The appellant, aggrieved by the judgment and
order dated 13.6.2002 passed by the Division Bench
of the Kerala High Court in Writ Appeal No.1734 of 1995 setting aside the judgment and order dated
4.8.1995 passed by learned Single Judge of the
said High Court in Original Petition No.12514 of
1994; whereby it had directed for refund of an
amount of Rs.7,68,600/- along with interest, is
before us with the leave of the Court.
The appellant, Mary was a successful bidder
in an auction conducted on 24.3.1994 for sale of
privilege to vend arrack in Shop Nos. 47 to 55 and
57 in Kalady Range –III for the period 1.4.1994 to
31.3.1995. Her bid was for a sum of
Rs.25,62,000/-. The sale of the privilege to vend
arrack is governed by the Kerala Abkari Shops
(Disposal in Auction) Rules, 1974 (hereinafter
referred to as ‘the Rules’). The officer
conducting the sale declared the appellant to be
the ‘auction purchaser’ in terms of Rule 5(8) of
the Rules. Being declared as auction purchaser,
she deposited 30% of the bid amount i.e.
Rs.7,68,600/- on the same date and executed a temporary agreement in terms of Rule 5(10) which was subject to confirmation by the Board of
Revenue. Rule 5(19) makes this deposit as security
for due performance of the conditions of licence.
Kalady is the holy birth place of Adi
Sankaracharya and adjoining thereto existed a
Christian pilgrim centre associated with St.
Thomas. The residents of those areas objected to
the running of any abkari shop. A large number of
people collected and offered physical resistance
to the opening of the abkari shops and the law and
order enforcing agency could not assure smooth
conduct of business. The aforesaid circumstances
led the appellant to believe that it was
impossible for her to run the arrack shop in the
locality in question. The appellant, therefore, by
her letter dated 3.4.1994 addressed to the Board
of Revenue, District Collector and Assistant
Commissioner of Excise, informed them that
because of mass movement it was not possible for
her to open and run the shops. Accordingly, she
requested them not to confirm the sale in her
favour as it was impossible for her to execute the privilege for the reasons beyond her control. She
also requested that the proposed contract may be
treated as rescinded. She further reserved her
right to claim refund of the security amount.
There is nothing on record to show that after the
appellant refused to carry out her obligations,
the State Government took any step to re-sell or
re-dispose the arrack shops in question.
Notwithstanding that, the Excise Inspector
of Kalady Range sent a notice dated 8.4.1994 to
the appellant, inter alia, stating that the sale
has already been confirmed in her favour. The
appellant was asked to accept the confirmation
notice and enter into a permanent agreement. By
the said notice the Excise Inspector also called
upon the appellant to show cause as to why further
proceedings as contemplated under the Rules should
not be initiated against her. The appellant filed
her reply to show cause on 17.4.1994 reiterating
her inability to run the arrack shops and further requested that all proceedings pursuant to the auction held on 24.3.1994 be cancelled and the
amount already deposited by her be refunded to
her. It seems that the cause shown by the
appellant did not find favour with the authority
and the Assistant Excise Commissioner, by notice
dated 20.4.1995, called upon the appellant to pay
a sum of Rs.33,41,400/- towards the balance amount
payable by her, together with interest at the rate
of 18% thereon. Revenue recovery notice dated
30.6.1995 was also issued for realisation of the
aforesaid amount. The appellant challenged the
aforesaid notices issued to her in a writ petition
filed before the Kerala High Court which was
registered as Original Petition No.9976 of 1995
(Mary vs. State of Kerala & Others). While
challenging the aforesaid notices and further
proceedings, the appellant contended that Rule
5(15) and 5(16) are arbitrary and violative of
Article 14 of the Constitution of India. The
appellant filed another writ petition, inter alia,
praying for direction to the State authorities to
refund an amount of Rs.7,68,600/- paid by her as initial deposit.JUDGMENTThis writ petition was registered
as Original Petition No.12514 of 1994 (Mary vs.
State of Kerala & Others).
