granted. However, the retest also found that the sample retained by the Field Survey Officer failed the specifications, while the dealer’s sample could not be tested due to the presence of sludge. Consequently, the dealership was terminated on 25th April 2014, citing violations of the Marketing Discipline Guidelines, 2012.

Timeline

Course of Proceedings

The dealer challenged the termination before the Gauhati High Court. The Single Judge allowed the writ petition, citing non-compliance with the time limits for sample testing as per the Guidelines. The court held that the samples should have reached the laboratory within ten days of collection, and the delay in testing was a violation of the Guidelines. The Division Bench upheld this decision, agreeing that the time limits were mandatory and the delay was not permissible.

Legal Framework

The case primarily involves the interpretation of the Marketing Discipline Guidelines, 2012, issued by the Public Sector Oil Marketing Companies. These guidelines outline the procedures for maintaining quality and preventing malpractices in the sale of petroleum products. Key clauses from the Guidelines include:

• Clause 1.5(v): “The provisions contained in the Motor Spirit and High Speed Diesel (Prevention of Malpractices in Supply & Distribution) Order issued by the Government of India (or any amendment or revision thereof) and instructions issued by the Oil Company/State Govt. authorities etc. from time to time shall be strictly adhered to and all concerned records shall be maintained and produced to Inspecting officials on demand.”
• Clause 2.4.4 Note (2): “All the above samples should reach the laboratories for testing preferably within 10 days of the collection of the samples.”
• Clause 2.5(A): “All samples should preferably be suitably coded before sending to lab for testing preferably within 10 days of drawal.”
• Clause 2.5(I): “The purpose of mentioning time frame for various activities e.g. sending samples to lab preferably within 10 days etc. is to streamline the system and is no way related to quality/result of the product.”
• Clause 5.1.1: Defines “Adulteration” as the introduction of any foreign substance into Motor Spirit/High Speed Diesel illegally or unauthorizedly, causing the product to not conform to BIS specifications.
• Clause 5.1.11: Deals with stock variation of MS/HSD beyond permissible limits. It states that if a sample fails after a positive stock variation, action in line with that of adulteration will be initiated.
• Clause 8.2: Classifies “Adulteration of MS/HSD” as a critical irregularity, warranting termination of the dealership at the first instance.
• Clause 8.3: Classifies “Non-availability of reference density at the time of inspection” as a major irregularity. It also classifies “Stock variation beyond permissible limits but sample passing quality tests” as a major irregularity.
• Clause 8.5.1: “The above are general guidelines and the actions prescribed in MDG 2012 are minimum. The competent Authority of the concerned Oil Company can however take appropriate higher action against the erring dealer, if deemed necessary including termination in the first or any instance in line with the provisions of the Agreement.”

Additionally, the Motor Spirit and High Speed Diesel (Prevention of Malpractices in Supply & Distribution) Order, 2005, issued under Section 3 of the Essential Commodities Act, 1955, was also brought into the discussion, particularly regarding the procedure for search and seizure.

Arguments

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

• The appellants argued that the High Court misread the Guidelines by holding that the time limits for sending samples to the laboratory were mandatory. They emphasized that the word “preferably” in Clauses 2.4.4 and 2.5 indicates that the time limit is not strict.
• They contended that Clause 5.1.11 of the Guidelines stipulates that in the event of a positive stock variation beyond permissible limits and failure of the sample, action in line with that of adulteration should be initiated, which is a critical irregularity under Clause 8.2, warranting termination.
• The appellants submitted that the High Court erred in setting aside the termination of the dealership, as the dealer was found to have violated the Guidelines.

Arguments by the Respondent (M/S. R.M. Service Centre):

• The dealer argued that the sample provided to them was found to contain sludge, which casts doubt on the authenticity of the other two samples.
• The dealer contended that the search and seizure procedure under the Control Order read with Section 100 of the Code of Criminal Procedure, 1973, was not followed, which renders the termination illegal.
• The dealer supported the High Court’s view that the time limits in the Guidelines are mandatory, and the delay by the appellants in sending samples for testing is detrimental to the dealer’s rights.
• The dealer argued that termination of dealership is a serious consequence affecting rights under Articles 21 and 14 of the Constitution of India.

Issues Framed by the Supreme Court

The Supreme Court considered the following issues:

1. Whether the appellants were required to follow the procedure under the Control Order read with Section 100 of the Code of Criminal Procedure, 1973.
2. Whether the time limit for sending samples to the laboratory as prescribed in the Guidelines is mandatory or directory.
3. Whether the termination of the dealership was justified based on the findings of stock variation and sample failure.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the fact that the dealer’s fuel samples failed the quality tests, indicating adulteration. The Court emphasized that the Marketing Discipline Guidelines, 2012, clearly classify adulteration as a critical irregularity that warrants termination of the dealership. The Court also noted that the time limits for sample testing are directory, not mandatory, and that the dealer was given sufficient opportunity to defend themselves, including the option to retest the umpire sample.

