SCA No. 18868 of 2007 · Gujarat High Court

Someone who thinks logically is a nice contrast to the real world. Normally that is what is required of a judge. While adjudicating a lis a judge is expected not to fall prey to over simplified generalisations made on basis of cited, but inapplicable, precedents. The problem of stereotyping is that it makes particular into the SCA/18868/2007 JUDGMENT general, often leading to wholly misleading conclusions.

This group of petitions has been heard by the Larger Bench constituted in compliance with directions issued by the Hon'ble Supreme Court vide order dated 26.02.2008 in Petition(s) for Special Leave to Appeal (Civil) No(s) 21397-21399 of 2007 which reads as under : “Transfer Petition (c) Nos.513-515 of 2007 and 557-564 of 2007 are taken on Board. These special leave petitions have been filed against the interim order(s) passed by the High Court of Gujarat refusing stay to the petitioners during the pendency of the writ petitions. Petition(s) for Special Leave to Appeal (Civil) No(s). 21397-21399/2007. Learned Senior Counsel appearing for the petitioners as well as learned Solicitor General and Additional Solicitor Generals and other respective counsel are agreed for disposal of these special leave petitions in the following terms :

1. We would request the Hon'ble Chief Justice of the Gujarat High Court to constitute a three Judge Bench by 07th March, 2008 and the SCA/18868/2007 JUDGMENT hearing of the writ petitions shall start from the 10th March, 2008 on day do day basis and dispose them off as expeditiously as possible, without being influenced by any of the observations made in the impugned orders.

2. In case, the petitioners succeed, then the High Court would be at liberty to pass such directions as it may deem fit regarding refund of the amount in accordance with law.

All contentions are left open. Ordered accordingly. Transfer Petition(c) Nos. 513-515 of 2007 have been filed seeking transfer of Special Civil Application No. 18868/2007 pending in the Gujarat High Court to the High Court of Delhi and to be heard along with WP(C) No.5098 of 2007 pending in the High Court of Delhi on the same point whereas Transfer Petition (C) Nos. 557-564 of 2007 have been filed by the Union of India seeking transfer of writ petitions pending in the Gujarat High Court as well as Delhi High Court to this Court. In view of the aforesaid order passed by us today in the special leave petitions, transfer petitions seeking transfer of writ petitions pending before the Gujarat High Court have become infructuous and are dismissed as such. Insofar as Civil Petition(s) for Special Leave to Appeal (Civil) No(s). 21397-21399/2007 SCA/18868/2007 JUDGMENT Writ Petition No. 5098 of 2007 pending before the Delhi High Court is concerned, since we have disposed of the special leave petitions by requesting the Gujarat High Court to dispose of the writ petitions pending before it, we deem it appropriate to transfer the writ petition pending before the High Court of Delhi to the Gujarat High Court and to be heard along with the writ petitions pending before the Gujarat High Court.

3. In light of the aforesaid directions of the Apex Court the petitions have been taken up for final hearing and disposal. Rule. The learned Advocates appearing for respective parties are directed to waive service of Rule in this Special Civil Application as also in all cognate matters.

The principal challenge in these petitions is Central Government directive issued by way of SCA/18868/2007 JUDGMENT communication dated 06/03/2007. The said directive reads as under:

L-11012/1/06-GP-II/Vol.-II Government of India Ministry of Petroleum & Natural Gas Shastri Bhavan, New Delhi March 6, 2007. To, The Managing Director & CEO, Petronet LNG Ltd. New Delhi. Subject : Policy decision as to pooling of RLNG prices. Sir, The question of prices to be charged for RLNG from different customers has been under consideration of the Government. After considering existing practices and to avoid loading high cost of additional RLNG being made available to the prospective customers, it has been decided, after examination of all aspects, in public interest, that the gas prices being charged on supply of RLNG procured under long term contracts should be on a non-discriminatory basis and uniform pooled prices should be charged from all the existing and new consumers. You are advised accordingly and requested to 2 give effect to the same immediately. Yours faithfully, Sd/- (Deepak Ratanpal) Under Secretary to the Govt. of India. Copy to :- 1 Chairman, IOC, New Delhi. SCA/18868/2007 JUDGMENT 2 3 C & MD, GAIL, New Delhi. C & MD, BPCL, Mumbai

