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REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO.9466 OF 2003

MARY ...APPELLANT VERSUS

STATE OF KERALA AND ORS.   ... RESPONDENTS

JUDGMENT  CHANDRAMAULI KR. PRASAD,J.

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.

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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  

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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,  

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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  

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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. This 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  

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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  

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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:

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“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  

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.  

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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  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  

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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 at 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:

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“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 not  being 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.”

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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:

5. xxx xxx xxx (15)  In  addition  to  the  solvency  certificate  and  cash  security  mentioned in sub-rule(10) the auction  

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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  

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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.

xxx xxx xxx”

       (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)  

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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  

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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.  

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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.   

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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  

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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  

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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  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  

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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  has  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:

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“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  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  

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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, in 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  

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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 that 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  

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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  where  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…”

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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)

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    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.

………………………………………………………………J.  (CHANDRAMAULI KR. PRASAD)

                         ………..………………………………………..J.      (V.GOPALA GOWDA)

NEW DELHI, OCTOBER 22, 2013.  

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