Central Inland Water Transportcorporation Ltd. & ANR Vs. Brojo Nath Ganguly & ANR [1986] INSC 64 (6 April 1986)
1986 Latest Caselaw 64 SC

Central Inland Water Transport Corporation Ltd. ANR Vs. Brojo Nath Ganguly ANR[1986] INSC 64 (6 April 1986)

MADON, D.P. MADON, D.P. SEN, A.P. (J)

CITATION: 1986 AIR 1571 1986 SCR (2) 278 1986 SCC (3) 156 1986 SCALE (1)799

CITATOR INFO:

R 1987 SC 111 (3,4) F 1988 SC 286 (5) E&D 1989 SC1977 (8) R 1990 SC 808 (7) E&F 1991 SC 101 (10,20,45,65,84,88,94,100,182, RF 1992 SC 1 (133) RF 1992 SC 76 (3)

ACT:

A. Constitution of India, 1950, Article 12 - "State" whether a Government company as defined in section 617 of the Indian Companies Act, 1956, is "the State" within the meaning of Article 12 of the Constitution.

B. Words and phrases - 'Unconscionable bargain", "distributive justice, reasonableness and fair play" Meaning of - Constitution of India, Articles 14, 38 and 39 read with sections 16, 19A of the Indian Contracts Act, 1872.

C. Contract of Employment - Whether an unconscionable term in a contract of employment is void under section 23 of the Indian Contract Act, 1872 , as being opposed to public policy and, when such a term is contained in a contract of employment entered into with the Government company, is also void as infringing Article 14 of the Constitution in case a Government company is "the State" under Article 12 of the Constitution.

D. The Central Inland Water Transport Corporation Limited (A Government of India Undertaking) - service, Discipline and Appeal Rules, 1979, Rule 9(1) Validity of Whether the said provision is discriminatory and violates Article 14 of the Constitution and also void under section 16 of the Contract Act as opposed to public policy under section 23 ibid.

HEADNOTE:

The Central Inland Water Transport Corporation which was incorporated on February 22, 1967 is a company owned by the Government of India and the State Governments of West Bengal and Assam. It is a Government company within the meaning of section 617 of the Companies Act, 1956. The Memorandum of Association and the Articles of Association of the said 279 corporation indicate that the corporation is under the complete control and management of the Central Government though all the shares were and are owned by the Central Government and the two State Governments. A company called "Rivers Steam Navigation Company Limited" which was carrying on very much the same business including the maintenance and running of river service as the corporation is doing was ordered to be wound up by an order dated May 5, 1967 passed by the Calcutta High Court and upon payment to all the creditors it came to be dissolved. By a scheme of Arrangement approved by the High Court and entered into between the said dissolved company and the corporation the assets and certain liabilities of the said company was taken over by the corporation. The Scheme of Arrangement provided as follows:

(a) that the new company shall take as many of the existing staff or labour as possible and as can be reasonably taken over by the said transferee company subject to any valid objection to any individual employee or employees;

(b) that as to exactly how many can be employed it is left to the said transferee company's bonafide discretion;

(c) that those employees who cannot be taken over shall be paid by the transferor company all moneys due to them under the law and all legitimate and legal compensations payable to them either under Industrial Disputes Act or otherwise legally admissible and that such moneys shall be provided by the Government of India to the existing transferor company who will pay these dues.

Brojo Nath Ganguly the first respondent in Civil Appeal No. 4412 of 1985 was at the date when the said scheme of arrangement became effective, working in the said company and his services were taken over by the Corporation and he was appointed on September 8, 1967 as a Deputy Chief Accounts Officer. Tarun Kanti Sengupta, the first respondent in Civil Appeal No. 4413 of 1985 was also working in the said company and his services were also taken over by the Corporation and he was appointed on September 8, 1967 as Chief Engineer on the ship "River Ganga" Letters of appointment issued to both these respondents provided that they would be subject to the service rules and regulations including the conduct rules to be framed 280 by the Corporation. Service rules were framed by the Corporation for the first time in 1970 and were replaced by new rules in 1979 known as "The Central Inland Water Transport Corporation Limited - Service, Discipline and Appeal Rules, 1979". The said rules applied to all employees in the service of the Corporation in all units in West Bengal, Bihar, Assam or in other State or Union Territory except those employees who were covered by the Standing orders under the Industrial Employment (Standing Orders) Act, 1956 or those employees in respect of whom the Board of Directors has issued separate orders. Rule 9 of the said rules refers to termination of employment for acts other than misdemeanor. Under Rule 10 an Employee is to retire on completion of the age of 58 years though in exceptional cases and in the interests of the Corporation an extension may be granted with the prior approval of the Chairman-cum- Managing Director and the Board of Directors. Rule 33 provides for suspension of an employee where a disciplinary proceeding against him is contemplated or Dis pending or where a case against him in respect of a criminal offence is under investigation or trial. Rule 36 sets out the different penalties which can be imposed on an employee for his misconduct. Rule 38 prescribes the procedure for imposing a major penalty and sets out in detail how a disciplinary inquiry is to be held. Rule 39 provides for action to be taken by the disciplinary authority on the report made by the Inquiring Authority. Rule 40 prescribes the procedure to be followed for imposing minor penalties. Rule 43 provides for a special procedure to be followed in certain cases which consists of dispensing with disciplinary inquiry altogether. Rule 45 provides for an appeal against an order imposing penalty to the appropriate authority specified in the Schedule to the said Rules and Rule 45A provides for a review.

The first respondent Mr. Ganguly in Civil Appeal No. 4412 of 1985 was promoted to the Manager (Finance), in October 1980 and also acted as General Manager (Finance) from November 1981 to March 1982. On February 16, 1983 a confidential letter was sent to him by the General Manager (Finance) who is the Third Appellant to reply within 24 hours to the allegation of negligence in the maintenance of Provident Fund Accounts. Ganguly made a representation as also gave a detailed reply to the said show cause notice.

Thereafter by a letter dated February 26, 1983 signed by the Chairman-cum-Managing Director 281 of the Corporation, a notice under clause (i) of Rule 9 or the Service Rules was given to Ganguly terminating his services with the Corporation with immediate effect. Along with the said letter a cheque for three months' basic pay and dearness allowance was enclosed.

