Holding

The corporation is "the State" under Article 12 and clause (i) of Rule 9 is void as an arbitrary, unconscionable term violating Article 14 and public policy.

Summary

The Supreme Court examined whether the Central Inland Water Transport Corporation Ltd., a government‑owned company under section 617 of the Companies Act, qualifies as "the State" under Article 12 of the Constitution and whether clause (i) of Rule 9 in its service rules – which allows termination of a permanent employee on three months' notice or payment in lieu – is an unconscionable term void under section 23 of the Indian Contract Act and violative of Article 14. The Court held that the corporation is indeed an instrumentality of the State and that Rule 9(i) is arbitrary, discriminatory and contrary to public policy, rendering it void. Consequently, the High Court’s order striking down the clause was affirmed, the corporation was ordered to pay arrears, and the appeals were dismissed.

Issues considered

Whether a government company defined under section 617 of the Companies Act, 1956, is "the State" within the meaning of Article 12 of the Constitution.
Whether clause (i) of Rule 9 of the Central Inland Water Transport Corporation’s Service, Discipline and Appeal Rules, 1979, is an unconscionable term in a contract of employment and therefore void under section 23 of the Indian Contract Act, 1872 and ultra vires Article 14 of the Constitution.

Legislation cited

Companies Act, 1956s. Section 617
Constitution of Indias. Article 12, s. Article 14, s. Article 38, s. Article 39, s. Article 41
Indian Contract Act, 1872s. Section 16, s. Section 19A, s. Section 23, s. Section 24
Industrial Disputes Act, 1947
Specific Relief Act, 1963s. Section 31(1)

Subjects

Article 12State definitionGovernment companyArticle 14Unconscionable contractPublic policyIndian Contract ActEmployment terminationRule 9(i)Corporate veilNatural justiceHenry VIII clauseDistributive justice

Judgment

278

A
CEN'lKAL INLAND WATER. 'IIANSPORT
_._
<DPOIATIOH LTD. & UL ETC.
v.
BIIDJO NA11I GANGULY & .ANL

APRIL 6, 1.986

B
[A.P.SEN AND D.P. MADON, JJ.]

A. Constitution of India, 1950, Article 12 - "State..
whether a Government company as defined in section 617 of the
Indian Companies Act, 1956, is "the State" within the meaning
of Article 12 of the Constitution."
c ·{·
B. Words and phrases "Unconscionable bargain",..(
1
"distributive justice, reasonableness and fair play"
Meaning of - Constitution of India, Articles 14, 38 and 39
read with sections 16, 19A of the Indian Contracts Act, 1872.
D
c. Contract of Employment - Whether an unconscionable
term in a contract of employment is void under section 23 of
the Indian Contract Act, 1872, as being opposed to public
policy and, when such a term is contained in a contract of}'--
employment entered into with the Government company, is also
void as infringing Article 14 of the Constitution in case a
E
Government company is "the State" under Article 12 of the
Constitution.

D. The Central Inland Water Transport Corporatiorr-t"'
Limited (A Government of India Undertaking) - Service,
Discipline and Appeal -Rules, 1979, Rule 9(1) Validity of --~
F
Whether the said provision is discriminatory and violates .
Article 14 of the Constitution and also void under section 16
of the Contract Act as opposed to public policy under section
23 ibid.

The Central Inland Water Transport CorpOration which was
G
incorporated on February 22, 1967 is a company owned by the
Government of India and the State Governments of West Bengal)..../
and Assam. It is a Government company within the meaning of
section 617 of the Companies Act, 1956. The Memorandum of
~sociation and the Articles of Association of the said

H
C.I.W.T.CORPN. v. B.N. GANGULY 279

' A
~corporation indicate that the corporation is under the
complete control and management of the Central Government
though all the shares were and are owned by the Central
Government and the two State Governments. A company called
"Rivers Steam Navigation Company Limited" which was carrying
on very much the same business including the maintenance and B
rUlUling of river service as the corporation is doing was
.. i ordered to be wound up by an order dated May 5, 1967 passed by
the Calcutta High Court and upon payment to all the creditors

-
it came to be dissolved. By a scheme of Arrangement approved
by the High Court and entered into between the said dissolved
company and the corporation the assets and certain liabilities
of the said company was taken over by the corporation. The c
.
,, - '\ Scheme of Arrangement provided as follows :
'
~
(a) that the new company shall take as many of the
existing staff or labour as possible and as c:an be reasonably
taken over by the said transferee company subject to any valid
objection to any individual employee or employees; D

(b) that as to exactly how many can be employed it is
left to the said transferee company's bonafide discretion;

(c) ·that those employees who cannot be taken over shall
be paid by the transferor company all moneys due to them under E
the law and all legitimate and legal compensations payable to
them either under Industrial Disputes Act or otherwise legally
admissible and that such moneys shall be provided by the
-;.Government of India to the existing transferor company who
will pay these dues.
F
Brojo Nath Ganguly the first respondent in Civil Appeal
No. 4412 of 1985 was at the date when the said scheme of
arrangement became effective, working in the said company and
his services were taken over by the Corporation and he was
appointed on September 8, 1967 as a· Deputy Chief Accounts
Officer. Tarun Kanti Sengupta, the first respondent in Civil G
Appeal No. 4413 of 1985 was also working in the said company
-v,;,.._.( and his services were also taken over by the Corporation and
he was appointed on September 8, 1967 as Chief Engineer on the
ship "River Ganga11 Letters of appointment issued to both these
respondents provided that they would be subject to the service
rules and regulations including the conduct rules to be framed H
'
280 SUPREME COURT REPORTS [ 1986] 2 S. C. R.

A
by the Corporation. Service rules were framed by the .....l-
Corporation for the first time in 1970 and were replaced by
new rules in 1979 known as "The Central Inland Water Transport
Corporation LLmited - Service, Discipline and Appeal Rules,
1979". The said rules applied to all employees in the service
of the Corporation in all units in West Bengal, Bihar, Assam
B or in other State or Union Territory except those employees
who were covered by the Standing orders under the Industrial y .
Employment (Standing Orders) Act, 1956 or those employees in
respect of whom the Board of Directors has issued separate
orders. Rule 9 of the said rules refers to termination of
employment for acts other than misdemeanor. Under Rule 10 an
c employee is to retire on completion of the age of 58 years
though in exceptional cases and in the interests of the -f.-· ·
Corporation an extension may be granted with the prior ~ -4
approval of the Chairman-cUIIM1anaging Director and the Board
.
of Directors. Rule 33 provides for suspension of an employee
where a disciplinary proceeding against him is contemplated or
D is pending or where a case against him in respect of a
criminal offence is under investigation or trial. Rule 36 sets
out the different penalties which can be imposed on an
employee for his misconduct. Rule 38 prescribes the procedure
for imposing a major penalty and sets out in detail how a )--
disciplinary inquiry is to be held. Rule 39 provides for
action to be taken by the disciplinary authority on the report
made by the Inquiring Authority. Rule 40 prescribes the
procedure to be followed for imposing minor penalties. Rule 43
provides for a special procedure to be followed in certain .
cases which consists of dispensing with disciplinary inquiry~
altogether. Rule 45 provides for an appeal against an order
F imposing penalty to the appropriate authority specified in the ~
Schedule to the said Rules and Rule 45A provides for a review.

