Introduction Article 226 of the Constitution of India (Constitution) confers a writ jurisdiction on a High Court. This is an extra ordinary jurisdiction and extends to the action of the State or any authority endowed with State authority and empowers the High Court to issue direction to the State and the authorities to act in accordance with those directions. Courts have time again emphasised that this extra ordinary power must be exercised sparingly, cautiously and in exceptional situations only.
Can a writ jurisdiction be exercised when the State is not acting in an administrative capacity but acting only as a party to a contract i.e in a contractual capacity? The Supreme Court of India (SC) had the occasion to reiterate some of the basic principles governing the subject recently in the case of Joshi Technologies International Inc vs. UOI in the context of section 42 of the Income-tax Act, 1961(the Act).
FACTS IN BRIEF
Joshi Technologies (Petitioner/appellant) had entered into two contracts dated 20.02.1995 with the Union of India, through Ministry of Petroleum and Natural Gas (MoPNG) relating to exploration of certain oil fields. These contracts were on production sharing basis (Production Sharing Contracts,i.e PSC). It started production after entering into the contract and submitted its return of income on the income generated from the aforesaid production. The appellant claimed benefit of section 42 of the Act in the return of income.
Section 42 is a special provision for deductions in the case of business for prospecting, etc. for mineral oil. It provides for certain additional deduction of expenditure as specified in the PSC. It may be noted that such allowances, as stipulated in the section, are to be specifically mentioned in the PSC as well, which is entered into with the Central Government and it is also necessary that such an agreement has been laid on the Table of each House of Parliament.
It may be noted that Article 16 of the Model Production Sharing Contract (MPSC) contained a specific provision, which provided certain financial benefits and deductions in relation to taxes etc. that would be allowed to contractors/developers, as per the requirements of section 42 of the Act. According to the appellant, since no amendments to Article 16 of MPSC had been suggested nor contemplated by the Union of India, it was (and is) the belief and legitimate expectation of the appellant that all the benefits, financial or otherwise, offered in Article 16 of the MPSC to the prospective bidders were duly included in the above two PSCs.
The Assessing Officer (AO) granted deductions u/s. 42 of the Act from the assessment year 2001-02 onwards. However, while making assessment for the Assessment Year 2005-06, the AO observed that there were no such provisions in the PSC/Agreements which were signed between the Central Government and the appellant and in the absence of such stipulation in the agreements, the appellant was not entitled to deductions u/s. 42 of the Act.
It is worth noting that the Union of India signed many PSC’s with the private developers at the relevant period of time and there were 13 PSCs which did not contain the provisions for the deduction as envisaged under Article 16 of MPSC read with section 42 of the Act. A Joint Secretary of the MoPNG vide his communication dated 11.04.2007 wrote to the MoF specifically admitting that in certain PSCs, a reference to section 42 deductions had been omitted by oversight. The MoF was, accordingly, requested to extend the benefits of section 42 to the 13 PSCs (including the appellant’s two PSCs) in line with all other signed PSCs.
Realising that the Agreements did not contain such a provision, the appellant wrote to the MoPNG stating that there was an arrangement agreed to as per the understanding between the two parties to grant deduction as envisaged u/s. 42, non-inclusion thereof was an inadvertent omission in the agreements that were signed.
The MoPNG wrote to Ministry of Finance (MoF) accepting the aforesaid omissions and requested the MoF to give clarification in this behalf. However, no clarification came from the MoF and hence, the AO disallowed the claim for deduction u/s. 42of the Act.
At this stage, the appellant preferred writ petition under Article 226 of the Constitution in the High Court of Delhi.
In this background, the petitioner prayed among other prayers that a writ, order or direction be issued that considering the total facts of the case the petitioner is entitled to the benefit of the said deductions u/s. 42 of the Act, from the date of these Production Sharing Contracts. The prayer did not include a specific prayer to direct the authorities to amend the PSC.
The High Court examined the notice inviting the tender (Bid documents), MPSC and other relevant documents. It noted that, no statement or promise, that advantage u/s. 42 would be available to the successful bidder, was promised or made. It concluded that appellant was fully aware of Clause 16.2 of MPSC which specifically makes reference to benefit u/s. 42 of the Act, but did not advert to and refer to the same in their tender bid and did not ask for this benefit. Therefore, it was not possible to accept the contention of the appellant that benefit u/s. 42 of the Act was inadvertently missed out, or due to an act of oversight, not included in the contract.
The High Court accepted the explanation put forth by the respondents that 13 PSCs formed a different class in as much as their contract was in respect of small oil fields which had already been discovered and, therefore, the risk factor was less. On the other hand, other PSCs were in respect of undiscovered oil fields and for this reason benefit u/s. 42 had been granted to them.