The First Respondent in Civil Appeal No. 4413 of 1985 Sengupta was promoted to the post of General Manager (River Services) with effect from January 1, 1980. His name was enrolled by the bureau of public enterprises and he was called for an interview for the post of Chairman-cum- Director of the Corporation by the Public Enterprises Selection Board. However, he could not appear before the Selection Board as he received the letter calling him for the interview after the date fixed in that behalf. The new Chairman-cum-Managing Director who was selected at the said interview and is alleged to have borne a grudge against Sen Gupta for having completed against him for the said post, on February 1, 1983, issued a charge-sheet against Sengupta intimating to him that a disciplinary inquiry was proposed to be held against him under the said Rules and calling upon him to file his written statement of defence. By his letter dated February 10, 1983, addressed to the Chairman-cum- Managing Director, Sengupta denied the charges made against him and asked for inspection of documents and copies of statements of witnesses mentioned in the said charge-sheet.

By a letter dated February 26, 1983, signed by the Chairman- cum-Managing Director notice was given to Sengupta under clause (i) of Rule 9 of the said Rule, terminating his service with the Corporation with immediate effect. Along with the said letter a cheque for three month's basic pay and dearness allowance in lieu of notice was enclosed.

Both Ganguly and Sengupta filed writ petitions in the Calcutta High Court under Article 226 of the Constitution challenging the termination of their services as also the validity of the said Rule 9(i). In both these writ petitions rule nisi was issued and ex parte and ad interim order staying the operation of the said notices of termination was passed by a learned Single Judge of the High Court. The appellants went in Letters Patent Appeal before a Division Bench of the said High Court against the said ad interim orders. On January 28, 1985 the Division Bench ordered in both these Appeals that the 282 said writ petitions should stand transferred to and heard by it along with the said appeals. The said appeals and writ petitions were, thereupon, heard together and by a common judgment delivered on August 9, 1985, the Division Bench held that the Corporation was a "state" within the meaning of Article 12 of the Constitution and that the said Rule 9(i) was ultra vires Article 14 of the Constitution.

Consequently the Division Bench struck down the said Rule 9(i) as being void. It also quashed the impugned orders of termination dated February 26, 1983. hence the appeals by special leave by the Court .

Arguments for the Appellants:-

1. A government company stands on a wholly different footing from a statutory corporation for while a statutory corporation is established by a statute, a Government company is incorporated like any other company by obtaining a certificate of incorporation under the Companies Act and, therefore, a Government company cannot come within the scope of the term "The State" as defined in Article 12 of the Constitution.

2. A statutory corporation is usually established in order to create a monopoly in the State in respect of a particular activity. A Government company is, however, not established for this purpose;

3. The Corporation does not have the monopoly of inland water transport but is only a trading company as is shown by the objects clause in its Memorandum of Association; and

4. Assuming a Government company is "the State" within the meaning of Article 12, a contract of employment entered into by it is like any other contract entered into between two parties and a term in that contract cannot be struck down under Article 14 of the Constitution on the ground that it is arbitrary or unreasonable or unconscionable or one- sided or unfair.

Arguments on behalf of the Respondents :

283

1. The definition of the expression "the State" given in Article 12 is wide enough to include within its scope and reach a Government company.

2. A State is entitled to carry on any activity, even a trading activity, through any of its instrumentalities or agencies, whether such instrumentality or agency be one of the departments of the Government, a statutory corporation, a statutory authority or a Government company incorporated under the Companies Act.

3. Merely because a Government company carries on a trading activity or is authorised to carry on a trading activity does not mean that it is excluded from the definition of the expression "the State" contained in Article 12.

4. A Government company being "the State" within the meaning of Article 12 is bound to act fairly and reasonably and if it does not do so its action can be struck down under Article 14 as being arbitrary.

5. A contract of employment stands on a different footing from other contracts. A term in a contract of employment entered into by a private employer which is unfair, unreasonable and unconscionable is bad in law. Such a term in a contract of employment entered into by the State is, therefore, also bad in law and can be struck down under Article 14.

Dismissing the appeals, the Court, ^

HELD : 1.1 The word "State" has different meanings depending upon the context in which it is used. The expression "The State" when used in Parts III & IV of the Constitution is not confined to only the federating States or the Union of India or even to both. By the express terms of Article 12, the expression "the State" includes : (i) the Government of India; (ii) Parliament of India; (iii) the Government of each of the States which constitute the Union of India; (iv) the Legislature of each of the States which constitute the Union of India; (v) all local authorities within the territory of India; (vi) all local authorities under the control of the Government of India; (vii) all other authorities within the 284 territory of India; and (viii) all other authorities under the control of the Government of India. [306 D; 309 A-B]

1.2 Where an interpretation clause defines a word to mean a particular thing, the definition is explanatory and prima facie restrictive and whenever an interpretation clause defines a term to include something the definition is extensive. While an explanatory and restrictive definition confines the meaning of the word defined to what is stated in the interpretation clause, so that wherever the word defined is used in the particular statute in which that interpretation clause occurs, it will bear only that meaning unless where, as is usually provided, the subject or context otherwise requires an extensive definition expands or extends the meaning of the word defined to include within it what would otherwise not have been comprehended in it when the word defined is used in its ordinary sense. Article 12 uses the word "includes", it thus extends the meaning of the expression "the State" so as to include within it also what otherwise may not have been comprehended by that expression when used in its ordinary legal sense. [310 F-H; 311 A-B]

1.3 The definition of the expression "the State" in Article 12, is however, for the purposes of Parts III and IV of the Constitution, whose contents cleary show that the expression "the State" in Article 12 as also in Article 36 is not confined to its ordinary and constitutional sense as extended by the inclusive portion of Article 12 but is used in the concept of the State in relation to the Fundamental Rights guaranteed by Part III of the Constitution and the Directive Principles of State Policy contained in Part IV of the Constitution which principles are declared by Article 37 to be fundamental to the governance of the country and enjoins upon the State to apply making laws. [311 C-E]