Gujarat State Petroleum Corporation Limited (GSPCL), petitioner of Special Civil Application No. 18868 of 2007, is a Government Company engaged in business of Oil and Gas exploration and also marketing of oil, natural gas and regasified liquefied natural gas (RLNG). GSPCL has entered into contracts on 07.02.2004 to purchase RLNG from various agencies including Gas Authority of India Limited (GAIL), Indian Oil Corporation Limited (IOCL) and Bharat Petroleum Corporation Limited (BPCL). It is an agreed position between the parties that the said contract provided for specified quantities of RLNG at a fixed rate upto

31.12.2008. The case of the petitioners is that by the so called directive dated 06.03.2007 under a purported policy decision Union of India (UOI) is seeking to disturb the concluded contracts by overriding the terms of contract between two private parties.

The facts which are not in dispute are that SCA/18868/2007 JUDGMENT one Ras Gas Agency based at Qatar has agreed to supply liquefied natural gas (LNG) for a period of 25 years under a sale purchase agreement entered into in July, 1999 by Ras Gas with PETRONET LNG, (PETRONET) a Company incorporated under the Companies Act, 1956. Ras Gas and PETRONET entered into a fixed price five years contract for sale of LNG by Ras Gas to PETRONET on 26.09.2003. Under the said contract PETRONET is to receive contracted quantity of LNG which is 5 Million Metric Tonnes Per Annum (MMTPA) and the price of LNG is fixed between 2 to 3 US$ per Million Metric British Thermal Unit (MMBTU).

Pursuant to contract with Ras Gas, PETRONET entered into back to back contracts with GAIL, IOCL and BPCL for sale of 5 MMTPA LNG after regasifing the same. In other words, PETRONET after purchasing LNG from Ras Gas converted the same into RLNG before supplying to three Government Companies i.e. GAIL, IOCL and BPCL, who can be described as distributing companies, though at places the SCA/18868/2007 JUDGMENT parties have described the three distributors as Offtakers. LNG transported (shipped) from Qatar is unloaded at Dahej Port located in South Gujarat at a terminal belonging to PETRONET where LNG is first converted into RLNG and thereafter transmitted through pipeline.

At this juncture, it is necessary to take note of the fact that PETRONET is not a Government Company. The said Company is a joint venture involving public and private participation promoted by GAIL, IOCL, BPCL and Oil and Natural Gas Corporation Limited (ONGC). PETRONET was set up in 1998 to import LNG, Build and operate terminals so as to receive, store and undertake regasification of imported LNG. 50% shareholding of PETRONET is in the hands of four promoter corporations while the balance 50% is held by private entities/persons,i.e.public.

RLNG received from PETRONET by three distributing companies is sold to some of the SCA/18868/2007 JUDGMENT petitioners and various other persons. Thus in effect there are three stages or three contracts, the common thread running through all the contracts and at all the stages is that the contracts are for supply of 5 MMTPA of LNG/RLNG upto 31.12.2008 at a fixed price i.e. foreign component of the price is

frozen : [i] The first stage or the first contract is between Ras Gas and PETRONET for supply of LNG, [ii] the second stage or the second contract is between PETRONET and the three distributor companies for supply of RLNG, [iii] the third stage or the third contract is between the three distributor companies and their respective customers.

The second and third stages involve more than one contract – the total quantity of 5 MMTPA gas remaining constant. The reason is, PETRONET does not have additional capacity at Dahej to either receive, store or regasify quantity of gas exceeding 5 MMTPA. SCA/18868/2007 JUDGMENT

In the aforesaid backdrop of facts the case of the petitioners is that Union of India cannot be permitted to direct one of the contracting parties to modify/rewrite the terms of contracts entered into between the parties, more particularly when contracts at stages 1 and 2 are not being disturbed/modified/rewritten in any manner whatsoever. In other words, if Ras Gas is not entitled to and is not charging anything more than the contracted prices to PETRONET, PETRONET in turn is not entitled to charge anything more than the contracted price to the distribution companies, the distribution companies cannot charge anything more from the petitioners who have direct contracts with the distributor companies. That under the guise of directive from Union of India the distributor companies cannot call upon PETRONET to recover a larger amount from the distributor companies so as to enable the distributor companies to recover such larger amount viz. more than the contracted price, from the petitioners who have contracted with the distributor companies. That the entire SCA/18868/2007 JUDGMENT exercise is malafide only to artificially reduce cost price of RLNG in hands of one Ratnagiri Gas Power Project Limited (RGPPL).