The High Court dismissed the writ petition vide its judgment dated 28.05.2012 holding that the appellant is not entitled to any deductions u/s. 42 of the Act in the absence of stipulations to this effect in the Contracts signed between the parties. The matter went to the SC.
PROCEEDINGS BEFORE SUPREME COURT
One of the submissions of the counsel for the petitioner was that a writ of Mandamus be issued for amending the contract and including the clause for granting the benefit of section 42 of the Act. It was also submitted that when the other contracting parties, namely, MoPNG specifically admitted that this provision was left out inadvertently, the Court should have given a direction for amendment of the Contract and that such a direction can be issued by the High Court in exercise of its powers under Article 226 of the Constitution. In support of his submission the counsel relied on various judicial precedents.
Opposing the said prayer for issue of a writ, the counsel for the respondent submitted that in the realm of contractual relationship between the parties, this plea was inadmissible. He pleaded that PSCs are in the nature of contract agreed to between two independent contracting parties and each of the PSCs are distinct from the other and is not a copy of MPSC. He also pointed out that before signing the PSC, the approval of the Cabinet was obtained, which meant that the PSCs as submitted to the Cabinet, had the approval of one of the contracting parties, i.e. Government of India and when signed by the other party it became a binding contract.
Therefore, the appellant could not claim to be oblivious of the provisions of law or the contents of the contract at the time of signing and was precluded from seeking retrospective amendment as a matter of right when no such right was conferred under the contract. He submitted that the doctrine of fairness and reasonableness applies only in the exercise of statutory or administrative actions of a State and not in the exercise of a contractual obligation and that the issues arising out of contractual matters will have to be decided on the basis of the law of contract and not on the basis of the administrative law. He also relied on the various precedents in support of his submissions.
The SC took note of the Article 32 of the PSC entered into between the parties and observed that Article 32.2 categorically provided that the PSC shall not be amended, modified, varied or supplemented in any respect except by an instrument in writing signed by all the parties, which shall state the date upon which the amendment or modification shall become effective. Thus, even if it is presumed that there was an understanding between the parties before entering into an agreement to the effect that benefit of section 42 shall be extended to the appellant, the understanding vanished into thin air with the execution of the two PSCs. Now, for all intent and purpose, it was only the PSCs signed between the parties, which could be looked into. Thus, unless respondents agreed to amend, modify or vary/supplement the terms of the contract, no right accrued to the appellant in this behalf.
The SC noted that the PSCs in question were governed by the provisions of Article 299 of the Constitution. These were formal contracts made in the exercise of an executive power of the Union (or of a State, as the case may be) and are made on behalf of the President (or by the Governor, as the case may be). Further, these contracts are to be made by such persons and in such a manner as the President or the Governor may direct or authorise. Thus, when a particular contract is entered into, its novation has to be on fulfillment of all procedural requirements.
Whether, in such a case, can the Court issue a Mandamus?
OBSERVATIONS OF THE SUPREME COURT
The Supreme Court among other questions framed the question whether mandamus can be issued by the Court to the parties to amend the contract and incorporate provisions to this effect? In other words, whether the Court has the power to issue a writ of mandamus or direction to the Government?
The Supreme Court observed that in pure contractual matters extraordinary remedy of writ under Article 226 or Article 32 of the Constitution cannot be invoked. However, in a limited sphere, such remedies are available only when the non-Government contracting party is able to demonstrate that it is a public law remedy which such party seeks to invoke, in contradistinction to the private law remedy.
The Supreme Court examined various judicial precedents in this regard and observed that under the following circumstances, ‘normally’, the Court would not exercise such discretion to issue a writ:
a) the Court may not examine the issue unless the action has some public law character attached to it.
(b) Whenever a particular mode of settlement of dispute is provided in the contract, the High Court would refuse to exercise its discretion under Article 226 of the Constitution and relegate the party to the said mode of settlement, particularly when settlement of disputes is to be resorted to through the means of arbitration.
(c) If there are very serious disputed questions of fact which are of complex nature and require oral evidence for their determination.
(d) Money claims per se particularly arising out of contractual obligations are normally not to be entertained except in exceptional circumstances.
The Supreme Court examined various case laws on the subject and legal position emerging from them. The same are summarised as under:
(i) At the stage of entering into a contract, the State acts purely in its executive capacity and is bound by the obligations of fairness. In its executive capacity, even in the contractual field, the state cannot practice discrimination. It has an obligation in law to act fairly, justly and reasonably which is the requirement of Article 14 of the Constitution of India. Therefore, if State or instrumentality of the State has acted in contravention of the above said requirement of Article 14 then a writ court can issue suitable directions to set right the arbitrary actions.