1.4 Article 298 of the Constitution expands the executive power of the Union of India and of each of the States which collectively constitute the Union to carry on any trade or business. By extending the executive power of the Union and of each of the States to the carrying on of any trade or business Article 298 does not, however, convert either the Union of India or any of the States which collectively form the Union into a Merchant buying and selling 285 goods or carrying on either trading or business activity, for A the executive power of the Union and of the States whether in the field of trade or business or in any other field, is always subject to constitutional limitations and particularly the provisions relating to Fundamental Rights in Part III of the Constitution and is exercisable in accordance with and for the furtherance of the Directive Principles of State Policy prescribed by Part IV of the Constitution. [322 E-G] The State is an abstract entity and it can, therefore only act through its agencies or instrumentalities, whether such agency or instrumentality be human or juristic. The trading and business activities of the State constitute "public enterprise". The structural forms in which the Government operates in the field of public enterprise are many and varied. These may consist of Government departments, statutory bodies, statutory corporations, Government companies etc. The immunities and privileges possessed by bodies so set up by the Government in India cannot, however, be the same as those possessed by similar bodies established in the private sector because the setting up of such bodies is referable to the executive power of the Government under Article 298 to carry on any trade or business. [322 H; 323 A-B; 324 C-D] Sukhdev Singh & Ors. v. Bhagatram Sardar Singh Baghuvanshi & Anr.. [1975] 3 S.C.R. 619 referred to.

1.5 The whole process of judicial interpretation lies in extending or applying by analogy the ratio decidendi of an earlier case to a subsequent case which differs it in certain essentials, so as to make the principle laid down in the earlier case fit in with the new set of circumstances.

The sequitur of the above assumption would be that the Court should tell the suitor that there is no precedent governing his case and, therefore, it cannot give him any relief. This would be to do gross injustice. Had this not been done, the law would have never advanced. [348 D-F]

1.6 Authorities constituted under and corporations established by statutes have been held to be instrumentalities and agencies of the Government in a long catena of decisions of the Supreme Court. The observations in several of these decisions are general in nature and take in their sweep all 286 instrumentalities and agencies of the State, whatever be the form which such instrumentality or agency may have assumed.

If there is an instrumentality or agency of the State which has assumed the garb of a Government company as defined in section 617 of the Companies Act, it does not follow that it thereby ceases to be an instrumentality or agency of the State. For the purposes of Article 12 one must necessarily see through the corporate veil to ascertain whether behind that veil is the face of an instrumentality or agency of the State. The corporation squarely falls within these observations and it also satisfies the various tests which have been laid down. Merely because it has so far not the monopoly of inland water transportation is not sufficient to divest it of its character of an instrumentality or agency of the State. It is nothing but the Government operating behind a corporate veil, carrying out a governmental activity and governmental functions of vital public importance. There can thus be no doubt that the corporation is "the State" within the meaning of Article 12 of the Constitution.[349 A-F]

1.7 The Central Inland Water Transport Corporation is not only a Government company as defined in section 617 of the Companies Act 1956, but is wholly owned by the three Governments - Central Government and the Governments of West Bengal and Assam jointly. It is financed entirely by these three Governments and is completely under the control of the Central Government, and is managed by the Chairman and Board of Directors appointed by the Central Government and removable by it. In every respect it is thus a veil behind which the Central Government operates through the instrumentality of a Government company. The activities carried on by the Corporation are of vital national importance. There can thus be no doubt that the corporation is a Government undertaking in the public sector. The corporation itself has considered that it is a Government of India Undertaking. The complete heading of the impugned Rule is "The Central Inland Water Transport Corporation Ltd. (A Government of India Undertaking) Service, Discipline and Appeal Rules, 1979." In the face of so much evidence it is ridiculous to describe the corporation as a trading company.

The activities of the corporation are of great importance to public interest, concern and welfare and are activities of the nature carried on by a modern State and particularly a modern welfare State. [343 E-G; 346 E-G] 287 Sukhdev Singh & Ors. v. Bhagat Ram Sardar Singh Raghuvanchi & Anr., [1975] 3 S.C.R. 619; Ramana Dayaram Shetty v. The International Airport Authority of India & Anr., [1979] 3 S.C.R. 1014; Managing Director, Uttar Pradesh Ware Housing Corporation & Anr. v. Vinay Narain Vajpayee, [1980] 2 S.C.R. 773; Ajay Hasia etc. v. Khalid Mujib Sehravardi & Ors. etc., [1981] 2 S.C.R. 79; Prakash Rekhi v.

Union of India & Anr., [1981] 2 S.C.R. 111; B.S. Minhas v. Indian Statistical Institute & Ors [1983] 4 S.C.C. 582; Manmohan Singh Jaitla v. Commissioner, Union Territory of Chandigarh & Ors., [1984] Supp. S.C.C. 540; Workmen of Hindustan Steel Ltd. & Anr. v. Hiodustan Steel Ltd. & Ors., [1984] Supp. S.C.C. 554, 560; - P.K. Ramachandra Iyer & Ors. v. Union of India & Ors., [1984] 2 S.C.R. 141; A.L. Kalra v. Project and Equipment Corporation of India Ltd., [1984] 3 S.C.R. 316 and West Bengal State Electricity Board & Ors. v. Desh Bandhu Ghosh & Ors., [1985] 3 S.C.C. 116 followed.

Praga Tools Corporation v. C.A. Imanual & Ors., [1969] 3 S.C.R. 773; State of Bihar v. Union of India & Anr., [1970] 2 S.C.R. 522; S.L. Agarwal v. General Manager, Hindustan Steels Ltd., [1970] 3 S.C.R. 363; Sabhajit Tewary v. Union of India & Ors., [1975] 3 S.C.R. 616; and S.C.

Dhanoa v. Municipal Corporation Delhi & Ors., [1981] 3 S.C.C. 431 distinguished.

Rai Sahib Ram Jewaya Kapur & Ors. v. State of Punjab, [1955] 2 S.C.R. 225; Rajasthan State Electricity Board, Jaipur v. Mohan Lal & Ors., [1967] 3 S.C.R. 377; Gurugobinda Basu v. Sankari Prasad Ghosal & Ors., [1964] 4 S.C.R. 311, 315; Rylands v. Fletcher, [1868 L.R. 3 H.L. 330 and Donoghue v. Stevenson, [1932] A.C. 562 referred to.