The first respondent Mr. Ganguly in Civil Appeal No.
4412 of 1985 was promoted to the Manager (Finance), in October
1980 and also acted as General Manager (Finance) from November
G 1981 to March 1982. On February 16, 1983 a confidential letter
was sent to him by the General Manager (Finance) who is the
Third Appellant to reply within 24 hours to the allegation of ~~
negligence in the maintenance of Provident Fund Accounts.
Ganguly made a representation as also gave a detailed reply to
the said show cause notice. Thereafter by a letter dated
H February 26, 1983 signed by the Chairman-cum-Managing Director
C.I.W.T.CORPN. v. B.N. GANGULY 281

A
-J- of the Corporation, a notice under clause (i) of Rule 9 or the
Service Rules was given to Ganguly terminating his services
with the Corporation with iunediate effect. Along with the
said letter a cheque for three months' basic pay and dearness
allowance was enclosed.
B
The First Respondent in Civil Appeal No. 4413 of 1985
, "1 Sengupta was promoted to the post of General Manager (River
Services) with effect from January 1, 1980. His name was
enrolled by the bureau of public enterprises and _he was called
for an interview for the post of Chairman-cum-Director of the
Corporation by the Public Enterprises Selection Board.
However, he could not appear before the Selection Board as he c
·l received the letter calling him for the interview after the
,._ date fixed in that behalf. The new Chairman-cum-Managing
Director who was selected at the said interview and is alleged
to have borne a grudge against Sen Gupta for having completed
against him for the said post, on Februa~y l, 1983, issued a
charge-sheet against Sengupta intimating to him that a D.
disciplinary inquiry was proposed to be held against him under
the said Rules and calling upon him to file his written
statement of defence. By his letter dated February 10, 1983,
--1 addressed to the Chairman-cum-Managing Director., Sengupta
denied the charges made against him and asked for inspection
of documents and copies of statements of witnesses mentioned E
in the said charge-sheet. By a letter dated February 26, 1983,
signed by the Chairman-cum-Managing Director notice. was given
to Sengupta under clause (i) of Rule 9 of the said Rule,
· _..r terminating his service with the Corporation with iamediate
effect. Along with the said letter a cheque for three month's ·
~ basic pay and dearness allowance in lieu of notice was F
enclosed.

Both Ganguly and Sengupta filed writ petitions in the
Calcutta High Court under Article 226 of the Constitution
challenging the termination of their services as also the
validity of the said Rule 9(i). In both these writ petitions G
_ rule nisi was issued and ex parte and ad interim order staying
~ the operation of the said notices of termination was passed by
a learned Single Judge of the High Court. The appellants went
in Letters Patent Appeal before a Division Ber•ch of the said
High Court against the said ad interim orders. On January 28,
1985 the Division Bench ordered in both these AJ>peals that the H
[1986] 2 s.c.k.
A
said writ petitions should stand transferred to and heard by ~
it along with the said appeals. The said appeals and writ
petitions were, thereupon, heard together and by a common
judgment delivered on August 9, 1985, the Division Bench held
that the Corporation was a "state" within the meaning of
Article 12 of the Constitution and that the said Rule 9(i) was
ultra vires Article 14 of the Constitution. Consequently the
Division Bench struck down the said Rule 9(i) as being void. y
It also quashed the impugned orders of termination dated

c
February 26, 1983. Hence the appeals by special leave by the
Court. ...
Arguments for the Appellants :-
-t-
1. A government company stands on a wholly different ~ ..
footing from a statutory corporation for while a statutory
corporation is established by a statute, a Government company
is incorporated like any other company by obtaining a certi-
D ficate of incorporation under the Companies Act and,
therefore, a Government company cannot come within the scope
of the term "The State" as defined in Article 12 of the
Constitution.

2. A statutory corporation is usually established in
order to create a monopoly in the State in respect of a
particular activity. A Government company is, however, not
established for this purpose;

3. The Corporation does not ~ve the monopoly of inland -1'- -
water transport but is only a trading company as is shown by
the objects clause in its Memorandum of Association; and

4. Assuming a Government company is "the State" within
the meaning of Article 12, a contract of employment entered
into by it is like any other contract entered into between two
parties and a term in that contract cannot be struck down
G under Article 14 of the Constitution on the ground that it is
arbitrary or unreasonable or unconscionable or one-sided or
unfair.

Arguments on behalf of the Respondents :-
H
C.I.W.T.CORPN. v. B.N. GaNGULY 283

A
: -j._ 1. The definition of the expression nthe State11 given in
Article 12 is wide enough to include within its scope and
reach a Government company.

2. A State is entitled to carry on any activity, even a
trading activity, through any of its instrumentalities or
B
agencies, whether such instrumentality or agency be one of the
4 departments of the Government, a statutory corporation, a
i statutory authority or a Government company incorporated under
the Companies Act.

3. Merely because a Government company carries on a
trading activity or is authorised to carry on a trading
-) activity does not mean that it is excluded from the definition
c
i..,. ~ of the expression "the State" contained in Article 12.

4. A Government company being 11 the Sta~e" within the
meaning of Article 12 is bound to act fairly and reasonably
and if it does not do so its action can be struck down under D
Article 14 as being arbitrary.

5. A contract of employment stands on a different
footing from other contracts. A term in a contract of
employment entered into by a private employer which is unfair,

.. unreasonable and unconscionable is bad in law. Such a term in
a contract of employment entered into by the State is,
therefore, also bad in law and can be struck dow under
Article 14.
E

Dismissing the appeals, the Court,
F
HELD : 1.1 The word "State" has different meanings
depending uf>on the context in which it is used. The expression
"The State" when used in Parts Ill & IV of thE~ Constitution is
not confined to only the federating States or the Union of
India or even to both. By the express terms of Article 12, the
expression "the State" includes : (i) the Government of
G
India; (ii) Parliament of India; (iii) the Government of each
- .i of the States which constitute the Union of India; (iv) the
)
-=== Legislature of each of the States which constitute the Union
of India; (v) all local authorities within the territory of
India; (vi) all local authorities under the control of the
Government of India; (vii) all other authorities within the
H,
"
2t;4 SUPWil::. CUUl\T KEPORTS 11986 J 2 S. C. R.

A
territory of India; and (viii) all other authorities under the ~
control of the Government of India. [306 D; 309 A-B]

1. 2 Where an interpretation clause defines a word to
mean a particular thing, the definition is explanatory and
prima facie restrictive and whenever an interpretation clause
defines a term to include something the definition is
extensive. While an explanatory and restrictive definition
confines the meaning of the word defined to what is stated in
the interpretation clause, so that wherever the word defined
is used in the particular statute in which that interpretation
clause occurs, it will bear only that meaning unless where, as
c is usually provided, the subject or context otherwise requires
an extensive definition expands or extends the meaning of the
word defined to include within it what would otherwise not
have been comprehended in it when the word defined is used in
its ordinary s.ense. Article 12 uses the word "include~", it
thus extends the meaning of the expression "the State" so as
D to include within it also what otherwise may not have been
comprehended by that expression when used in its ordinary·
legal sense. [310 F-H; 311 A-B]

1. 3 The definition of the expression "the State" in t---
Article 12, is however, for the purposes of Parts III and IV
of the Constitution, whose contents cleary show that the
expression "the State" in Article 12 as also in Article 36 is
not confined to its ordinary and constitutional sense as
extended by the inclusive portion of Article 12 but is used in
the concept of the State in relation to the Fundamental Rights --r- -·
guaranteed by Part III of the Constitution and the Directive
F Principles of State Policy contained in ~art IV o f the .J
Constitution which principles are declared by Article 3 7 to be
fundamental to the governance of the country and enjoins upon
the State to apply making laws. [311 C-E]