Both the writ petitions were heard together
and the learned Single Judge vide judgment dated
4.8.1995 allowed both the writ petitions. The
learned Single Judge quashed the notices and all
the proceedings initiated against the appellant
and further directed the refund of the amount of
Rs.7,68,600/- deposited by her along with
interest. However, learned Single Judge did not
strike down Rule 5(15) and 5(16). While doing so,
learned Single Judge observed as follows:
“15. The undisputed and
uncontroverted facts as appearing
above clearly attract the doctrine of
frustration and impossibility leading
to the conclusion that the contract
from its inception becomes void and
discharged. Consequently, it is
needless to consider and decide other
contentions urged as regards
excesses of delegated legislation in
the forms of the rules, as they are
unnecessary altogether in view of the
above conclusion. Both these
petitions succeed accordingly.”
The State of Kerala and its functionaries, aggrieved by the aforesaid judgment, preferred
separate appeals. Both the appeals were heard
together and disposed of by a common judgment.
Writ Appeal No.1722 of 1995, filed against the
recovery of the balance amount was dismissed.
While allowing Writ Appeal No.1734 of 1995 which
was against the direction of the learned Single
Judge for refund of the initial deposit, the
Division Bench held that the State is justified in
forfeiting the said amount in view of Rule 5(15).
While doing so, the Division Bench observed as
follows:
“8………However, where there are
statutory provisions, the contractual
terms are defined by the statutory
provisions which must govern the
relationship between the parties.
Where the statute governs the
relationship, it is the statutory
terms which have to be applied for
deciding the disputes between the
parties. In this view of the matter,
particularly when the contention of
invalidity of sub-rule (15) and (16)
of Rule 5 was negatived by the
learned Single Judge, we are of the
view that the rights and liabilities
between the parties have to be worked
out purely in accordance with the
applicable rules.”
Accordingly, the Division Bench found that
the offer of the appellant having been accepted,
same could not have been withdrawn. For coming to
the aforesaid conclusion, the High Court placed
reliance on sub-rules (10)&(15) of Rule 5 and
observed as follows:
“10. It is on the basis of these
rules that the rights of the parties
have to be determined. These rules
really form the substratum of the
contract between the parties, though
all disputes arising between the
parties have to be resolved in
accordance with the principles of
contract law, taking the rules as
forming the basic contract between
the parties. That the accepted offer
is incapable of being withdrawn, is
clear from the provisions under sub-
rule(10) of Rule 5. The first
respondent, therefore, could not have
purported to withdraw the offer or
rescind the contract by letter dated
3.4.1994. That the first respondent
did not carry out several obligations
as provided in sub-rule (10) of Rule
5 is also beyond dispute.
Consequently, by reason of sub-
rule(15) of Rule 5 of the Rules, the
State was entitled to forfeit the
entire deposit amount of
Rs.7,68,600/-. Thus far, there is no
difficulty. “
In the present appeal, we have been called JUDGMENT upon to examine the validity of this part of the
judgment whereby the Division Bench held that the
State was entitled to forfeit the entire deposited
amount of Rs. 7,68,600/-.
We have heard Ms. Neha Aggarwal for the
appellant and Ms. Mukta Chowdhary for respondents.
Ms. Aggarwal contends that the appellant could not
carry out her obligation as it became impossible
in view of the mass movement and resistance which
State could not contain. In this connection, she
has drawn our attention to Section 56 of the
Contract Act. In support of the submission
reliance has also been placed on a decision of
this Court in the case of Sushila Devi v. Hari
Singh, (1971) 2 SCC 288, and our attention has
been drawn to Paragraph 11 of the judgment which
reads as follows:
“11. In our opinion on this point the
conclusion of the appellate court is
not sustainable. But in fact, as
found by the Trial Court as well as
by the appellate court, it was
impossible for the plaintiffs to even
get into Pakistan. Both the Trial
Court as well as the appellate court JUDGMENT
have found that because of the
prevailing circumstances, it was
impossible for the plaintiffs to
either take possession of the
properties intended to be leased or
even to collect rent from the
cultivators. For that situation the
plaintiffs were not responsible in
any manner. As observed by this Court
in Satyabrata Ghose v. Mugneeram
Bangur and Co.,(1954) SCR 310, the
doctrine of frustration is really an
aspect or part of the law of
discharge of contract by reason of
supervening impossibility or
illegality of the act agreed to be
done and hence comes within the
purview of Section 56 of the Indian
Contract Act. The view that Section
56 applies only to cases of physical
impossibility and that where this
section is not applicable recourse
can be had to the principles of
English law on the subject of
frustration is not correct. Section
56 of the Indian Contract Act lays
down a rule of positive law and does
not leave the matter to be determined
according to the intention of the
parties. The impossibility
contemplated by Section 56 of the
Contract Act is not confined to
something which is not humanly
possible. If the performance of a
contract becomes impracticable or
useless having regard to the object
and purpose the parties had in view
then it must be held that the
performance of the contract has
become impossible. But the
supervening events should take away
the basis of the contract and it
should be of such a character that it
strikes JUDGMENTat the root of the contract.”