2.1 The word "unconscionable" is defined when used with reference to actions as "showing no regard for conscience;

irreconcilable with what is right or reasonable". An unconscionable bargain would, therefore, be one which is irreconcilable with what is right or reasonable. If a contract or term thereof is unconscionable at the time the contract is made, the Court may refuse to enforce the contract. An unconscionable bargain could be brought about by economic duress even between parties who may not in economic terms be situate differently. [355 A; 360 A-B] 288 Pickering v. IIfracombe, [1868] L.R. 3 C.P. 235; Occidental Worldwide Investment Corpn. v. Skibs A/S Avanti, [1976] 1 Llyod's Rep. 293; North Ocean Shipping Co. Ltd. v. Hynddai Construction Co. Ltd., [1979] Q.B. 705; Pao On v. Lau Yin Long, [1980] A.C. 614; and Universe Tankships of Manrovia v. International Transport workers Federation, [1981] 1 C.R.

129 reversed in [1981] 2 W.L.R. 803 referred to.

2.2 According to the doctrine of distributive Justice, distributive fairness and justice in the possession of wealth and property can be achieved not only by taxation but also by regulatory control of private and contractual transactions even though this might involve some sacrifice of individual liberty. [360 C-D] When our Constitution states that it is being enacted to give to all the citizens of India "Justice, Social, economic and political", when clause (I) of Article 38 of the Constitution directs the State to strive to promote the welfare of the people by securing and protecting as effectively as it may a social order in which social, economic and political justice shall inform all the institutions of the national life, when clause (2) of Article 38 directs the State in particular, to minimise the inequalities in income, not only amongst individuals but also amongst group of people residing in different areas or engaged in different vocations and when Article 39 directs the State that it shall, in particular, direct its policy towards securing that the citizens men and women equally, have the right to an adequate means of livelihood and that the operation of the economic system does not result in the concentration of wealth and reasons of production to the common detriment and that there should equal pay for equal work for both men and women, it is the doctrine of distributive justice which is speaking through the words of the Constitution. [361 C-F] Lingappa Pochanna Appelwar v. State of Maharashtra & Anr., [1985] 1 S.C.C. 479 referred to.

2.3 Another theory which has made its emergence in recent years in the sphere of the law of contracts in the test of reasonableness or fairness of a clause in a contract where there is inequality of bargaining power. In such cases it is 289 recognised that the freedom of contract is absent. In such A cases, judicial review is permitted and consequential relief allowed. [361 F-G] Gillespie Brothers & Co. Ltd. v. Roy Bowles Transport Ltd., [1973] 1 Q.B. 400; Lloyds Bank Ltd. v. Bundy, [1974] 3 All. E.R. 757; A. Schroeder music Publishing Co. Ltd. v. Macaulay (Formerely Instone), [1974] 1 W.L.R. 1308; and Levison & Anr. v. Patent Steam Carpet Co. Ltd., [1978] 1 Q.B. 69 referred to.

2.4 Article 14 of the Constitution guarantees to all persons equality before the law and the equal protection of the laws. This principle is that the Courts will not enforce and will, when called upon to do so, strike down an unfair and unreasonable contract, or an unfair and unreasonable clause in a contract entered into between parties who are not equal in bargaining power. The above principle will apply where the inequality of bargaining power is the result of the great disparity in the economic strength of the contracting parties. It will apply where the inequality is the result of circumstances, whether of the creating of the parties or not. It will apply to situations in which the weaker party is in a position in which he can obtain goods or services or means of livelihood only upon the terms imposed by the stronger party or go without them. It will also apply where a man has no choice, or rather no meaningful choice, but to give his assent to a contract or to sign on the dotted line in a prescribed or standard form or to accept a set of rules as part of the contract, however, unfair unreasonable or unconsionable a clause in that contract or form or rules may be. This principle will not apply when the bargaining power of the contracting parties is equal or almost equal. mis principle may not apply where both parties are businessmen and the contract is a commercial transaction. In today's complex world of giant corporations with their vast infrastructural organisations and with the State through its instrumentalities and agencies entering into almost every branch of industry and commerce, there can be myriad situations which result in unfair and unreasonable bargains between parties possessing wholly disproportionate and unequal bargaining power. The Court must judge each case on its own facts and circumstances when called upon to do so by a party under section 31(1) of H the Specific Relief Act, 1963. [370 A-G] 290

2.5 In the vast majority of cases, however, such contracts with unconscionable term are entered into by the weaker party under pressure of circumstances, generally economic, which results in inequality of bargaining power.

Such contracts will not fall within the four corners of the definition of "undue influence" as defined by section 16(1) of the Indian Contract Act. The majority of such contracts are in a standard or prescribed form or consist of a set of rules. They are not contracts between individuals containing terms meant for those individuals alone. Contracts in prescribed or standard forms or which embody a set of rules as part of the contract are entered into by the party with superior bargaining power with a large number of persons who have far less bargaining power or no bargaining power at all. Such contracts which affect a large number of persons or a group or groups of persons, if they are unconscionable, unfair and unreasonable are injurious to the public interest. To say such a contract is only voidable would be to compel each person with whom the party with superior bargaining power had contracted to go to Court to have the contract adjudged voidable. This would only result in multiplicity of litigation which no Court should encourage and also would not be in public interest. Such a contract or such a clause in a contract ought, therefore, to be adjudged void under section 23 of the Indian Contract Act , as opposed to public policy. [371 C-H]

2.6 The Indian Contract Act does not define the expression "public policy" or "opposed to public policy".

From the very nature of things, such expressions 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 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. The principles governing public policy must be and are 291 capable on proper occasion, of expansion or modification.

Practices which were considered perfectly normal at one time have today become abnoxious 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 declares such practice to be opposed to public policy. Above all, in deciding any case which may not be covered by authority Indian 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. [372 A- D; 373 C-E] The normal rule of Common Law has been that a party who seeks to enforce an agreement which is opposed to public policy will be non-suited. The types of contracts to which the principle formulated in this case applies are not contracts which are tainted with illegality but are contracts which contain terms which are so unfair and unreasonable that they shock the conscience of the Court.

They are opposed to public policy and required to be adjudged void. [373 F; 374 D-E] A. Schroeder Music Publishing Co. Ltd. v. Macaulay (Formerely Instone), [1974] 1 W.L.R. 1308; Janson v.