1. 4 Article 298 of the Constitution expands the
G executive power of the Union of India and of each of the
States which collectively constitute the Union to carry on any
trade or business. By extending the executive power of the ')..-
Union and of each of the States to the carrying on of any \---- .. _
trade or business Article 298 does not, however, convert -........_
either the Union of India or any of the States which
H collectively form the Union into a Merchant buying and selling
C.I.W.T.CU~PN. v. B.N. GA~GULY 285

I

-~ goods or carrying on either trading or business activity, for A
the executive power of the Union and of the States whether in
the field of trade or business or in any other field, is
always subject to constitutional limitations and particularly
the provisions relating to Fundamental Rights in Part Ill of
the Constitution and is exercisable in accordance with and for
B
the furtherance of the Directive Principles of State Policy
'i prescribed by Part IV of the Constitution. [322 E-{;]

The State is an abstract entity and it can, therefore
..,
.•
only act through its agencies or instrumentalities, whether
such agency or instrumentality be hwoan or juristic.· The
trading and business activities of the State constitute
-t "public enterprise". The structural forms in which the c
~ ~ Government operates in the field of public enterprise are many
and varied. These may consist of Government departments,
statutory bodies, statutory corporations, Government companies
etc. The immunities and privileges possessed by bodies so set
up by the Government in India cannot, however, be the same as
D
those possessed by similar bodies established in the private
sector because the setting up of such bodies is referable to
. the executive power of the Government under Article 298 to
-~ carry on any trade or business. (322 H; 323 A-B; 324 C-Dl

Snkhdev Singh & Ors. v. Bbagatraa Sardar Singh
E
... iagbuvaosbi &Anr., [1975] 3 s.c.R. 619 referred to •

1.5 The whole process of judicial interpretation lies in
-')-· extending or applying by analogy the ratio decidendi of an
earlier case to a subsequent case which differs it in certain
essentials, so as to make the principle laid down in the
F
-t earlier case fit in with the new set of ci.rcumstances. The
sequitur of the above assumption would be' that the Court
should tell the suitor that there is no precedent governing
his case and, therefore, it cannot give him any relief. This
would be to do gross injustice. Had this not been done, the
law would have never advanced. (348 D-Fl G
~ 1.6 Authorities constituted under and corporations
established by statutes have been held to be instrumentalities
and agencies of the Government in a long catena of decisions
of the Supreme Court. The observations in several of these
decisions are general in nature and take in their sweep all H
2B6 SUPI:<.f..\1£ COUI:<.T KEPOt{TS [ 1986 ] 2 S. C. R.

A '
instrumentalities and agEncies of the State; whatever be the .4.-
fonn which such instrumentality or agency may have assumed. If
there is an instrumentality or agency of the State which has
assumed the garb of a Government company as defined in section
617 of the Companies Act, it does not follow that it thereby
ceases to be an instrumentality or agency of the State. For
B the purposes of Article 12 one must necessarily see through
the corporate veil to ascertain whether behind that veil is y
the face of an instrumentality or agency of the State. The
corporation squarely falls within these observations and it
also s2.tisfies the various tests which have been laid down.
Merely because it has so far not the monopoly of inland water
c transportation is not sufficient to divest it of its character ,
of an instrumentality or agency of the State. It is nothing
but the Government operating behind a corporate veil, carrying ,
1--
out a governmental activity and governmental functions of
vital public importance. There can thus be no doubt that the
corporation is "the State" within the meaning of Article 12 of
the Constitution. [349 A-F]

1.7 The Central Inland Water Transport Corporation is
not only a Government company as defined in section 617 of the
Companies Act 1956, but is wholly owned by the three r--
Governments - Central Government and the Governments of West
E Bengal and Assam_ jointly. It is financed entirely by these
tlrree' Gq'~rnments and is completely under the control of the
Central Government, and is managed by the Chairman and Board
of Directors appointed by the Central Government and removable
by it. In every respect it is thus a veil behind which the -1 ..
Central Government operates through the instrumentality of a
F Government company. The activities carried on by the Corpora- .~
tion are of vital national importance. There can thus be no
doubt that the corporation is a Government undertaking in the
public sector. The corporation itself has aonsidered that it
is a Government of India Undertaking. The complete heading of
the impugned Rule is "The Central Inland Water' Transport
G Corporation Ltd. (A Government of India Undertaking)
Service, Discipline and Appeal Rules, 1979." In the face of so
much evidence it is ridiculous to describe the corporation as ,~
a trading company. The activities of the corporation are of
great ic.portance to public interest, concern and welfare and
are activities of the nature carried on by a modern State and
H particularly a modern welfare State. [343 E-G; 346 E-G]
C.I.W.T.CORPN. V• B.l'l. GANGULY 287

..\
~ Sukhdev Singh & Ors. V• Bbagat Raa Sardar Singh
Kaghuvanchi & Aor.~ [1975] 3 S.C.R, 619; Ramana Da.yaraa Sbetty
v. 1he International Airport Authority of India & Anr., [ 1979 J
3 S.C.R. 1014; Managing Director, Uttar Pradesh Ware Housing
Corporation & Anr. v. Vinay Narain Vajpayee, [ 1980 l 2 s. c. R.
773; Ajay Rasia etc. V• Kbalid ~jib Sehravardi & Ors. etc., B
[1981] 2 S.C. R. 79; Prakash Rekhi v. Union of India & Anr.,
[1981] 2 s.c.R. 111; B.s. Minbas v. Indian Statistical
1 Institute & Ors., (1983] 4 s.c.c. 582; Mao.ohan Singh Jaitla
v. ec.mssiooer, Union Territory of CbancUgarh & Ors., [1984]
Supp. s.c.c. 540; Worben of Hindustan Steel Ltd. & Aor. V•
Hindustao· Steel Lt:d. & Ors., [1984] Supp. s.c.c. 554, 560;
P.L Ramadwodra lyer & Ors. v. Union of India & Ors. • [1984] c

~
2 S.C.R. 141; A.L. Kalra V• Project and EquiJlEil~ Corporation
of Iuclia Ltd.. [1984] 3 s.c.R. 316 and West Bengal State
Electricity Board & Ors. v. Desh Bandhu Qlosh & Ors., [ 1985] 3
s.c.c. 116 followed.
Praga Tools <4rPoration V• C.A. I.mual & Ors., ·[1969] 3 D
s.c.R. 773; State of Bihar v. Union of India & Anr•• [1970] 2
s.c.R. 522; S.L. Agarwal v. General Manager, Hindustan Steels
Ltd., (1970] 3 s.c.R. 363; Sabbajit Tewary V• Union of India &
"'f Ors.,. (1975] 3 S.C.R. 616; and S.C. Ihanoa v. ~cipal
Corporation Delhi & Ors., (19811 3 s.c.c. 431 distinguished.
E
Rai Sahib Raa Jewaya ICapur & Ors. V• State of Punjab,
(1955] 2 S.C.R. 225; Rajasthan State Electricity Board, Jaipur
v. Mohan La1 & Ors., [1967] 3 s.c.R. 377; Glrugobinda Basu v.
),S-»kari Prasad. Qlosa1 & Ors., (1964] 4 s.c.R. 311, 315;
ltylands V• Fletcher, [1868] L.R. 3 H.L. 330 and ~noghue V•
~Stevenson, [1932} A.C. 562 referred to. F

2.1 The word nunconscionable" is defined when used with
reference to actions as 11showing no regard for conscience;
irreconcilable with what is right or reasonable". An un-
conscionable bargain would, therefore, be one which is irre-
concilable with what is right or reasonable. If a contract or G
term thereof is unconscionable at the time the contract is
.....(made, the Court may refuse to enforce the contract. An wtcon-
scionable bargain could be brought about by economic duress
even between parties who may not in economic terms be situate
differently. [355 A; 360 A-B]
288 SUPREME COURT REPORTS [1986] 2 S.C. R..