It is an admitted position that a fresh agreement dated 03.07.2007 between Ras Gas and PETRONET, for supply of further 1.5 MMTPA of LNG at the then prevailing price, which approximately comes to 8 to 9 US$ per MMBTU, has been entered into. It is further an accepted position that this entire quantity of LNG i.e. 1.5 MMTPA received by PETRONET is being supplied to RGPPL through the distributor companies. The petitioners therefore contend that to benefit RGPPL the impugned directive dated 06.03.2007 has been issued by Union of India, but the direct consequence of the said communication is escalation in the foreign component of the cost price of RLNG in the hands of the petitioners. That just as RGPPL is to use RLNG for production of electric power even the petitioners are engaged in production of electric power which is being supplied to various consumers SCA/18868/2007 JUDGMENT of electricity.

GSPCL supplies RLNG to Gujarat Paguthan Energy Corporation Limited (Petitioner of SCA No. 23151 of 2007), Essar Power Limited (Petitioner of SCA No. 19045 of 2007) etc. who produce electricity after consuming RLNG and the electricity so produced is sold to Gujarat Urja Vikas Nigam Limited (GUVNL) (Petitioner of SCA No.23018 of 2007). GUVNL is a Government Corporation involved in transmission and distribution of electric power procured from various sources, including from the aforesaid consumers of RLNG who are customers of GSPCL.

Similarly Gujarat State Electricity Corporation Ltd. (GSECL) (petitioner of SCA No.19048 of 2007) is also receiving RLNG from GAIL under a contract executed on 09.02.2004 and using such RLNG for producing electricity and selling to GUVNL for further transmission and distribution of electric power through four different SCA/18868/2007 JUDGMENT regional/zonal companies.

Gujarat Alkalies and Chemicals Limited (GACL) (Petitioner of Special Civil Application No. 19050 of 2007) has a captive gas based power plant.

Gujarat Narmada Valley Fertilizer Company (Petitioner of Special Civil Application No. 19049 of 2007) uses RLNG for manufacturing different chemicals for various uses including manufacture of fertilizers.

Gujarat Industries Power Company Limited (Petitioner of Special Civil Application No. 19047 of 2007) is involved in power generation which is sold to GUVNL for being transmitted and distributed.

During course of hearing the learned Advocates for the various petitioners have referred to various clauses of the respective agreements entered into by the petitioners with the SCA/18868/2007 JUDGMENT distributor companies as there is a serious dispute between the parties as to whether the contracts permit, or do not permit, revision of price of RLNG supplied by the distributor companies. However, in light of the view that the Court is inclined to adopt it is not necessary to record the respective contentions as to operation of, import of and the interpretation of various clauses of agreements.

There are other petitioners who enter at stage No.4 viz. who are having contracts to purchase RLNG from GSPCL at a fixed rate upto 31.12.2008. In so far as such petitioners are concerned, it is apparent that the said petitioners have no direct nexus with distributor companies and are thus not directly affected, though there may be an indirect effect of the litigation between the distributor companies on one hand and the petitioners, who are having agreements with the distributor companies. In the circumstances, for the time being it is not necessary to state anything further as regards such petitioners. Suffice it to state that case of such SCA/18868/2007 JUDGMENT petitioners is that if GSPCL and similarly situated petitioners are affected by the escalation of the cost price it is the fourth stage petitioners who would directly be affected in the event the increased price component is passed over to such petitioners.