Driefontein Consolidated Mines Limited, [1902] A.C. 484, 500; Richardson v. Mellish [1824] 2 Bing. 229, 252; s.c. 130 E.R. 294, 303 and [1824-34] All E.R. Reprint 258, 266;

Enderby Town Football Club Ltd. v. Football Association Ltd., [1971] Ch. 591, 606; and Kedar Nath Metani & Ors. v. Prahlad Bai & Ors., [1960] 1 S.C.R. 861 referred to.

3.1 Rule 9(i) of the Central Inland Water Transport Corporation Ltd. (A Government of India Undertaking) Service, Discipline and Appeal Rules, 1979 confers upon the corporation the power to terminate the service of a permanent employee by giving him three months' notice in writing or in lieu thereof to pay him the equivalent of three months' basic v pay and dearness allowance. A clause such as Rule 9(1) in a contract of employment affecting large sections of the public is harmful and injurious to the public interest for it tends to create a sense of insecurity in the minds of those to whom it applies and consequently it is against the public good.

292 Such a clause, which apply be described as "the Henry VIII clause", therefore, is opposed to public policy and being opposed to public policy it is void under section 23 of the Indian Contract Act . It confers absolute and arbitrary power upon the corporation. It does not even state who on behalf of the Corporation is to exercise that power. There are no guidelines whatever laid down to indicate in what circumstances the power given by rule 9(i) is to be exercised by the Corporation. No opportunity whatever of an hearing is at all to be afforded to the permanent employee whose services is being terminated in the exercise of this power. Even where the corporation could proceed under Rule 36 and dismiss an employee on the ground of misconduct after holding a regular disciplinary inquiry, it is free to resort instead to Rule 9(i) in order to avoid the hassle of an inquiry. [375 H; 376 A-B; G-H; 377 E-F] West Bengal State Electricity Board & Ors. v. Desh Bandhu Ghosh & Ors., [1985] 3 S.C.C. 116; Union of India etc. v. Thusiram Patel etc., [1985] 3 S.C.C. 398 and Swadeshi Cotton Mills V. Union of India, [1981] 2 S.C.R. 533, 591.

3.2 The power conferred by Rule 9(i) is not only arbitrary but is also discriminatory, for it enables the corporation to discriminate between employee and employee.

It can pick up one employee and apply to him clause (i) of Rule 9. It can pick up another employee and apply to him clause (ii) of Rule 9. It can pick up yet another employee and apply to him sub-clause (iv) of clause (b) of Rule 36 read with Rule 38 and to yet another employee it can apply Rule 37. All this the corporation can do when the same circumstances exist as would justify the corporation in holding under Rule 38 a regular disciplinary inquiry into the alleged misconduct of the employee. In the instant case, both the contesting Respondents had, in fact been asked to submit their explanation to the charges made against them.

Sen Gupta had been informed that a disciplinary inquiry was proposed to be held in his case. The charges made against both the Respondents were such that a disciplinary inquiry could easily have been held. It was, however, not held but instead resort was had to rule 9(i). [378 C-E] Employees cannot be equated with goods which can be bought and sold. It is equally not possible to equate a contract of employment with a mercantile transaction between 293 two businessmen and much less to do so when the contract of employment is between a powerful employer and a weak employee. [379 E-F]

3.2 It is true that there is mutuality in clause 9(i) the same mutuality as in a contract between the lion and the lamb that both will be free to roam about in the jungle and each other will be at liberty to devour the other. When one considers the unequal position of the corporation and its employees, the argument of mutuality becomes laughable. [380 A-B]

3.3 Rule 9(i) is both arbitrary and unreasonable and it also wholly ingonre and sets aside the audi alteram partem rule, it, therefore, violates Article 14 of the Constitution to the extent that it confers upon the corporation the right to terminate the employment of a permanent employee by giving him three months' notice in writing or by paying him the equivalent of three months' basic pay and dearness allowance in lieu of such notice. [381 D; 387 B-C] As the corporation is "the State" within the meaning of Article 12, it was amenable to the writ jurisdiction of the High Court under Article 226. It is now well-established that an instrumentality or agency of the State being "the State" under Article 12 of the Constitution is subject to the Constitutional limitations, and its actions are State actions and must be judged in the light of the Fundamental Rights guaranteed by Part III of the Constitution. The actions of an instrumentality or agency of the State must, therefore, be in conformity with Article 14 of the Constitution. [380 D-F] Sukhdev singh & Ors. v. Bhagatram Sardar Singh Raghuvanshi & Anr., [1975] 3 S.C.R. 619; Ramana Dayaram Shetty v. The International Airport Authority of India & Ors., [1979 3 S.C.R. 1014; Ajay Hasia etc. v. Khalid Mujib Sehravardi & Ors. etc., [1981] 2 S.C.R. 79; and Union of India v. Thulsiram Patel etc., [1985] 3 S.C.C. 398 referred to.

Radhakrishna Agarwal & Ors. v. State of Bihar & Ors., [1977] 3 S.C.R. 249 distinguished.

OBSERVATION 294 the purposes of both Part III and Part IV of the Constitution, State actions, including actions of the instrumentalities and agencies of the State, must not only be in conformity with the Fundamental Rights guaranteed by Part III but must also be in accordance with the Directive Principles of State Policy prescribed by Part IV. Clause (a) of Article 39 provides that the State shall, in particular, direct its policy towards "securing that the citizens, men and women, equally have the right to adequate means of livelihood." Article 41 requires the State, within the limits of its economic capacity and development, to "make effective provision for securing the right to work." An adequate means of livelihood cannot be secured to the citizens by taking away without any reason the means of livelihood. The mode of making "effective provision for securing the right to work" cannot be by giving employment to a person and then without any reason throwing him out of employment. The action of an instrumentality or agency of the State, if it frames a service rule such as clause (a) of Rule 9 or a rule analogous thereto would, therefore, not only be violative of Article 14 but would also be contrary to the Directive Principles of State Policy contained in clause (a) of Article 39 and in Article 41. [385 F-H; 386 A- B] (2) Rule 9 also confers upon a permanent employee the right to resign from the service of the Corporation. By entering into a contract of employment a person does not sign a bond of slavery and a permanent employee cannot be deprived of his right to resign. A resignation by an employee, would, however, normally require to be accepted by the employer in order to be effective. It can be that in certain circumstances an employer would be justified in refusing to accept the employee's resignation as, for instance, when an employee wants to leave in the middle of a work which is urgent or important and for the completion of which his presence and participation are necessary. An employer can also refuse to accept the resignation when there is a disciplinary inquiry pending against the employee. In such a case, to permit an employee to resign would be to allow him to go away from the service and escape the consequences of an adverse finding against him in such an inquity. There can also be other grounds on which an employer would be justified in not accepting the resignation of an employee. The Corporation ought to make suitable provisions in that behalf in the said Rules. [386 D-G] 295

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 4412 & 4413 of 1985.