A Pickering V• llfraco.be, [1868] L.R. 3 C.P. 235; .
Occidental Worldwide Inveat.ent Corpn. v. Skibs A/S Avant!,
[1976] 1 Llyod 's Rep. 293; North Ocean Shipping Co. lht. v.
llyaddai Coostruction Co. Ltd., [1979] Q.B. 705; Pao On v. Lau
D.a IDag, [1980) A.C. 614; and Universe Tanksbipa of Hanrori.a
v. International haDSport Workers Federation, [1981] 1 C. R.
129 reversed in [1981} 2 w.L.R. 803 referred to.
B
2.2 According to the doctrine of distributive Justice,
distributive fairness and justice in the possession of wealth
and property can be achieved not only by taxation but also by
regulatory control of private and contractual transactions
even though this might involve some sacrifice of individual
c liberty. [360 C-D)

When our Constitution states that it is being enacted to..J
give to all the citizens of India "Justice, Social, economic.
and political", when clause (I) of Article 38 of thL.
Constitution directs the State to strive to promote the
D welfare of the people by securing and protecting as
effectively as it may a social order in which social, economic
and political justice shall inform all the institutions of the
national life, when clause (2) of Article 38 directs the State )
in particular, to mnimise the inequali_ties in income, not
only amongst individuals but also amongst group of people
E residing in different areas or engaged in different vocations
and when Article 39 directs the State that it shall, in parti-
cular, direct its policy towards securing that the citizens
men and women equally, have the right to an adequate means o~
livelihood and that the operation of the economic system doe~·
not result in the concentration of wealth and reasons of pro-
F duction to the coumon detriment and that there should equal J·
pay for equal work for both men and women, it is the doctrine
of distributive justice which is speaking through the words of
the Constitution. (361 C-F l

Lingappa Pocbanga Appel1iBI' v. State of .Habarashtra &
G Aar., [1985} 1 s.c.c. 479 referred to.

2. 3 Another theory 'Which has made its emergence in >-
recent years in the sphere of the law of contracts in the test
of reasonableness or fairness of a clause in a contract where
there is inequality of bargaining power. In such cases it is
H
C.I.W.T.CORPN. V• B.N. GANGULY 289

A
~recognised that the freedom of contract is absent. In such
cases, judicial review is permitted and consequential relief
allowed. [361 F-G 1

Gillespie Brothers & Co. ~. V• Boy Bowles Transport
Ltd•• [1973] 1 Q.B. 400; Lloyds Bank Ltd. v. Buody, [1974] 3
B
All. E.R. 757; A. Schroeder bic Publishing (h. lbl. v.
~Mcaulay (Fomerely Iastone), [19741 1 W.L.R. 1308; and
f Jataon & Aor. v. Patent Steall Carpet eo. Ltd., [1978] 1 Q.B.
69 referred to.

2. 4 Article 14 of the Constitution guarantees to all
persons equality before the law and the equal protection of
~· the laws. This principle is that the Courts will not enforce
c
~and will, when called upon to do so, strike down an unfair and
unreasonable contract, or an unfair and unreasonable clause in
a contract entered into between parties who are not equal in
bargaining power. The above principle will apply where the
inequality of bargaining power is the result of the great
D
disparity in the economic strength of the contracting parties.
It will apply where the inequality is the result of circum-
stances, whether of the creating of the parties or not. It
( will apply to situations in which the weaker party is in a
position in which he can obtain goods or services or means of
livelihood only upon the terms imposed by the stronger party
E
or go without them. It ·will also apply where a man has no
choice, or rather no meaningful choice, but to give his assent
to a contract or to sign on the dotted line in a prescribed or
r standard form or to accept a set of rules as part of the
contract, however, unfair unreasonable or unconsionable a
clause in that contract or form or rules may be. nus
F
{ principle will not apply when the bargaining power of the
contracting parties is equal or almost equal. This principle
may not apply where both parties are businessmen and the
contract is a commercial transaction. In today's complex world
of giant corporations with their vast infrastructural organi-
sations and with the State through its instrumentalities and
agencies entering into almost every branch of industry and G
~ coumerce, there can be myriad situations which result in
unfair and unreasonable bargains between parties possessing
wholly disproportionate and unequal bargaining power. The
Court must judge each case on its own facts and circumstances
when called upon to do so by a party under section 31(1) of
the Specific ~lief Act, 1963. [370 A-Gl
290 SUPREME COURT REPORTS [ 1986 J 2 S.C. R.

A
2.5 In the vast majority of cases, however, such,
contracts with unconscionable term are entered into by the
weaker party under pressure of circumstances, generally
economic, which results in inequality of bargaining power.
Such contracts will not fall within the four corners of the
definition of "undue influence11 as defined by section 16(1) of
B the Indian Contract Act. The majority of such contracts are in
a standard or prescribed form or consist of a set of rules. ,
They are not contracts between individuals containing terms
meant for those individuals alone. Contracts in prescribed
or standard forms or which embody a set of rules as part of
the contract are entered into by the party with superior
c bargaining power with a large number of persons who have far
less bargaining power or no bargaining power at all. Such
contracts which affect a large number of persons or a group or_
groups of persons, if they are unconscionable, unfair and
unreasonable are injurious to the public interest. To sar such
a contract is only voidable would be to compel each person
with whom the party with superior bargaining power had
contracted to go to Court to have the contract adjudged
voidable. This would only result in multiplicity of litigation
which no Court should encourage and also would not be in
public interest. Such a contract or such a clause in a
contract ought, therefore, to be adjudged void under section
E· 23 o~ the Indian Contract Act, as opposed to public policy.
(371 C-Hl

2.6 The Indian Contract Act does not 4efine the
expression 11public policyn or "opposed to public policy". From~
the very nature of things, such expressions are incapable of
F ?recise definition. Public policy, however, is not the policy
of a particular government. It connotes some matter which ~
concerns the public good and the public interest. The concept
of what is for the public good or in the public interest or
what would be injurious or harmful to the public good or the
public interest has varied from time to time. As new concepts
G take the place of old, transactions which were once considered
against public policy are now being upheld by the courts and
similarly where. there has been a well-recognized head of
public policy, the courts have not shirked from extending it·
to new transactions and changed circumstances and have at
times not even flinched from inventing a new head of public
H policy. The principles governing public policy must be and are
C.I.W.T.CORPN. v. B.N. GANGULY 291