Yet another decision on which Ms. Aggarwal
has placed reliance is the decision of this Court
in Har Prasad Choubey v. Union of India, (1973) 2
SCC 746, in Paragraph 9 whereof it has been held
as follows:
“9. This elaborate narration would make it clear that the appellant had bid for the coal under the honest and reasonable impression that he would be allowed to transport the coal to Ferozabad, that this was thwarted by the attitude of the Coal Commissioner, that later on the parties proceeded on the basis that the auction sale was to be cancelled and the appellant refunded his money. But apparently because by that time much of the coal had been lost and the Railways would have been in difficulty to explain the loss they chose to deny the appellant's claim. We can see no justification on facts for such a denial and the defendants cannot refuse to refund the plaintiff's amount. The contract had become clearly frustrated. We must make it clear that we are not referring to the refusal to supply wagons but the refusal of the Coal Commissioner to allow the movement of coal to Ferozabad in spite of the fact that it was not one of the conditions of the auction. The appellant is, therefore, clearly entitled to the refund of his money. Furthermore, the contract itself notbeing in accordance with Section 175 of the Government of India Act is void and the appellant is entitled to the refund of his money. We are unable to understand the reasoning of the High Court when it proceeds as though the appellant was trying to enforce the contract. We can see no justification for the lower Court refusing to allow interest for the plaintiff's amount at least from the date of his demand, or the latest from the date of suit.”
Ms. Chowdhary, however, contends that in the
case in hand, the terms and conditions for grant
of privilege is governed by the Rules and in view
of specific consequences provided for non-
compliance of the terms and conditions of the
contract i.e. forfeiture of the security money,
the Division Bench of the High Court has not
committed any error in holding that the State was
entitled to forfeit the entire deposit.
In view of the rival submission we deem it
expedient to go through the relevant rules. Rule
2(a) defines Abkari shop to include an arrack shop
with which we are concerned in the present appeal.
Chapter IV of the Rules provides for general conditions applicable to sale of Abkari shops. It
consists of only one Rule i.e. Rule 5 but it has
22 sub-rules. Sub-rule 15 of Rule 5 reads as
follows:
(15) In addition to the solvency
certificate and cash security
mentioned in sub-rule(10) the auction
purchaser shall furnish such personal sureties as may be required of him to the satisfaction of the Assistant Excise Commissioner. The Board of Revenue may, if in their opinion it is necessary, require the auction purchaser to furnish additional cash security as may be fixed by them at the time of confirmation. The auction purchaser shall also execute a permanent agreement in Form No. 11 appended to these rules and take out necessary licence before installation of the shop or shops. On the failure of the auction purchaser to make such deposit referred to in sub-rule (10) or take out such licence or execute such agreement temporary or permanent or furnish such personal surety or additional cash security as aforesaid, the deposit already made by him towards earnest money and security shall be forfeited to Government and the shop resold or otherwise disposed of by the Assistant Excise Commissioner subject to confirmation by the Board of Revenue. Disposal otherwise includes closure or departmental management. In the case of death of an auction purchaser before the execution of the permanent agreement, the same shall be obtained from the heirs of the deceased unless the Assistant Excise Commissioner subject to the confirmation by the Board of Revenue cancels the contract. In the case of death of an auction purchaser after confirmation of the sale of the shop or shops, his heirs, if any, shall be required to produce the necessary legal evidence in support of their claim and on production of the same the shop shall be transferred to them
and pending such transfer the shop
shall be run on departmental
management. It is open to the
Assistant Excise Commissioner to call
upon them to furnish additional
security, if in his opinion it is
necessary for the successful working
of the contract. If the heirs fail
to produce within a period of one
month from the date of death of the
auction purchaser the necessary
evidence in support of their claim or
to deposit the additional security
required, the Assistant Excise
Commissioner shall order the re-sale
of the shop or shops or otherwise
dispose of the shop or shops at the
risk of the original purchaser
subject to confirmation by the Board
of Revenue.