From the Judgment and Order dated 9.8.1985 of the Calcutta High Court in F.M.A.T. No. 1604 and 649 of 1983.

Shanti Bhushan, Subrata Ray and A.K. Sil for the Appellants.

Dr. Y.S. Chitale, H.K. Puri, G.A. Shah, Mrs. Anil Katiyal, C.V. Subba Rao and R.N. Poddar for the Respondents.

Mridul Ray and K. Swami for the Interveners.

The Judgment of the Court was delivered by MADON, J. These Appeals by Special Leave granted by this Court raise two questions of considerable importance to Government companies and their employees including their officers. These questions are 1) Whether a Government company as defined in section 617 of the Companies Act, 1956, is "the State" within the meaning of Article 12 of the Constitution? 2) Whether an unconscionable term in a contract of employment is void under section 23 of the Indian Contract Act, 1872 , as being opposed to public policy and, when such a term is contained in a contract of employment entered into with a Government company, is also void as infringing Article 14 of the Constitution in case a Government company is "the State" under Article 12 of the Constitution? Although the record of these Appeals is voluminous, the salient facts lie within a narrow compass. The First Appellant in both these Appeals, namely, the Central Inland Water Transport Corporation Limited (hereinafter referred to in short as "the Corporation"), was incorporated on February 22, 1967. The majority of the shares of the Corporation were at all times and still are held by the Union of India which is 296 the Second Respondent in these Appeals, and the remaining shares were and are held by the State of West Bengal and the State of Assam. Section 617 of the Companies Act, 1959 (Act No.l of 1956), provides as follows :

"617. Definition of 'Government Company'.- For the purposes of this Act Government company means any company in which not less than fifty-one per cent of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments and includes a company which is a subsidiary of a Government company as thus defined." As all the shares of the Corporation are held by different Governments, namely, the Government of India and the Governments of West Bengal and Assam, the Corporation is not only a Government company as defined by the said section 617 but is a company wholly owned by the Central Government and two State Governments.

Clause III(A) of the Memorandum of Association of the Corporation lists the main objects of the Corporation and clause III(B) of the Memorandum of Association lists the objects incidental or ancillary to the main objects. It is unnecessary to reproduce all these objects for according to the Petitions filed by the Corporation for obtaining Special Leave in these Appeals, it is currently engaged in carrying out the following activities, namely, (i) maintaining and running river service with ancillary function of maintenance and operation of river-site jetty and terminal;

(ii) constructing vessels of various sizes and descriptions;

(iii) repairing vessels of various sizes and descriptions; and (iv) undertaking general engineering activities.

297 Article 4 of the Articles of Association of the Corporation provides that the Corporation is a private company within the meaning of clause (iii) of sub-section (1) of section 3 of the Companies Act and that no invitation is to be issued to the public to subscribe for any shares in, or debentures or debenture stock of, the Corporation.

Article 51 of the Articles of Association confers upon the President of India the power to issue from time to time such directions or instructions as he may consider necessary in regard to the affairs or the conduct of the business of the Corporation or of the Directors thereof. The said Article also confers upon the President the power to issue such directions or instructions to the Corporation as to the exercise and performance of its functions in matters involving national security or public interest. Under the said Article, the Directors of the Corporation are bound to comply with and give immediate effect to such directions and instructions. Under Article 51A, the President has the power to call for such returns, accounts and other information with respect to properties and activities of the Corporation as might be required from time to time. Under Article 40, subject to the provisions of the Companies Act and the directions and instructions issued from time to time by the President under Article 51, the business of the Corporation is to be managed by the Board of Directors. Under Article 14(a), subject to the provisions of section 252 of the Companies Act, the President is to determine in writing from time to time the number of Directors of the Corporation which, however is not to be less than two or more than twelve and under Article 14(b), at every annual general meeting of the Corporation, every Director appointed by the President is to retire but is eligible for re-appointment.

Under Article 15(a), the President has the power at any time and from time to time to appoint any person as an Additional Director. Under Article 16, the President has the power to remove any Director appointed by him from office at any time in his absolute discretion. Under Article 17, the vacancy in the office of a Director appointed by the President caused by retirement, removal, resignation, death or otherwise, is to be filled by the President by fresh appointment. Article 18 provides that the Directors are not required to hold any share qualification. Under Article 37, the President may from time to time appoint one of the Directors to the office of the Chairman of the Board of 298 Directors or to the office of the Managing Director or to both these offices for such time and at such remuneration as the President may think fit and the President may also from time to time remove the person or persons so appointed from service and appoint another or others in his or their place or places. Under Article 41, the Chairman of the Board has the power, on his own motion, and is bound, when requested by the Managing Director in writing, to reserve for the consideration of the President the matters relating to the working of the Corporation set out in the said Article.

Article 42 lists the matters in respect of which prior approval of the President is required to be obtained. Under Article 47, the auditor or auditors of the Corporation are to be appointed or re-appointed by the Central Government on the advice of the Comptroller and Auditor-General of India.

The said Article also confers power upon the Comptroller and Auditor-General of India to direct the manner in which the accounts of the corporation are to be audited and to give the auditors instructions in regard to any matter relating to the performance of their function. Under the said Article, he has also the power to conduct a supplementary or test audit of the accounts of the Corporation by such person or persons as he may authorize in that behalf and for the purposes of such audit to require such information or additional information to be furnished to such person or persons on such matters by such person or persons as the Comptroller and Auditor-General may, by general or special order, direct.

Under clause (V) of the Memorandum of Association, the authorized share capital was rupees four crores. It was raised to rupees ten crores by a special resolution passed at the Annual General Meeting of the Corporation held on December 30, 1972, and further raised to rupees twenty crores by a special resolution passed at the Annual General Meeting held on November 5, 1979.