" capable on proper occasion, of expansion or modification. A
Practices which were considered perfectly normal at one time
have today become abnoxious and oppress! ve to public
conscience. If there is no head of public policy which covers
a case, then the court must in consonance with public
conscience and in keeping with public good and public interest
declares such practice to be opposed to public policy. Above B
all, in deciding any case which may not be covered by
r authority Indian Courts have before them the beacon light of
the Preamble to the Constitution. Lacking precedent, the Court
can always be guided by that light and the principles
underlying the Fundamental Rights and the Directive Principles
enshrined in our Constitution. [372 A-D; 373 C-E]
~
c
~ The normal rule of Common Law has been that a party who
seeks to enforce an agreement which is opposed to public
policy will be non-suited. The types of contracts to which the
principle formulated in this case applies are not contracts
which are tainted with illegality but are contracts which
contain terms which are so unfair and unreasonabl~ that they D
shock the conscience of the Court. They are opposed to public
policy and required to be adjudged void. [373 F; 374 D-E]
(
A. Schroeder lblic Publishiug Co. Ltd. v.- Macaulay
(Fomerely lnstone), (1974] 1 W.L.R. 1308; Janson V•
lkiefontein Consolidated KiDes Limited, [19021 A.C. 484, 500; E
Richardson v. Mellish, [18241 2 Bing. 229, 252; S•C• 130 E.R.
294, 303 and [1824-34] All E.R. Reprint 258, 266; Eoderby IOwn
)'--Football Club Ltd. V• Football Association U.d., [1971] Ch.
591~ 606; and ledar liath Metani & Ors. v. Prahlad .Rai & Ors.,
~· [1960] 1 S.C.R. 861 referred to.
F
3.1 Rule 9(i) of the Central Inland Water Transport
Corporation Ltd. (A Government of India Undertaking) -
Service, Discipline and Appeal Rules, 1979 confers upon the
corporation the power to terminate the service of a permanent
employee by giving him three months' notice in writing or in
lieu thereof to pay him the equivalent of three months' basic G
..( pay and dearness allowance. A clause such as Rule 9(1) 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 the public good.
H
,.
'
292 .. SUPREME .COURT REPORTS [19861 2 s.c.R. i

A Such a clause, which apply be described as "the Henry VIII .~
\
clause", therefore, '. is ·. opposed to public policy · and being '
opposed to public policy it is void under section 23 ·of the
Indian Contract Act. It . confers absolute and arbitrary POtier
upon the corporation. It does not even state who on behalf of
the Corporation is to exercise ·that power. There ate no
guidelines whatever laid down · to indicate in what
B circumstances the power given by rule 9(1) is to be exercised
by the Corporation. No opportunity whatever of an hearing is
at all to be afforded to the permanent employee whose services
is being terminated in the exercise of this power. Even where
the corporation could proceed under Rule 36 and dismiss an
employee on the ground of misconduct after holding a regular
c disciplinary inquiry, it is free to resort instead to Rule
9(i) in order to avoid the hassle of an inquiry. [375 H; ·
376 A-B; G-H; 377 E-F1

West Bengal State Electricity Board & Ors. v. De.sh
Bandbu Gbosh & Ors., (1985] 3 s.c.c. 116; Union of India etc.
v. 'lhl.sirBlll Patel etc., [19851 3 s.c.c. 398 and Swadeshi
COtton Hilla V• Union of India, {1981} 2 S.C.R. 533, 591.

3.2 The power conferred by Rule 9(1) is not only
arbitrary but is also discriminatory, for it enables the
corporation to discriminate between employee and employee. It
can pick up one employee and apply to him clause (i) of Rule
9. It can pick up another employee and apply to him clause
(ii) of Rule 9. lt can pick up yet another employee and apply
to him sub-clause (iv) of clause (b) of Rule 36 read with Rule
38 and to yet another employee it can apply Rule 37. All this
the corporation can do when the same circumstances exist as
F would justify the corporation in holding under Rule 38 a
regular disciplinary inquiry into the alleged misconduct of
the employee. In the instant case, both the contesting
IW:!spondents had» in fact been asked to submit their
.
'•
explanation to the charges made against them. Sen Gupta had
'
been informed that a disciplinary inquiry was proposed to be
h.eld in · his case. The charges made against both the
Respondents were such that a disciplinary inquiry could easily
have been held. It was, however, not held but instead resort
was had to rule 9(1). [378 C-E} ·

Employees cannot be equated with goods which can be
H bought and sold. It is equally not possible to equate a
contract of employment with a mercantile transaction between
C.I.W.T.CORPN. v. B.N. GANGULY 293

A
two businessmen and much less to do so when · the contract of
employment is between a powerful employer and a weak employee.
'!
(379 E-F] . . : . . . '
. I

. J
3.2 It is true that there .is mutuality in clause . 9(i)-

;
the same mutuality as in a contract between the lion and the
lamb that both will be free to roam about in the jungle and
r"l;'? each other will be at liberty to devour the other. When one
B
lI
} considers . the ·unequal · position of the corporation and its )
l employees, the argument of mutuality becomes laughable. )
l
\ . [380 A-B] ;
\;
t..:' . . 3.3 Rule 9(i) is both arbitrary and unreasonable and it c
I;
!!
1 ~ also wholly ingonre and sets aside the audi alteram partem Jl
I' l'' · rule, it, therefore, violates Article 14 of the Constitution ;,
(~ to the· extent that it confers upon the corporation the right
to terminate the employment of a permanent employee by giving
f
him three months • notice in writing or by paying him the
equivalent of three months' basic pay and dearness allowance D
in lieu of such notice. (381 D; 387 B-e] ·
i!
~ ... As the corporation is "t~ State" within the meaning of
I· Article 12, it was amenable to the writ jurisdiction of the
· ~ High Court under Article 226. It is now well-established that
an instrumentality or agency of the State being ••the Stateu E
under Article 12 of the Constitution is subject to the
Constitutional limitations, and its actions are State actions
' and must be judged in the light of the Fundamental Rights
guaranteed by Part III of the Constitution. The actions of an
s instrumentality or agency of the State must, therefore, .be in
1
.'~.( conformity with Article 14 of the Constitution. [380 D-F] F

Sukbdev siogb & Ors. V• Bbagatram Sardar Singh
Bagbuvanahi & Anr •• {1975] 3 s.c.R. 619; Ra-ana ~Byaraa Shetty
. v. The Ioternatioo.al Airport Authority of ludia & Ora. • [1979]
3 s.c.R. 1014; Ajay Haaia etc. V• .Khal.id ~jib Sehravardi &
ars. etc •• [1981] 2 s.c.R. 79; and Union of India v. TUlsiram G
Patel etc •• [1985] 3 s.c.c. 398 referred to.

Radbakrislma Agarwal & Ora. v. State of Bihar & Ors.,
(1977] 3 s.c.R. 249 distinguished.
OBSERVATION

...... ..... .
..~ .
294 SUPI®1E COURT REPORTS [ 1986] 2 S.C. R.