(ii) In cases where question is of choice or consideration of competing claims before entering into the field of contract, facts have to be investigated and found. If those facts are disputed and require assessment of evidence, the correctness of which can only be tested satisfactorily by taking detailed evidence, examination and crossexamination of witnesses, the case could not be decided in proceedings under Article 226 of the Constitution. In such cases court can direct the aggrieved party to resort to alternate remedy of civil suit etc.
(iii) Writ jurisdiction of the High Court under Article 226 cannot be used to avoid voluntarily obligation undertaken. Occurrence of commercial difficulty, inconvenience or hardship in performance of the conditions agreed to in the contract cannot provide justification in not complying with the terms of contract which the parties had accepted with open eyes. Writ petition cannot be maintained in such cases.
(iv) Ordinarily, where a breach of contract is complained of, the party complaining of such breach may sue for specific performance of the contract, if contract is capable of being specifically performed. Otherwise, the party may sue for damages.
(v) Writ can be issued where there is executive action unsupported by law or there is denial of equality before law or equal protection of law or it can be shown that action of the public authorities was without giving any hearing and violation of principles of natural justice after holding that action could not have been taken without observing principles of natural justice.
(vi) If the contract between private party and the State/ instrumentality and/or agency of State is under the realm of a private law and there is no element of public law, writ jurisdiction generally would not survive .In such cases the aggrieved party should invoke the remedies provided under ordinary civil law.
(vii) The distinction between public law and private law element in the contract with State is getting blurred. However, it has not been totally obliterated. Dichotomy between public law and private law, rights and remedies would depend on the factual matrix of each case and the distinction between public law remedies and private law, field cannot be demarcated with precision.
Once on the facts of a particular case, it is found that the nature of the activity or controversy involves public law element, then the matter can be examined by the High Court under Article 226 of the Constitution to see whether action of the State and/or instrumentality or agency of the State is fair, just and equitable or that relevant factors are taken into consideration and irrelevant factors have not gone into the decision making process or that the decision is not arbitrary.
(viii) Failure to consider and give due weight to reasonable or legitimate expectation of a citizen, may render the decision of the state or its instrumentality arbitrary, and this is how the requirements of due consideration of a legitimate expectation be made part of the principle of non-arbitrariness.
(ix) If the rights are purely of private character, no mandamus can be issued. The condition which has to be satisfied for issuance of a writ of mandamus is the public duty. In a matter of private character or purely contractual field, no such public duty element is involved and, thus, mandamus will not lie.
(x) Where an authority appears acting unreasonably, a writ of mandamus can be issued for enforcing it to perform its duty free from arbitrariness or unreasonableness.
(xi) when an authority has to perform a public function or a public duty if there is a failure a writ petition under Article 226 of the Constitution is maintainable.
Keeping in mind the aforesaid principles and after considering the the facts of the case, the SC held that this was not a fit case where the High Court should have exercised discretionary jurisdiction under Article 226 of the Constitution. According to the court, the matter is in the realm of pure contract and it is not a case where any statutory contract is awarded. The SC confirmed the order of the High Court that the appellant is not entitled to benefit of deduction u/s. 42 of the Act.
CONCLUSION
It is clear from the above that the scope of judicial review in respect of disputes falling within the domain of contractual obligations may be limited. The power to issue prerogative writs under Article 226 of the Constitution is plenary in nature and is not limited by any other provisions of the Constitution. The High Court having regard to the facts of the case, has a discretion to entertain or not to entertain a writ petition. The Court has imposed upon itself certain restrictions in the exercise of this power. This plenary right of the High Court to issue a writ will not normally be exercised by the Court to the exclusion of other available remedies unless such action of the State or its instrumentality is arbitrary and unreasonable so as to violate the constitutional mandate of Article 14 or for other valid and legitimate reasons, for which the court thinks it necessary to exercise the said jurisdiction.
The reiteration of the aforesaid principles by the Supreme Court is very important today, especially when the Government is entering into partnership with private parties for various infrastructure projects under PPP model.
It is very clear from the above that the real challenge will lie in demarcating and identifying the line between the public law domain and the private law field, identifying the public duty, public cause. It is impossible to draw the line with precision and lay down in black and white the principles governing such demarcation. The question must be decided in each case with reference to the particular action, the activity in which the State or the instrumentality of the State is engaged when performing the action, the public law or private law character of the action and a host of other relevant circumstances.