(underlining ours)
From a plain reading of the aforesaid
provision it is evident that on the failure of the auction purchaser to execute the agreement whether
temporary or permanent, the deposit already made
by auction purchaser towards earnest money and
security money shall be forfeited. Undisputedly,
the appellant was declared as auction purchaser
and, in fact, she had deposited 30% of the bid
amount, that is, 7,68,600/- in terms of Rule 5(10)
of the Rules. It is further an admitted position
that the appellant did not execute a permanent
agreement or for that matter, did not execute the
privilege. Hence, in terms of sub-rule (15) of
Rule 5, the money deposited by her is liable to be
forfeited. However, as stated above, the
appellant’s plea is that it was due to the facts
beyond her control that she could not derive
benefit from the privilege granted to her and
hence did not run the shop. Therefore, the
security amount deposited by her is not fit to be
forfeited. In view of the aforesaid, what falls
for our determination is as to whether the
appellant could invoke the doctrine of frustration
or impossibility or whether she will be bound by the terms of the statutory contract. In other
words, in case of a statutory contract, will it
necessarily destroy all the incidents of an
ordinary contract that are otherwise governed by
the Contract Act?
It is not the case of the State that
appellant has purposely, or for any oblique
motive, or as a device to avoid any loss, refused
to execute the agreement. It appears to us that
the State was helpless because of the public
upsurge against the sale of arrack at Kaladi, the
birth place of Adi Shankaracharya as, in their
opinion, the same will render the soil unholy.
Consequently, the State also found it impossible
to re-sell or re-dispose of the arrack shops. In
view of second paragraph of Section 56 of the
Contract Act, a contract to do an act which after
the contract is made, by reason of some event
which the promissory could not prevent becomes
impossible, is rendered void. Hence, the
forfeiture of the security amount may be illegal.
But what would be the position in a case in which the consequence for non-performance of contract is
provided in the statutory contract itself? The
case in hand is one of such cases. The doctrine
of frustration excludes ordinarily further
performance where the contract is silent as to the
position of the parties in the event of
performance becoming literally impossible.
However, in our opinion, a statutory contract in
which party takes absolute responsibility cannot
escape liability whatever may be the reason. In
such a situation, events will not discharge the
party from the consequence of non-performance of a
contractual obligation. Further, in a case in
which the consequences of non-performance of
contract is provided in the statutory contract
itself, the parties shall be bound by that and
cannot take shelter behind Section 56 of the
Contract Act. Rule 5(15) in no uncertain terms
provides that “on the failure of the auction
purchaser to make such deposit referred to in sub-
rule 10” or “execute such agreement temporary or
permanent” “the deposit already made by him towards earnest money and security shall be
forfeited to Government”. When we apply the
aforesaid principle we find that the appellant had
not carried out several obligations as provided in
sub-rule (10) of Rule 5 and consequently, by
reason of sub-rule (15), the State was entitled to
forfeit the security money.
Now reverting to the decisions of this Court
in the cases of Sushila Devi (supra) and Har
Prasad Choubey (supra), we are of the opinion that
they are clearly distinguishable. In those cases
the contract itself did not provide for the
consequences for its non-performance. On the face
of the same, relying on the doctrine of
frustration, this Court came to the conclusion
that the parties shall not be liable. As stated
earlier, in the face of the specific consequences
having been provided, the appellant shall be bound
by it and could not take benefit of Section 56 of
the Contract Act to resist forfeiture of the
security money.
Confronted with this, Ms. Aggarwal raises
the issue of validity of Rule 5(15). The learned
Single Judge had allowed the writ petition filed
by the appellant but negatived her challenge to
the validity of Rule 5(15) and 5(16) of the Rules.