The Court’s reasoning was based on the following points:

• The word “preferably” in the Guidelines indicates that the time limits for sample testing are not mandatory.
• The purpose of the time frame is to streamline the system, not to affect the quality or result of the product.
• The dealer’s sample was found to be adulterated, which is a critical irregularity under the Guidelines.
• The dealer was given a fair opportunity to defend themselves, including the option to retest the umpire sample.
• The search and seizure procedure under the Control Order is not applicable in this case, as the dealer is not being prosecuted for violation of the Control Order.

Logical Reasoning

The Court rejected the argument that the time limits for sample testing were mandatory, emphasizing that the word “preferably” in the Guidelines indicated a directory, not mandatory, timeline. The Court also rejected the argument that the sample given to the dealer was found with sludge, stating that the other two samples collected and sealed cannot be permitted to be disputed only because one sample was found with sludge. Furthermore, the Court held that the search and seizure procedure under the Control Order was not applicable in this case, as the dealer was not being prosecuted for violation of the Control Order.

The Court’s decision was based on the fact that the dealer’s fuel samples failed the quality tests, indicating adulteration. The Court emphasized that the Marketing Discipline Guidelines, 2012, clearly classify adulteration as a critical irregularity that warrants termination of the dealership. The Court also noted that the time limits for sample testing are directory, not mandatory, and that the dealer was given sufficient opportunity to defend themselves, including the option to retest the umpire sample.

“The purpose of mentioning time frame for various activities e.g. sending samples to lab preferably within 10 days etc. is to streamline the system and is no way related to quality/result of the product.”

“In case of positive stock variation beyond permissible limits, samples will be drawn and sent to laboratory for testing. Sales and supplies of all products to be suspended immediately. Study to be carried out to identify the reasons for stock variation. If the sample passes but some other irregularity like unauthorized purchase etc. is established action to be taken accordingly. However, if the sample fails, action in line with that of adulteration will be initiated.”

“T ermination at the First instance will be imposed for the above irregularities.”

Key Takeaways

• Fuel dealerships can be terminated for adulteration, as it is a critical violation of the Marketing Discipline Guidelines.
• Time limits for sample testing mentioned with the word “preferably” in the Guidelines are directory, not mandatory.
• The search and seizure procedure under the Control Order is applicable only when a person is prosecuted for violation of the Control Order.
• Dealers must adhere to the quality standards and guidelines set by the oil companies to avoid termination.

Directions

No specific directions were given by the Supreme Court in this case.

Development of Law

The ratio decidendi of this case is that the time limits for sample testing mentioned in the Marketing Discipline Guidelines, 2012, are directory and not mandatory. This clarifies the interpretation of the word “preferably” in the context of these guidelines. Further, the Court upheld the termination of dealership based on adulteration of fuel.

Conclusion

The Supreme Court allowed the appeal filed by Indian Oil Corporation Ltd., setting aside the High Court’s order. The Court held that the termination of the fuel dealership was valid and legal, as the dealer was found to have violated the Marketing Discipline Guidelines by adulterating the fuel. The Court clarified that the time limits for sample testing are directory and that the search and seizure procedure under the Control Order is not applicable in this case.

Category

Parent Category: Contract Law
Child Category: Breach of Contract
Child Category: Termination of Contract
Parent Category: Petroleum Laws
Child Category: Marketing Discipline Guidelines, 2012
Child Category: Adulteration of Fuel
Parent Category: Essential Commodities Act, 1955
Child Category: Section 3, Essential Commodities Act, 1955

FAQ

Q: Can a fuel dealership be terminated for minor delays in sample testing?
A: No, the Supreme Court has clarified that the time limits for sample testing mentioned with the word “preferably” in the Marketing Discipline Guidelines are directory, not mandatory. Minor delays will not lead to termination unless there is a violation of other clauses of the guidelines.

Q: What is considered a critical irregularity that can lead to termination of a fuel dealership?
A: Adulteration of fuel is considered a critical irregularity that can lead to termination of a fuel dealership as per the Marketing Discipline Guidelines, 2012.

Q: Is it necessary to follow the search and seizure procedure under the Essential Commodities Act for terminating a dealership?
A: No, the search and seizure procedure under the Essential Commodities Act is applicable only when a person is being prosecuted for a violation of the Control Order. It is not required for terminating a dealership based on contractual violations of the Marketing Discipline Guidelines.

Q: What should a fuel dealer do to avoid termination?
A: Fuel dealers should adhere to the quality standards and guidelines set by the oil companies, ensure proper stock management, and avoid any practices that could lead to adulteration of fuel.