The above facts and the provisions aforementioned of the Memorandum of Association and the Articles of Association clearly show that not only is the Corporation a Government company of which all the shares were and are owned by the Central Government and two State Governments but is a Government company which is under the complete control and management of the Central Government.

299 A company called the "Rivers Steam Navigation Company Limited" was carrying on very much the same business including the maintenance and running of river service as the Corporation is doing. A Scheme of Arrangement was entered into between the said company and the Corporation.

The Calcutta High Court by its order dated May 5, 1967, approved the said Scheme of Arrangement and order the closure of the said Company and further directed that upon payment to all the creditors of the said Company, the said Company would stand dissolved without winding up by an order to be obtained from the High Court and accordingly, upon payment to all the creditors, the said Company was ordered to be dissolved. The said Scheme of Arrangement provided that the assets and certain liabilities of the said Company would be taken over by the Corporation. The said Scheme of Arrangement as approved by the High Court also provided as follows :

"a) That the new Company shall take as many of the existing staff or labour as possible and as can be reasonably taken over by the said transferee Company subject to any valid objection to any individual employee or employees.

b) That as to exactly how many can be employed it is left to the said transferee Company's bona fide discretion.

c) That those employees who cannot be taken over shall be paid by the transferor Company all moneys due to them under the law and all legitimate and legal compensations payable to them either under Industrial Disputes Act or otherwise legally admissible and that such moneys shall be provided by the Government of India to the existing transferor Company who will pay these dues." The First Respondent in Civil Appeal No. 4412 of 1985, Brojo Nath Ganguly, was, at the date when the said Scheme of Arrangement became effective, working in the said Company and his services were taken over by the Corporation and he was appointed on September 8, 1967, as a Deputy Chief Accounts Officer. The First Respondent in Civil Appeal No.

4413 of 1985, Tarun Kanti Sengupta, was also working in the said 300 Company and his services were also taken over by the Corporation and he was appointed on September 8, 1967, as Chief Engineer on the ship "River Ganga". It is unnecessary to refer at this stage to the terms and conditions of the letters of appointment issued to these two Respondents as they have been subsequently superseded by service rules framed by the Corporation except to state that under the said letters of appointment the age of superannuation was fifty-five years unless the Corporation agreed to retain them beyond this period. The said letters of appointment also provided that these Respondents would be subject to the service rules and regulations including the conduct rules.

Service rules were framed by the Corporation for the first time in 1970 and were replaced by new rules in 1979.

We are concerned in these Appeals with the "Central Inland Water Transport Corporation Ltd. Service Discipline and Appeal Rules" of 1979 framed by the Corporation. These rules will hereinafter be referred to in short as "the said Rules". The said Rules apply to all employees in the service of the Corporation in all units in West Bengal, Bihar, Assam or in other State or Union Territory except those employees who are covered by the Standing Orders under the Industrial Employment (Standing Orders) Act, 1946, or those employees in respect of whom the Board of Directors has issued separate orders. Rule 9 of the said Rules deals with termination of employment for acts other than misdemeanour.

The relevant provisions of the said Rule 9 relating to permanent employees are as follows :

"9. TERMINATION OF EMPLOYMENT FOR ACTS OTHER THAN

MISDEMEANOUR. - (i) The employment of a permanent employee shall be subject to termination on three months' notice on either side. The notice shall be in writing on either side. The Company may pay the equivalent of three months' basic pay and dearness allowance, if any, in lieu of notice or may deduct a like amount when the employee has failed to give due notice.

(ii) The services of a permanent employee can be terminated on the grounds of "Services no longer 1 required in the interest of the Company" without 301 assigning any reason. A permanent employee whose services are terminated under this clause shall be paid 15 days' basic pay and dearness allowance for each completed year of continuous service in the Company as compensation. In addition he will be entitled to encashment of leave at his credit." B Under Rule 10, an employee is to retire on completion of the age of fifty-eight years though in exceptional cases and in the interest of the Corporation, an extension may be granted with the prior approval of the Chairman-cum-Managing Director and the Board of Directors. Rule 11 provides as follows :

"11. RESIGNATION. - Employees who wish to leave the Company's services must give the Company the same notice as the Company is required to give them under Rule 9." Rule 33 provides for suspension of an employee where a disciplinary proceeding against him is contemplated or is pending or where a case against him in respect of any criminal offence is under investigation or trial. Rule 34 provides for payment of subsistence allowance during the period of suspension. Rule 36 sets out the different penalties which can be imposed on an employee for his misconduct. These penalties are divided into minor and major penalties. Rule 37 is as follows :

"37. ACTS OF MISCONDUCT.-

Without prejudice to the general meaning of the term 'misconduct' the Company shall have the right to terminate the services of any employee at any time without any notice if the employee is found guilty of any insubordination, intemperance or other misconduct or of any breach of any rules pertaining to service or conduct or non- performance of his duties." Rule 38 prescribes the procedure for imposing a major penalty and sets out in detail how a disciplinary inquiry is to be held. Rule 39 provides for action to be taken by the H 302 disciplinary authority on the report made by the Inquiring Authority. Rule 40 prescribes the procedure to be followed for imposing minor penalties. Rule 43 provides for a special procedure to be followed in certain cases. This special procedure consists of dispensing with a disciplinary inquiry altogether. The said Rule 43 provides as follows :

"43. SPECIAL PROCEDURE IN CERTAIN CASES. - Notwithstanding anything contained in Rule 38, 39 or 40, the disciplinary authority may impose any of the penalties specified in Rule 36 in any of the following circumstances :

i) The employee has been convicted on a criminal charge, or on the strength of facts or conclusions arrived at by a judicial trial; or ii) where the disciplinary authority is satisfied for reasons to be recorded by it in writing that it is not reasonably practicable to hold an inquiry in the manner Provided in these Rules; or iii) where the Board is satisfied that in the interest of the security of the Corporation Company, it is not expedient to hold any inquiry in the manner provided in these rules." Rule 45 provides for an appeal against an order imposing penalty to the appropriate authority specified in the Schedule to the said Rules and Rule 45-A provides for a review.

We are concerned in these Appeals with the validity of clause (i) of Rule 9 only.