A. the purposes of both Part III and Part IV of the Constitution, -
State actions, including actions of the instrumentalities and
agencies of the State, must not only be in conformity with the
Fundamental Rights guaranteed by Part III but must also be
in accordance with the Directive Principles of State Policy
prescribed by Part IV. Clause (a) of Article 39 provides that
the State shall, in particular, direct its policy towards
B
"securing that the citizens, men and women, eually have the ,
right to adequate means of livelihood." Article 41 requires
the State, within the limits of its economic capacity and
development, to "make effective provision for securing the
right to work. 11 An adequate means of livelihood cannot be
secured to the citizens by taking away without any reason the
c means of livelihood. The mode of making "effective provision
for securing the right to work" cannot be by giving employment-.4
to a person and then without any reason throwing him out of
employment. The action of an instrumentality or agency of the
State, if it frames a service rule such as clause (a) of Rule
9 or a rule analogous thereto would, therefore, not only be
D
violative of Article 14 but would also be contrary to the
Directive Principles of State Policy contained in clause (a)
of Article 39 and in Article 41. [385 F~; 386 A-B]

(2) Rule S' also confers upon a permanent employee the
right to resign from the service of the Corporation. By
entering into a contract of employment a person does not sign
a bond of slavery and a permanent employee cannot be deprived
of his right to resign. A resignation by an employee, would,
however, normally require to be accepted by the employer in...,
order to be effective. It can be that in certain circumstances
an employer would be justified in refusing to accept the f
F
employee •s resignation as, for instance, when an employee
wants to leave in the middle of a work which is urgent or
important and for the completion of which his presence and
participation are necessary. An employer can also refuse to
accept the resignation when there is a disciplinary inquiry
pending against the employee. In such a case, to permit an
G employee to resign would be to allow him to go away from the_
service and escape the consequences of an adverse finding>-
against him in such an inquity. There can also be other
grounds on which. an employer would be justified in not
accepting the resignation of an employee. The Corporation
ought to make suitable provisions in that behalf in the said
H
Rules • [ 386 D-<; l
C.I.~.T.CORPN. v. B.N. GANGULY [MADON, J.] 295

A
CIVIL APPELLATE JURISDICTION Civil Appeal No. 4412 &
4413 of 1985.

From the Judgment and Order dated 9. 8. 1985 of the
Calcutta High Court in F.M.A.T. No. 1604 and 649 of 1983.
B
Shant! Bhushan, Subrata Ray and A. K. Sil for the
-i Appellants.
Dr. Y. s. Chitale, H.K. Puri, G. A. Shah, Mrs. Anil
Katiyal, c. V. Subba Rao and R.N. Poddar for the Respondents.

Mridul Ray and K. Swami for the Interveners. c
The Judgment of the Court was delivered by

MADON, J. These Appeals by Special Leave granted by this
Court raise two questions of considerable importance to
Government companies and their employees including their D
officers. These questions are :

l) Whether a Government company as defined in
section 617 of the Companies Act, 1956, is "the
State11 within the meaning of Article 12 of the
Constitution? E

2) Whether an unconscionable -term ·in a contract of
employment is void under section 23 of the Indian
Contract Act, 1872, as being opposed to public
policy and, when such a term is contained in a
contract of employment entered into with a F
Government company, is also void as infringing
Article 14 of the Constitution in case a Government
company is "the State11 under Article 12 of the
Constitution?

Alt:hough the record of these Appeals is voluminous, the G
_ ..J salient facts lie within a narrow compass. The First Appellant
--,_ in both these Appeals, namely, the Central Inland Water
Transport Corporation Limited (hereinafter referred to in
short as "the Corporationn), was incorpora~ed on February 22,
1967. The majority of the shares of the Corporation were at
all times and still are held by the Union of India which is H
296 SUPREME COURT REPORTS [19861 2 s.c.R.

A the Second Respondent in these Appeals, and the remaining ~
shares were and are held by the State of West· Bengal and the
State of Assam. Section 617 of the Companies Act, 1959 (Act
No.1 of 1956), provides as follo~ :
"617. Definition of 'Coveralent Co.pany'. -

B For the purposes of this Act Government company 'r
means any company in which not less than fifty-one
per cent of the paid-up share capital is held by
the Central Govermnent, or by any State Government
or Governments, or partly by the Central Government
and partly by one or niore State Govermnents and
c includes a company which is a subsidiary of a
Government company as thus defined."

As all the shares of the Corporation are held by different
Governments, namely, the Government of India and the
Governments of West Bengal and Assam, the Corporation is not
D only a Government company as defined by the said section 617
but is a company wholly owned by the Central Government and
two State Governments.

Clause III(A) of the Memorandum of Association of the
Corporation lists the main objects of the Corporation and
E clause III(B) of the Memorandum of Association lists the
objects incidental or ancillary to the main objects. It is
unnecessary to reproduce all these objects for according to
the Petitions filed by the Corporation for obtaining Special 'i ...
Leave in these Appeals, it is currently engaged in carrying
out the following activities, namely t r
F
(i) maintaining and running river service with
ancillary function of maintenance and operation of
river-site jetty and terminal;

(ii) constructing vessels of various sizes and
G descriptions;

(iii) repairing vessels of various sizes and
descrip~ions; and

(iv) undertaking general engineering activities.
H
C.I.W.T.CORPN. v. B.N. GANGULY [MADON, J.] 297

A
Article 4 of the Articles of Association of the
Corporation provides that the Corporation is a private company
within the meaning of clause (iii) of sub-section (1) of
section 3 of the Companies Act and that no invitation is to be
issued to the public to subscribe for any shares in, or
debentures or debenture stock of, the Corporation. Article 51
B
of the Articles of Association confers upon the President of
f India the power to issue from time to time such directions or
instructions as he may consider necessary in regard to the
affairs or the conduct of the business of the Corporation or
of the Directors thereof. The said Article also confers upon
the President the power to issue such directions or

l instructions to the Corporation as to the exercise and
performance of its functions in matters involving national
security or public interest. Under the said Article, the
Directors of the Corporation are bound to comply with and give
c

immediate effect to such directions and instructions. Undex:,
Article 51A, the President has the power to call for such
returns, accounts and other information with respect to
D
properties and activities of the , Corporation as might be
required from time to time. Under Article 40, subject to the
~ provisions of the Companies Act and the directions and
instructions issued from time to time by the President under
Article 51, the business of the Corporation is to be managed
by the Board of Directors. Under Article 14(a), subject to the
E
provisions of section 252 of the Companies Act, the President
is to determine in writing from time to time the number of
~ Directors of the Corporation which, however is not to be less
than two or more than twelve and under Article 14(b), at every
annual general meeting of the Corporation, every Director
~appointed by the President is to retire but is eligible for
re-appointment. Under Article 15(a), the President has the F
po-wer at any time and from time to time to appoint any person
as an Additional Director. Under Article 16, the President has
the power to remove any Director appointed by him from office
at any time in his absolute discretion. Under Article 17, the
vacancy in the office of a Director appointed by the President
--{ caused by retirement, removal, resignat~on, death or G
, otherwise, is to be filled by the President by fresh
appointment. Article 18 provides that the Directors are not
required to hold any share qualification. Under Article 37 ,
the President may from time to time appoint one of the
Directors to the office of the Clairman of the Board of
298 SUPREME COURT REPORTS [1986] 2 ~.C.R.