On behalf of Union of India and other respondents the principal contention raised before the Court is whether Government of India is justified in making a policy decision to ensure that the price of gas charged in relation to RLNG supplied after procuring under long term contracts should be uniform, nondiscriminatory pooled price from all existing and new customers ? In support of the submission attention was invited to historical background in which Ras Gas agreed to supply LNG @ 2 to 3 US$ per MMBTU in 2003 when the agreement was entered into between Ras Gas and PETRONET. The Court was also informed about the global shortage of natural gas and difficulties in procuring the same coupled with the prices of SCA/18868/2007 JUDGMENT Oil & Petroleum Products in international markets to contend that an action which may be seen disadvantageous vis-a-vis the petitioners at present would ultimately be beneficial to the petitioners in future. That the emphasis of Union of India was to ensure proper growth of power and fertilizer sectors, which are priority sectors, and are facing production deficit at present. It was further submitted that Union of India had taken a policy decision and the High Court should be slow and unwilling to interfere with the policy decision unless and until the Court came to the conclusion that the policy was arbitrary or unreasonable or was detrimental to public interest. That the settled legal position did not permit the Court to strike down a policy decision merely because a better policy could have been framed. It was therefore urged that the petitions deserved to be rejected.

Alternatively, it was pleaded that Union of India was well within its right to issue a SCA/18868/2007 JUDGMENT directive to the Government Companies who were bound by their respective articles of association which permit intervention and issuance of directions. That accordingly the offtakers, each of them having similarly worded articles of association, were bound by the directions issued by the Central Government and were therefore bound to charge and recover enhanced price for RLNG supplied by offtakers. That Government of India was of the opinion that the contract between offtakers and their respective customers permitted enhancement/revision of the price of gas supplied, but if the petitioners were of the opinion that the contract did not permit such revision it was left upto the petitioners to take appropriate steps in accordance with law in light of their respective rights available under the terms of their respective contracts. That the Court would not interfere with terms of the contract and relegate the parties to avail of appropriate legal remedies, inclusive of arbitration, as may be provided by the contracts. Lastly, it was pleaded that there was SCA/18868/2007 JUDGMENT clause of Force Majure and the effect thereof would have to be worked out by the contracting parties.

The contentions raised by various counsels appearing for various petitioners and various respondents have not been individually reproduced and recorded for the simple reason that the basic controversy between the parties is as noted hereinbefore. All the parties put together, through their respective counsels, have cited more than One hundred authorities. Suffice it to state that the Court has taken note of the ratio laid down in the said authorities without finding it necessary to enumerate and list the same and thus burden the judgment.

The principal controversy between the parties relates to the decision, termed to be a policy decision, communicated vide letter dated 06.03.2007 by the Union of India :the case of the petitioners being that the so called policy cannot be termed to be a policy considering that the decision is in interest of only one party viz. RGPPL, while the SCA/18868/2007 JUDGMENT case of the respondents, more particularly Union of India, is that the decision is a policy decision and the Court should not intervene in policy matters.

Though a great deal has been said, written and expounded as regards policy, in the context of the controversy brought before the Court the plain meaning of the word 'policy' is required to be recapitulated.

72. Corpus Juris Secundrum. C.J.S. Principal and Surety – By Francis J. Ludes & Harold J. Gilbert (Page 208) “POLICY. The word “policy” is defined as meaning a settled or definite course or method adopted by a government, institution, body, or individual. As applied to a rule of law, “policy” refers to its probable effect, tendency, or object, considered with respect to the social or political well-being of a state”. Black's Law Dictionary – Eighth SCA/18868/2007 JUDGMENT Edition – By Bryan A. Garner (Page 1196) “policy. 1. The general principles by which a government is guided in its management of public affairs. See PUBLIC POLICY. 2. A document containing a contract of insurance;” Judicial Dictionary - 13th Edition – By K.J. Aiyar (Page 749) “Policy. The word 'policy' according to the Black's Law Dictionary, 16th edn, means the general principle by which a government is guided in its management of public affairs and according to the Concise Oxford Dictionary 8th edn a course of principle of action adopted or proposed by a government [Adarsh Matsyodyog Sahkari Sanstha Ltd. v.

M P Rajya Matsya Vikas Ngam 1995 JLJ 682 at 686]” A Dictionary of Modern Legal Usage - 2nd Edition – By Bryan A. Garner (Page 670) “policy; polity. Policy, by far the more common of these words, means SCA/18868/2007 JUDGMENT “a concerted course of action followed to achieve certain ends; a plan.” It is more restricted in sense than polity, which means (1) “the principle upon which a government is based”; (2) “the total governmental organization as based on its goals and policies.” Sense (2) is more usual – e.g.: “The ancient doctrine of the common law, founded on the principles of the feudal system, that a private wrong is merged in a felony, is not applicable to the civil polity of this country.” / “As to the practicing lawyer, in our polity he is potentially law-writer, law teacher, legislator, or judge.” (Roscoe Pound) Webster's Comprehensive Dictionary – Published Trident International (Page 976) “pol-i-cy 1 Prudence or sagacity in the conduct of affairs.