In an appeal preferred by the State, it does not
seem that the appellant had raised the plea of
invalidity of the Rules but before us it is the
contention of the appellant that Rule 5(15) does
not meet the requirement of the doctrine of
reasonableness or fairness and on this ground
alone the rule is invalid. As a corollary, the
forfeiture made is illegal. It is pointed out that
in a contract of the present nature, the relative
bargaining power of the contracting parties cannot
be overlooked. Viewed from this angle, the rule is
opposed to public policy, contends the learned
counsel. Reference in this connection has been
made to a decision of this Court in the case of
Central Inland Water Transport Corporation Limited
and Another v. Brojo Nath Ganguly and Another etc.
(1986) 3 SCC 156. In this case, the terms in the contract of employment as also service rules
provided for termination of service of permanent
employees without assigning any reason on three
months’ notice or pay in lieu thereof on either
side was under challenge. Taking into account
unequal bargaining power between the employer and
the employee, the term in contract and the rules
were held to be unconscionable, unfair,
unreasonable and against the public policy. On
these grounds, this Court struck down the
termination as void. The relevant portion of the
judgment reads as follows:
“100…………The said Rules form part of
the contract of employment between
the Corporation and its employees who
are not workmen. These employees had
no powerful workmen’s Union to
support them. They had no voice in
the framing of the said Rules. They
had no choice but to accept the said
Rules as part of their contract of
employment. There is gross disparity
between the Corporation and its
employees, whether they be workmen or
officers. The Corporation can afford
to dispense with the services of an
officer. It will find hundreds of
others to take his place but an
officer cannot afford to lose his job
because if he does so, there are not
hundreds of jobs waiting for him. A
clause such as clause (i) of Rule 9 JUDGMENT
is against right and reason. It is
wholly unconscionable. It has been
entered into between parties between
whom there is gross inequality of
bargaining power. Rule 9(i) is a term
of the contract between the
Corporation and all its officers. It
affects a large number of persons and
it squarely falls within the
principle formulated by us above.
Several statutory authorities have a
clause similar to Rule 9(i) in their
contracts of employment. As appears
from the decided cases, the West
Bengal State Electricity Board and
Air India International have it.
Several government companies apart
from the Corporation (which is the
first appellant before us) must be
having it. There are 970 government
companies with paid-up capital of
Rs.16,414.9 crores as stated in the
written arguments submitted on behalf
of the Union of India. The government
and its agencies and
instrumentalities constitute the
largest employer in the country. A
clause such as Rule 9(i) 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 public
good. Such a clause, therefore, is
opposed to public policy and being
opposed to public policy, it is void
under Section 23 of the Indian
Contract Act.”
Reference JUDGMENThas also been made to a Constitution Bench judgment of this Court in the
case of Delhi Transport Corporation v.
D.T.C.Mazdoor Congress and Another 1991 Supp (1)
SCC 600. In this case, Brojo Nath Ganguly (supra)
has elaborately been discussed and while endorsing
the view by majority this Court held as follows:
“338. Accordingly I hold that the
ratio in Brojo Nath Ganguly case,
(1986) 3 SCC 156 was correctly laid
and requires no reconsideration and
the cases are to be decided in the
light of the law laid above. From the
light shed by the path I tread, I
express my deep regrets for my
inability to agree with my learned
brother, the Hon’ble Chief Justice on
the applicability of the doctrine of
reading down to sustain the offending
provisions. I agree with my brethren
B.C.Ray and P.B.Sawant,JJ. with their
reasoning and conclusions in addition
to what I have laid earlier.”
However, it has been contended by learned
counsel representing the respondent-State that
doctrine of fairness or reasonableness is not
capable to be invoked in a statutory contract.
Strong reliance has been placed on a decision of
this Court in the case of Assistant Excise JUDGMENT Commissioner and Others v. Issac Peter and Others
(1994) 4 SCC 104, and our attention has been drawn
to the following passage.