A
both~
Directors or to the office of the Managing Director or to
these offices for such time and at such remuneration as the
President may think fit and the President may also from time
to time remove the person or persons so appointed from service
and appoint another or others in his or their place or places.
Under Article 41, the Chairman of the Board has the power, on
B his own motion, and is bound, when requested by the Managing
Director in writing, to reserve for the consideration of the ~
President the matters relating to the working of the
Corporation set out in the said Article. Article 42 lists the
matters in respect of which prior approval of the President is
required to be obtained. Under Article 47, the auditor or
c auditors of the Corporation are to be appointed or
re-appointed by the Central Government on the advice of the
Comptroller and Auditor-General of India. The said Article
also confers power upon the Comptroller and Auditor-General of
India to direct the manner in which the accounts of the
Corporation are to be audited and to give the auditors
D instructions in regard to any matter relating to the
performance of their function. Under the said Article, he has
also the power to conduct a supplementary or test audit of the
accounts of the Corporation by such person or persons as he
1
may authorize in that behalf and for the purposes of such
audit to require such information or additional information to
E · be furnished to such person or persons on such matters by such
person or persons as the Comptroller and Auditor-General may,
by general or special order, direct.

Under clause (V) of the Memorandum of Association, the i
authorized share capital was rupees four crores. It was raised
F to rupees ten crores by a special resolution passed at the f
Annual General Meeting of the Corporation held on December 30,·
1972, and further raised to rupees twenty crores by a special
resolution passed at the Annual General Meeting held on
November 5, 1979.

G The abov~ facts and the provisions aforementioned of the
Memorandum of Association and the Articles of Association
clearly show that not only is the Corporation a Government ~
company of which all the shares were and are owned by the
Central Government and two State Governments but is a
Government company which is under the complete control and
H management of the Central Government.
C.I.w.T.CORPN. v. B.N. GANGULY [MADON, J.] 299

A company called the "Ri.vers Steam Navigation Company A
Limited" was carrying on very much the same business including
the maintenance and running of river service as the
Corporation is doing. A Scheme of Arrangement was entered into
between the said company and the Corporation. The Calcutta
High Court by its order dated May 5, 1967, approved the said
Scheme of Arrangement and order the closure of the said B
--i Company and further directed that upon payment to all the
creditors of the said ComPany, the said Company would stand
dissolved without winding up by an order to be obtained from
the High Court and accordingly, upon payment to all the
creditors, the said Company was ordered to be dissolved. The
said Scheme of Arrangement provided that the assets and
certain liabilities of the said Company would be taken over by c
the Corporation. The said Scheme of Arrangement as approved by
the High Court also provided as follows :

"a) That the new Company shall take as many of the
existing staff or labour as possible and as can be
reasonably taken over by the said transferee D
Company subject to any valid objection to any
individual employee or employees.

b) That as to exactly how many can be employed it
is left to the said transferee Company's bona fide
discretion. E

c) That those employees who cannot be taken over
shall be paid by the transferor Company all moneys
due to them under the law and all legitimate and
legal compensations payable to them either under
Industrial Disputes Act or otherwise legally F
admissible and that such rooneys shall be provided
by the Government of India to the existing
transferor Company who will pay these dues."

The First Respondent in Civil Appeal No. 4412 of 1985,
Brojo Nath Ganguly, was, at the date when the said Scheme of G
Arrangement became effective, working in the said Company and
his services were taken over by the Corporation and he was
appointed on September 8, 1967, as a Deputy U1ief Accounts
Officer. The First Respondertt in Civil Appeal No. 4413 of
1985, Tarun Kanti Sengupta, was also working in the said

H
300 SUPREME COURT REPORTS [1986} 2 S.C.R.

A ~

Company and his services were also taken over by the ~
Corporation and he was appo.inted on September 8, 1967, as
Chief Engineer. on the sh:f p "R:J ver Ganga11 • It j s urmecessary to
refer at this stage to the terms and conditions of the letters
of appointment issued to these two Respondents as they have
been subsequently superseded by ser.v:l ce rules framed by the
B Corporation except to state that under the said letters of
appointment the age of superannuation was fifty-five years ).-
unless the Corporation agreed to retain them beyond th.is
period. The said letters of appointment also provided that
these Respondents would be subject to the service rules and
regulations :including the conduct rules. Service rules were
c framed by the CorporatJon for the first time in 1970 and were ~
replaced by new rules in 1979. ~

We are concerned in these Appeals with the "Central
Inland Water Transport Corporation Ltd. Service Discipline and
Appeal Rules" of 1979 framed by the Corporation. These rules
D will her.e:i nafter. be referred to :1 n short as "the said Rules".
The said Rules apply to all employees in the service of the
Corporation in all units :In West Bengal, Bihar, Assam or in
other State or. Union Territory except tho&e employees who are (
covered by the Sta11ding Orders under the Industrial Employment )---'
(Standing Orders) Act, 1946, or those employees in respect of
E whom the Board of Directors has issued separate orders. Rule 9
of. the said Rules deals w.l th tenninatj on of employment for.
acts other than misdemeanour.. The relevant provisions of the
sa:fd Rule 9 relat:fng to permanent employees are as follows :

''9. TERMINAIION OF 1ltPLOXMEN'l FOil ACrS Ol1IEll THAN
F MISWBW«>UR.- ~

(i) The employment of a permanent employee shall be
subject to termination on three months' notice on
either side. The notice shall be in writing on
either side. The Company may pay the equivalent of
G three months' basic pay and dearness allowance, if
any, in lieu of notice or may deduct a like amount
when the employee has faj led to give due notice. )-

(i j) The ser.vi ces of a permanent employee can be
terminated on the grounds of 11Serv:f ces no longer.
H required in the :f nterest of the Company" without
C.I.W.T.CORPN. v. B.N. GANGULY [MAOON, J.} 301

A
assigning any reason. A permanent employee whose
services are terminated under this clause shall be
paid 15 days ' basic pay and dearnes~• allowance for
each completed year of continuous service in the
Company as compensation. In addition he will be
entitled to encashment of leave at h:l.s credit." B

--. Under Rule 10, an employee is to retire on completion of the
age of fifty-eight years though in exceptional cases and in
the interest of the Corporation, an extension may be granted
with the prior approval of the Chairman-cum-Managing Director
and the Board of Directors. Rule 11 provides as follows :
11
11. RESIGN&TION. -
c

Employees Who wish to leave the Company's services
must give the Company the same notice as the
Company is required to give them unde1~ Rule 9."
D
Rule 33 provides for suspension of an employee where a
disciplinary proceeding against him is contemplated or is
pending or where a case against him in respect of any criminal
offence is under investigation or trial. Rule 34 provides for
payment of subsistence allowance during the perioci of
suspension. Rule 36 sets out the different penalties which can E
be imposed on an employee for his misconduct. These penalties
are divided into minor and major penalties. Rule 37 is as
follows :

'' 37. .ACl'S <W MlS(DUl)Cf. -
F
Without prejudice to the general meaning of the
term 'misconduct' the Company shall have the right
to terminate the services of any employee at any
time without any notice if the employee is found
guilty of any insubordination, intemperance or
other misconduct or of any breach o.f any rules G
pertaining to service or conduct or non-performance
of his duties."

Rule 38 prescribes the procedure for imposing a major penalty
and sets out in detail how a disciplinary inquiry is to be
held. Rule 39 provides for action to .be taken py the
H
302 SUPREME COURT REPORTS [1986} 2 S.C. R.