2 A course of plan of action, especially of administrative action. 3 Any system of management based on self- interest as opposed to equity; finesse in general; artifice. 4 Obs. Political science; government. See Synonyms under POLITY.” SCA/18868/2007 JUDGMENT Shorter Oxford English Dictionary – Fifth Edition - Vol-II (Page 2267) “policy In branch I from Old French policie from Latin politia from Greek politeia citizenship, government, etc., from polites, from polis city, state: cf. POLICE noun. In branch interim injunction from assoc. with Latin politus polished, refined. Cf. Also POLITY.] I 1 An organized and established government administration; a constitution, a polity. Now rare or obsolete. LME. 2 Government; the conduct of public affairs; political science. LME-L18. 3 Political sagacity diplomacy; prudence or skill in the conduct of public affairs. Also, political cunning. LME. 4 a Prudent or expedient conduct or action; sagacity, shrewdness. Also, cunning, craftiness. LME b A contrivance, a crafty device, a trick. LME-M19. SCA/18868/2007 JUDGMENT 5 A course of action or principle adopted or proposed by a government, party, individual, etc; any course of action adopted as advantageous or expedient. LME.”

Thus, it can be summarised that there has to be a settled or definite course/method adopted by a Government in the course of management of public affairs. In other words, the total Governmental organisation as based on its goals and policies reflecting prudence or sagacity in the conduct of affairs, especially of administrative action. However, such conduct has to be the conduct of public affairs guided by prudence based on general principles.

Thus, when the word 'policy' is read and applied to the administrative action, viz. conduct of governmental affairs, one has to necessarily bring in the concept of policy being for public good, or public interest. Anything that is done contrary to 'public policy' is a harmful thing, though the concept of what is for the public good or in the public interest or what would be injurious or harmful SCA/18868/2007 JUDGMENT to the public good or public interest has varied from time to time. However, one thing is certain that the interest of all the public must be taken into account; but in practice one finds that in many cases what seems to be in contemplation is the interest of only one section of the public, and it may be a small section at that. At this juncture, the Court is required to weigh the interest of the whole community as well as the interest of a considerable section of the community.

"Public policy'' has been defined by Winfield as "a principle of judicial legislation or interpretation founded on the current needs of the community''. (See Percy H. Winfield, "Public Policy in English Common Law'', 42 Harvard Law Rev. 76). Now, this would show that the interests of the whole public must be taken into account; but it leads in practice to the paradox that in many cases what seems to be in contemplation is the interest of one section only of the public, and a small section at that. The explanation of the paradox is that the courts must certainly weigh the interests of the whole community as well as the interests of a considerable section of it, such as tenants, for instance, as a class as in this case. If the decision is in their favour, it means no more than that there is nothing in their conduct which is prejudicial to the nation as a whole. Nor is the benefit of the whole community always a more tacit SCA/18868/2007 JUDGMENT consideration. The courts may have to strike a balance in express terms between community interests and sectional interests. So here we are concerned with the general freedom of contract which everyone possesses as against the principle that this freedom shall not be used to subject a class, to the harassment of suits without valid or reasonable grounds. Though there is considerable support in judicial dicta for the view that courts cannot create new heads of public policy, see Gherulal Parakh v. Mahadeodas Maiya, 1959 Supp (2) SCR 406 at p. 440 = (AIR 1959 SC 781), there is also no lack of judicial authority for the view that the categories of heads of the public policy are not closed and that there remains a broad field within which courts can apply a variable notion of policy as a principle of judicial legislation or interpretation founded on the current needs of the community. See Dennis Lloyd, "Public Policy'', (1953), pp. 112-113.

Public policy does not remain static in any given community. It may vary from generation to generation and even in the same generation. Public policy would be almost useless if it SCA/18868/2007 JUDGMENT were to remain in fixed moulds for all time.

