Corporation Being a ‘State’ Under Article 12, is Bound to Act in a Fair and Reasonable Manner Even in Contractual Disputes: Allahabad HC

The Allahabad High Court, Lucknow Bench, has set aside the termination of the dealership of R.S. Filling Station by Indian Oil Corporation Ltd. (IOCL), holding that the corporation acted arbitrarily and in violation of principles of natural justice. Justice Pankaj Bhatia delivered the judgment in Writ-C No. 4944 of 2023, ruling in favour of the petitioner, M/s R.S. Filling Station, operated by Amit Singh in Lakhimpur Kheri district.

Summary of Legal Issue and Outcome

The case concerned IOCL’s decision to terminate the dealership of R.S. Filling Station based on alleged tampering with dispensing units. The court found the termination order dated 12.01.2023 and the appellate order dated 15.05.2023 unsustainable due to procedural lapses, contradictory standards applied in similar cases, and lack of due consideration of expert reports as directed by the Supreme Court.

Background

The petitioner was appointed as a retail outlet dealer in 2005, and operations were governed by the Dealership Agreement and Marketing Discipline Guidelines (MDG). An inspection in May 2017 by a government-constituted team found alleged tampering in two dispensing units, prompting IOCL to issue a show cause notice and ultimately terminate the dealership.

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Arguments of the Parties

Petitioner’s Counsel:

• Argued that the show cause notice was issued beyond the 30-day period mandated by Clause 8.5.6 of MDG.
  
• Highlighted that no short delivery or manipulation was detected during inspection, and seals were intact.
  
• Contended that reliance on the MIDCO OEM’s clarificatory email was improper as it was not mentioned in the show cause notice.
  
• Emphasized contradictory findings by the same appellate authority in a similar case (Firozabad Fuels and Services), which was decided in favor of the dealer on similar facts.
  
• Cited violation of Clause 8.7 of MDG, requiring action only on advice of government authorities in inspections conducted by non-oil company officials.
  
• Asserted that the second OEM (Dresser Wayne) found no tampering during technical testing, whereas the MIDCO’s report was based on visual inspection alone.
  

Respondent’s Counsel (IOCL):

• Maintained that the findings of tampering were substantiated by the OEM reports.
  
• Argued that Clause 5.1.4 of the MDG empowers the Corporation to act independently if tampering is found.
  
• Denied that contradiction in appellate orders justified interference, asserting differing factual contexts.
  
• Asserted that petitioner had adequate opportunity to respond and was aware of all relevant materials.
  

Court’s Analysis

Justice Bhatia emphasized the following key points:

1. Procedural Irregularities:
   
   • The MIDCO clarificatory email, although pivotal, was not included in the show cause notice or shared with the petitioner in a legally sufficient manner.
     
   • Reliance on this email without due disclosure violated principles of natural justice.
     
2. Contradictory Standards:
   
   • The court noted that the same appellate authority had taken a contrary view in Firozabad Fuels and Services despite similar OEM findings, highlighting the arbitrariness and unequal treatment.
     
3. Non-compliance with Supreme Court Directions:
   
   • The Hon’ble Supreme Court had directed IOCL to consider both expert reports afresh without being influenced by earlier observations. The High Court found that this mandate was not properly followed.
     
4. Requirement of Conclusive Evidence Under MDG Clause 5.1.4:
   
   • The clause mandates that tampering must be shown to be “likely to manipulate delivery.” The court found no such manipulation was evidenced or alleged.
     
5. Observations on Personal Inferences:
   
   • The licensing authority’s reasoning included speculative commentary not supported by the record, further invalidating the decision-making process.
     

Conclusion and Decision

The High Court quashed the orders dated 12.01.2023 and 15.05.2023, restoring the petitioner’s dealership. The court ruled:

“The reliance on the clarificatory e-mail which was available to the corporation even before issuance of the first show cause notice and the same not being made a part of the document relied upon in the show cause notice, has resulted in violation of the principle of natural justice.”

The court also held:

“The Corporation being a ‘State’ within the meaning of Article 12, even in contractual matters, is bound to act in a fair and reasonable manner… the contrary finding recorded by the same appellate authority… is clearly an arbitrary exercise of Appellate Powers.”