“26…………We are, therefore, of the
opinion that in case of contracts
freely entered into with the State,
like the present ones, there is no
room for invoking the doctrine of
fairness and reasonableness against
one party to the contract(State), for
the purpose of altering or adding to
the terms and conditions of the
contract, merely because it happens
to be the State. In such cases, the
mutual rights and liabilities of the
parties are governed by the terms of
the contracts (which may be statutory
in some cases) and the laws relating
to contracts. It must be remembered
that these contracts are entered into
pursuant to public auction, floating
of tenders or by negotiation. There
is no compulsion on anyone to enter
into these contracts. It is voluntary
on both sides. There can be no
question of the State power being
involved in such contracts.”
We have given our most anxious
consideration to the submission advanced and we do
not find any substance in the submission of the
learned counsel for the appellant and the decision relied on by her,JUDGMENTin fact, carves out an exception
in case of a commercial transaction. The duty to
act fairly is sought to be imported into the
statutory contract to avoid forfeiture of the bid
amount. The doctrine of fairness is nothing but a
duty to act fairly and reasonably. It is a
doctrine developed in the administrative law field
to ensure rule of law and to prevent failure of
justice where an action is administrative in
nature. Where the function is quasi-judicial, the
doctrine of fairness is evolved to ensure fair
action. But, in our opinion, it certainly cannot
be invoked to amend, alter, or vary an express
term of the contract between the parties. This is
so even if the contract is governed by a statutory
provision i.e. where it is a statutory contract.
It is one thing to say that a statutory contract
or for that matter, every contract must be
construed reasonably, having regard to its
language. But to strike down the terms of a
statutory contract on the ground of unfairness is
entirely different. Viewed from this angle, we are of the opinion JUDGMENTthat Rule 5(15) of the Rules cannot
be struck down on the ground urged by the
appellant and a statutory contract cannot be
varied, added or altered by importing the doctrine
of fairness. In a contract of the present nature,
the licensee takes a calculated risk. Maybe the
appellant was not wise enough but in law, she can
not be relieved of the obligations undertaken by
her under the contract. Issac Peter (supra)
supports this view and says so eloquently in the
following words:
“26…………In short, the duty to act
fairly is sought to be imported into
the contract to modify and alter its
terms and to create an obligation
upon the State which is not there in
the contract. We must confess, we are
not aware of any such doctrine of
fairness or reasonableness. Nor could
the learned counsel bring to our
notice any decision laying down such
a proposition. Doctrine of fairness
or the duty to act fairly and
reasonably is a doctrine developed in
the administrative law field to
ensure the rule of law and to prevent
failure of justice where the action
is administrative in nature. Just as
principles of natural justice ensure
fair decision where the function is
quasi-judicial, the doctrine of
fairness is evolved to ensure fair
action JUDGMENTwhere the function is
administrative. But it can certainly
not be invoked to amend, alter or
vary the express terms of the
contract between the parties. This is
so, even if the contract is governed
by statutory provisions, i.e., where
it is a statutory contract — or
rather more so. It is one thing to
say that a contract — every contract
— must be construed reasonably having
regard to its language…”
Now, referring to the decision of this Court
in the case of Brojo Nath Ganguly (supra), the
same related to terms and conditions of service
and the decision in the said case has been
approved by this Court in the case of D.T.C.
Mazdoor Congress (supra). But while doing so, the
Constitution Bench explicitly observed in
unequivocal terms that doctrine of reasonableness
or fairness cannot apply in a commercial
transaction. It is not possible for us to equate a
contract of employment with a contract to vend
arrack. A contract of employment and a mercantile
transaction stand on a different footing. It
makes no difference when the contract to vend
arrack is between an individual and the State. This would be evident from the following text from
the judgment:
“286. ……This principle, however, will
not apply where the bargaining power
of the contracting parties is equal
or almost equal or where both parties
are businessmen and the contract is a
commercial transaction.”
(underlining ours)
Accordingly, we are of the opinion that in a
contract under the Abkari Act and the Rules made
thereunder, the licensee undertakes to abide by
the terms and conditions of the Act and the Rules
made thereunder which are statutory and in such a
situation, the licensee cannot invoke the doctrine
of fairness or reasonableness. Hence, we negative
the contention of the appellant.
In the result, we do not find any merit
in the appeal and it is dismissed accordingly but
without any order as to costs.