Central Inland Water Transport Corporation Ltd v Brojo Nath Ganguly (1986)

This is the case that put inequality of bargaining power on the map as a head of public policy under s. 23. Until 1986 the Indian position, taken from Gherulal Parakh v Mahadeodas (1959), was that the heads of public policy were settled, that courts should not go looking for new ones, and that the "unruly horse" was best kept stabled. Brojo Nath Ganguly rode it out, holding that a court will refuse to enforce an unfair and unreasonable clause where the parties were not on an equal footing and the weaker party had no real choice but to sign. It is also a bridge case: the same clause was struck down both under s. 23 and as arbitrary under Article 14.

The Rivers Steam Navigation Company was an old private carrier working the inland waterways of eastern India. By the late 1960s it was in serious financial trouble and headed for liquidation. Rather than let the undertaking and the jobs attached to it disappear, the Central Government stepped in. A new government company, the Central Inland Water Transport Corporation Ltd, was incorporated, its entire share capital held by the Union of India and the State Governments of West Bengal and Assam. Under a scheme of arrangement sanctioned by the Calcutta High Court the assets and business of the old company passed to the Corporation, and its employees, including Brojo Nath Ganguly and Tarun Kanti Sengupta, were taken over into its service. Both men were senior officers with long service, who had spent their working lives in this one industry, on these rivers, in a specialised trade with very few other employers.

In 1979 the Corporation framed service rules of its own. Rule 9(i) provided, in substance, that the employment of a permanent employee could be terminated by giving him three months' notice in writing, or by paying him three months' basic pay and dearness allowance in lieu. It said nothing about grounds. It required no charge, no inquiry, no reason, no opportunity to be heard, and made no distinction between a delinquent employee and a blameless one. Its counterpart gave the employee a corresponding right to resign on three months' notice — a formal symmetry that meant nothing in practice, since the employer had many employees and the employee had one job.

Rule 9(i) was then used. Ganguly's services were terminated under it; Sengupta was dealt with in substantially the same way. Neither was told why; neither was heard. Both moved the Calcutta High Court under Article 226. The High Court held in their favour, and the Corporation appealed.

1. Was the Corporation, a government company, "the State" or "other authority" within Article 12, so that Article 14 applied to it?
2. Was Rule 9(i), being a term of the contract of employment, void under s. 23 as opposed to public policy?
3. Can inequality of bargaining power be recognised as a head of public policy at all, given the caution in Gherulal Parakh?
4. Independently, was Rule 9(i) arbitrary and violative of Article 14?

For the Corporation: a contract freely entered into; the rule was reciprocal, each side free to walk away on three months' notice; a government company is a separate juristic person and not "State"; and public policy is a narrow, closed field, so a court cannot strike down a term merely because it thinks it harsh — the unruly horse warning.

For the employees: the Corporation was in substance an instrumentality of the Government, wholly owned and controlled by it; the reciprocity was illusory; an employee in a specialised trade with no comparable alternative employer has no bargaining power and signs whatever is put in front of him; and a naked, unreviewable power to end a man's livelihood without reason is exactly what the law should refuse to enforce.

The appeals were dismissed. The Supreme Court (judgment of Madon J) held:

• The Corporation is "the State" within Article 12. It was wholly owned by the Union and two State Governments, its management was in their hands, and it was an instrumentality or agency of the State. The corporate veil of a government company does not by itself take it outside Article 12.
• Rule 9(i), so far as it permitted termination of a permanent employee's service by three months' notice or pay in lieu without assigning any reason, was void under s. 23 as opposed to public policy.
• The same rule was also violative of Article 14, being wholly arbitrary and conferring an unguided and unfettered power.
• Rule 9(i) was struck down and the terminations set aside.

The ratio has two independent legs, either of which would have sufficed.

Leg one (contract). Where the parties to a contract are not in an equal bargaining position, and the weaker party has no real choice but to accept the terms offered — because he must sign or go without the thing he needs — a term which is unfair and unreasonable is opposed to public policy and therefore void under s. 23.

Leg two (constitutional). A rule of a State instrumentality conferring an absolute and unguided power to terminate permanent employment without reason, without notice of the ground and without a hearing, is arbitrary and bad under Article 14.

The obiter is extensive and is what makes the case so citable — the survey of unconscionable bargains, standard-form and "take it or leave it" terms, Lord Denning MR's inequality-of-bargaining-power principle in Lloyds Bank Ltd v Bundy (1975), and the reflections on the changing content of public policy. None of that binds. What binds is the proposition above.

Madon J began from the sanctity of contract and asked what "public policy" in s. 23 actually is. His answer was that it is not a fixed catalogue. The section says "the Court regards it as... opposed to public policy" — language pointing to a judicial evaluation made in the conditions of the day, not a list frozen in 1872. What was tolerable when the Act was drafted, in a very different economic order, need not be tolerable now.

Why is unfairness in a contract a public concern at all? Because mass contracting has destroyed the assumption on which freedom of contract rests. Where one side dictates the terms on a printed form and the other's only freedom is the freedom to starve, the "agreement" is a form of words, and the public has an interest in not lending the machinery of the courts to it. The Court called the exploitation ruthless, and said every ruthless exploitation of that kind is against public policy.

Two limits were built in from the start: the principle applies only where there is a real disparity of bargaining strength, and only to a term that is in fact unfair and unreasonable.

Compare s. 16. Section 16 deals with one species of the same problem: where a party in a position to dominate the will of another uses that position to obtain an unfair advantage, the contract is voidable, and under s. 16(3) the burden of disproving undue influence shifts to the dominant party where the transaction appears unconscionable. But s. 16 requires a relationship of domination — real or apparent authority, a fiduciary tie, or a party whose mental capacity is affected by age, illness or distress. A large employer and a job applicant do not fit that description. Section 16 also yields only a voidable contract at the weaker party's option; the s. 23 route yields a void term, struck down whether or not the weaker party can press for avoidance. That is why the Court took it.

On Article 12, the Court applied the settled instrumentality tests — deep and pervasive State control, ownership of share capital, functional character — and held that incorporation under the Companies Act does not immunise a body from Part III when the State stands behind it in every meaningful sense.

The decision was applied and extended almost at once. In Delhi Transport Corporation v D.T.C. Mazdoor Congress (1991) the Supreme Court struck down a comparable provision permitting removal of a permanent workman without inquiry. In LIC v Consumer Education and Research Centre (1995) it invoked the same principle against terms imposed by a State instrumentality on policyholders, observing that the State cannot enforce a contract made with a citizen where there was no equality of bargaining power. Later decisions treat fairness in the discharge of public functions as a facet of public policy — BCCI v Cricket Association of Bihar (2015). High Courts have used it in the private sphere too, against terms preventing an employee from enforcing his legal rights.