If it is variable, if it depends on the welfare of the community at any given time, how are the courts to ascertain it? The judges are more to be trusted as interpreters of the law than as expounders of public policy. However, there is no alternative under our system but to vest this power with judges. The difficulty of discovering what public policy is at any given moment certainly does not absolve the judges from the duty of doing so. In conducting an enquiry, as already stated, judges are not hide bound by precedent. The judges must look beyond the narrow field of past precedents, though this still leaves open the question, in which direction he must cast his gaze. The judges are to base their decision on the opinions of men of world, as distinguished from opinions based on legal learning. In other words, the judges will have to look beyond the jurisprudence and that in so doing, they must consult not their own personal standards or predilections but those of the dominant opinion at a given moment, or what has been termed customary morality.

The Contract Act does not define the expression "public policy" or "opposed to public policy". From the very nature of things, the expressions "public policy", "opposed to public policy", or "contrary to public policy" are incapable of precise definition. Public policy, however, is not the policy of a particular government. It connotes some matter which concerns the public good and the public interest. The concept of what is for the public good or in the public interest or what would be injurious or harmful to the public good or the public interest has varied from time to time. As new concepts SCA/18868/2007 JUDGMENT take the place of old, transactions which were once considered against public policy are now being upheld by the courts and similarly where there has been a well-recognized head of public policy, the courts have not shirked from extending it to new transactions and changed circumstances and have at times not even flinched from Inventing a new head of public policy. There are two schools of thought - "the narrow view" school and "the broad view" school. According to the former, courts cannot create new heads of public policy whereas the latter countenances judicial law- making in this area. The adherents of "the narrow view" school would not invalidate a contract on the ground of public policy unless that particular ground had been well established by authorities. Hardly ever has the voice of the timorous spoken more clearly and loudly than in these words of Lord Davey in Janson v. Driefontein Consolidated Mines, Limited (1902) AC 484, 500, "Public policy is always an unsafe and treacherous ground for legal decision. " That was in the year

1902. Seventy-eight years" earlier, Burrough, J., in Richardson v. Mellish (1824) 2 Bing 229, 252 SC 130 ER 294, 303, and (1824-34) All ER Reprint 258, SCA/18868/2007 JUDGMENT

described public policy as "a very unruly horse, and when once you get astride it you never know where it will carry you. " The Master of the Rolls, Lord Denning, however, was not a man to shy away from unmanageable horses and in words which' conjure up before our eyes the picture of the young Alexander the Great Taming Bucephalus, he said in Enderby Town Football Club Ltd. v. Football Association Ltd. (1971) Ch 591, 606, "With a good man in the saddle, the unruly horse can be kept in control. It can jump over obstacles. " Had the timorous always held "the field, not only the doctrine of public policy but even the Common Law or the principles of Equity would never have evolved. Sir William Holdsworth in his "History of English Law", Volume III, page 55, has said : "In fact, a body of law like the common law, which has grown up gradually with the growth of the nation, necessarily acquires some fixed principles, and if it is to maintain these principles it must be able, on the ground of public policy or some other like ground, to suppress practices which, under ever new disguises, seek to weaken or negative SCA/18868/2007 JUDGMENT them. " It is thus clear that the principles. governing public policy must be and are capable, on proper occasion, of expansion or modification. Practices which were considered perfectly normal at one time have today become obnoxious and oppressive to public conscience. If there is no head of public policy which covers a case, then the court must in consonance with public conscience and in keeping with public good and public interest declare such practice to be opposed to public policy. Above all, in deciding any case which may not be covered by authority our courts have before them the beacon light of the Preamble to the Constitution. Lacking precedent, the court can always be guided by that light and the principles underlying the Fundamental Rights and the Directive Principles enshrined in our Constitution.

The following decisions lay down the principles which would permit a Court to enter into the domain of judicial review in respect of disputes relating to contractual obligation, more particularly when the obligation is of a public SCA/18868/2007 JUDGMENT character. (d) L.I.C. Of India & Anr. Vs. Consumer Education and Research Centre and Ors., AIR 1995 SCC 1811: “28. In Kumari Shrilekha Vidyarthi v. State of