So far as Ganguly, the First Respondent in Civil Appeal No. 4412 of 1985, is concerned, he was promoted to the post of Manager (Finance) in October 1980 and also acted as General Manager (Finance) from November 1981 to March 1982.

On February 16, 1983, a confidential letter was sent to him by the General Manager (Finance), who is the Third Appellant in Civil Appeal No. 4412 of 1985, to reply within twenty- four hours to the allegation of negligence in the maintenance of 303 Provident Fund Accounts. Ganguli made a representation as also gave a detailed reply to the said show cause notice.

Thereafter by a letter dated February 26, 1983, signed by the Chairman-cum-Managing Director of the Corporation, a notice under clause (i) of Rule 9 of the said Rules was given to Ganguli terminating his service with the Corporation with immediate effect. Along with the said letter a cheque for three months' basic pay and dearness allowance was enclosed.

So far as Sengupta, the First Respondent in Civil Appeal No. 4413 of 1985, is concerned, he was promoted to the post of General Manager (River Services) with effect from January 1, 1980. His name was enrolled by the Bureau of Public Enterprises and he was called for an interview for the post of Chairman-cum-Director of the Corporation by the Public Enterprises Selection Board. According to Sengupta, he could not appear before the Selection Board as he received the letter calling him for the interview after the date fixed in D that behalf. According to Sengupta, the new Chairman-cum-Managing Director who was selected at the said interview bore a grudge against him for having competed against him for the said post and on February 1, 1983, he issued a charge-sheet against Sengupta intimating to him that a disciplinary inquiry was proposed to be held against him under the said Rules and calling upon him to file his written statement of defence. By his letter dated February 10, 1983, addressed to the Chairman-cum-Managing Director, Sengupta denied the charges made against him and asked for inspection of documents and copies of statements of witnesses mentioned in the said charge-sheet. By a letter dated February 26, 1983, signed by the Chairman-cum-Managing Director notice was given to Sengupta under clause (i) of Rule 9 of the said Rule, terminating his service with the Corporation with immediate effect. Along with the said letter a cheque for three months' basic pay and dearness allowance in lieu of notice was enclosed. G Both Ganguly and Sengupta filed writ petitions in Calcutta High Court under Article 226 of the Constitution challenging the termination of their service as also the validity of the said Rule 9(i). In both these writ petitions rule nisi was issued and an ex parte interim order staying 304 the operation of the said notice of termination was passed by a learned Single Judge of the High Court. The Appellants before us went in Letters Patent Appeal before a Division Bench of the said High Court against the said ad interim orders, the appeal in the case of Ganguly being F.M.A.T. No. 1604 of 1983 and in the case of Sengupta being F.M.A.T. No. 649 of 1983. On January 28, 1985, the Division Bench ordered in both these Appeals that the said writ petitions should stand transferred to and heard by it along with the said appeals. The said appeals and writ petitions were thereupon heard together and by a common judgment delivered on August 9, 1985, the Division Bench held that the Corporation was a State within the meaning of Article 12 of the Constitution and that the said Rule 9(i) was ultra vires Article 14 of the Constitution. Consequently the Division Bench struck down the said Rule 9(i) as being void. It also quashed the impugned orders of termination dated February 26, 1983. It is against the said judgment and orders of the Calcutta High Court that the present Appeals by Special Leave have been filed.

The contentions raised on behalf of the Corporation at the hearing of these Appeals may be thus summarized :

(1) A Government company stands on a wholly different footing from a statutory corporation for while a statutory corporation is established by a statute, a Government company is incorporated like any other company by obtaining a certificate of incorporation under the Companies Act and, therefore, a Government company cannot come within the scope of the term "the State" as defined in Article 12 of the Constitution.

(2) A statutory corporation is usually established in order to create a monopoly in the State in respect of a particular activity. A Government company is, however, not established for this purpose.

(3) The Corporation does not have the monopoly of inland water transport but is only a trading company as is shown by the objects clause in its u Memorandum of Association.

305 (4) Assuming a Government company is "the State" within the meaning of Article 12, a contract of employment entered into by it is like any other contract entered into between two parties and a term in that contract cannot be struck down under Article 14 of the Constitution on the ground that it is arbitrary or unreasonable or unconscionable or one-sided or unfair.

At the hearing of these Appeals the Union of India, which is the Second Respondent in these Appeals, joined in the contentions raised by the Corporation.

The arguments advanced on behalf of the contesting Respondents in broad outlines were as follows :

(1) The definition of the expression "the State" given in Article 12 is wide enough to include within its scope and reach a Government company.

(2) A State is entitled to carry on any activity, even a trading activity, through any of its instrumentalities or agencies, whether such instrumentality or agency be one of the Departments of the Government, a statutory corporation, a statutory authority or a Government company incorporated under the Companies Act.

(3) Merely because a Government company carries on a trading activity or is authorized to carry on a trading activity does not mean that it is excluded from the definition of the expression "the State" contained in Article 12.

(4) A Government company being "the State" within , the meaning of Article 12 is bound to act fairly J and reasonably and if it does not do so, its action can be struck down under Article 14 as being arbitrary.

(5) A contract of employment stands on a different footing from other contracts. A term in a contract of employment entered into by a private employer H 306 which is unfair, unreasonable and unconscionable is bad in law. Such a term in a contract of employment entered into by the State is, therefore, also bad in law and can be struck down under Article 14.

During the course of the hearing of these Appeals the Central Inland Water Transport Corporation Officers' Association made an application for permission to intervene in these Appeals and permission to intervene was granted to it by this Court. The said Association supported the stand taken by the contesting Respondents.

We will now examine the correctness of the rival submissions advanced at the Bar.

The word "State" has different meanings depending upon the context in which it is used. In the sense of being a polity, it is defined in the Shorter Oxford English Dictionary, Third Edition, Volume II, page 2005, as "a body of people occupying a defined territory and organized under a sovereign government". The same dictionary defines the expression "the State" as "the body politic as organized for supreme civil rule and government; the political organization which is the basis of civil government; hence, the supreme civil power and government vested in a country or nation". According to Black's Law Dictionary, Fifth Edition, page 1262, "In its largest sense, a 'state' is a body politic or a society of men". According to Black, the term "State" may refer "either to the body politic of a nation (e.g. United States) or to an individual governmental unit of such nation (e.g. California)". In modern international practice, whether a community is