A
disciplinary authority on the report made by the Inquiring
Authority. Rule 40 prescribes the procedure to be followed for
imposing minor penalties. Rule 43 provides for a special
procedure to be followed in certain cases. This special
procedure consists of disPensing with a disciplinary inquiry
altogether. The said Rule 43 provides as follows :
B
"43. SFECIAL PKOCEOOKE IN CERTAIN CASES. -

Notwithstanding anything contained in Rule 38, 39
or 40, the disciplinary authority may impose any of
the penalties specified in Rule 36 in any of the
c following circumstances : -

i) The employee has been convicted on a criminal
charge, or on the strength of facts or conclusions
arrived at by a judicial trial; or

D ii) where the disciplinary authority is satisfied
for reasons to be recorded by it in writing that it
is not reasonably practicable to hold an inquiry in
the manner provided in these Rules; or
..1
iii) where the Board is satisfied that in the
E interest of the security of the Corporation/
Company, it is not expedient to hold any inquiry in
the manner provided in these rules."

Rule 45 provides for an appeal against an order imposing -..
penalty to the appropriate authority specified in the Schedule
F to the said Rules and Rule 45-A provides for a review.

We are concerned in these Appeals with the validity of
I
clause (i) of Rule 9 only.

So far as Ganguly, the First Respondent in Civil Appeal
G No. 4412 of 1985, i.s concerned, he was promoted to the post of
Manager (Finance) in October 1980 and also acted as General
Manager (Finance) from November 1981 to March 1982. On)
February 16, 1983, a confidential letter was sent to him by
the General Manager (Finance), who is the Third Appellant in
Civil Appeal No. 4412 of 1985, to reply within twenty-four
H hours to the allE7gation of negligence in the maintenance of
C.I.W.T.CORPN. v. B.N. GANGULY [MADO.N, J. J 303
A
$ Provident Fund Account~. Ganguli ·made a representation as also .
gave · · a· detailed ~ reply . to the · said ·.·show . cause ·notice.
· Thereafter by a · letter dated . February . 26; 1983, signed by the
. Chairman-cul:lrl1.anaging Director · o f the Corporation, · a notice
under claus e (i) of Rule 9 'of ·· the : said ~ Rules was given to
B
; Ganguli ·· ·terminating his · service ·with - the Corporation with
·. · . immediate : effect. Along with the s aid letter a · cheque for
~~three months' basic pay and dearness al16wance was enclosed. ·
I ,. ·; '
f So · far as Sengupta, the Firs t Respondent in Civil · Appeal
l No. 4413 of 1985, is concerned, he was promoted to the post of
I~ General Manager (River Services) with effect from January 1,
1980. His name was enrolled by the .. Bureau · of Public
c
Enterprises and he was called for an interview for the post of
I Chairman-cum-Director of the Corporatiod by . the · Public
Enterprises Selection Board. According ' to Sengupta, he could
not appear before the Selection Board as he received the
letter calling him for the i nterview after the date fixed in
0
that behalf. According · to Sengupta, the new Chairman-cum-
Managing Director who was selected at the said interview bore
a grudge against him for having competed :against . him for the
t·--"..said post and on February 1, 1983, he · issued a charge-sheet
against Sengupta intimating to him that a dis ciplinary inquiry
was proposed to be held against him under the satd Rules and E
calling upon him to file his written statement of defence. By
his letter dated February · 10, 1983. addressed to the
Chairman-cum-Managing Director, Sengupta denied the charges
made agains t him and asked for inspection of documents and
copies of s~atements of witnesses mentioned in the said
charge-sheet. By a letter dated February 26, 1983, signed by F
! .--:(the Chairman-cum-Managing Director notice was given to
· Sengupta under clause (i) .. of Rule 9 of the said Rule,
terminating his service with the Corporation with immedlate
effect. Along with the said letter a cheque for three months'
basic pay and dearness allowance in lieu . of · noti~e was
enclosed.
G
Both Ganguly and Sengupta filed writ ·. petitions in
Calcutta High Court under Article 226 of the Constitution
challenging the termination of their . service . as also the
validity of the said Rule 9(i). In both these writ petitions
rule nisi was issued and an ~ parte ad interim order staying H
r
304 SUPREME COURT REPORTS [1986) 2 s. c. 1)
~ J ~·

A
the operation of the said notice of termination was passed by
a learned Single Judge of the High Court • The Appellant& ,
before us went in Letters Patent Appeal before a Div.ision ,
Bench of the said High Court against. the said ad interim
orders, the appeal in the case of Ganguly being F .M.A. T. No.
1
1604 o.f 1983 and in the case of Sengupta being F .M.A. T. No. J
B 649 of 1983. On January 28, 1985, the Division Bench ordered i
in both these Appeals that the said writ petitions should ~
stand transferred to and heard by it along with the said~~·
appeals. The said appeals and writ petitions were thereuPQn f
heard together and by a coomon judgment delivered on August f
9, 1985J the Division Bench held that the Corporation was a t
C State within the meaning of Article 12 of the Constitution and r
that the said Rule 9(i) was ultra vires Article 14 of the J
Constitution. Consequently the Division Bench struck down the 1
said Rule 9(i) as being void. It also quashed the impugned 1
orders of termination dated February 26, 1983. It is against•\
the said judgment and orders of the Calcutta High Court that ~
D the present Appeals by Special Leave have been filed.

The contentions raised on behalf of the Corporation at
the hearing of these Appeals may be thus sunmarized :

(1) Government company stands on a wholly~
A
E different footing from a statutory corporation for , ·
while · a statutory corporation is established by a
statute, a Government company is incorporated like
any other company by obtaining a certificate of
incorporation under ~he Companies Act and,
thereforeJ a Government company cannot come within
F the scope of the term "the State" as defined in 1
Article 12 of the Constitution.

(2) A statutory corporation ia usually established
in order to create a monopoly in the State in
respect of a particular activity. A Government
G company is, however • not established for this .
purpose.

(3) The Corporation does not have the monopoly of
inland water transport but is only a trading
company aa is shown by the obj ecta clause in itS
H Memorandum of Association.

' . .,........,.__-- ..........._....... ____ • - - • '• · - -· -- If - - - r---~· •• ~·
C.I.W.T.CORPN. v. B.N. GANGULY - [MADON, J.] 305

A
( 4) Assuming a Government company is "the State"
within the meaning of Article 12, a contract of
employment entered into by it is like any other
contract entered into between two parties and a
term in that contract cannot be struck down under
Article 14 of the Constitution on the ground that B
it is - arbitrary or unreasonable or unconscionable
or one-sided or unfair.

At the hearing of these Appeals the Union of India, which is
the Second Respondent in these Appeals • joined in the
contentions raised by the Corporation.
c
The arguments advanced on behalf of the contesting
Respondents in broad outlines were as follows :

(1) The definition of the expression ''the State"
given in Article 12 is wide enough to include
within its scope and reach a Government company. D

(2) A State is entitled to carry on any activity,
even a trading activity • "through any of - its
instrumentalities or agencies, whether such
instrumentality or agency be one of the Departments
of the Government, a statutory corporation, a E
statutory authority or a · Government company
incorporated under the Companies Act • ·
y

(3) Merely because a Government company carri4!§ on
a trading activity or is authorized to carry on a
trading activity does not mean that it is excluded F
from the definition of · the expression "the State"
contained in Article 12.
11
( 4) A Government company being the State'' within
the meaning of Article 12 is bound to act fairly
and reasonably and if it does not do so, its action G
can be struck down under · Article 14 as being
, arbitrary.
(5) A contract of employment stands on a different
footing from other contracts. A te~ in a contract
of eQlployment entered into by a private employer H

. . .-_....
~
-. - . . -. .. . .. _,. .... - ~ ~- .·.-.-- -~--
·r
I.
I: r
I
~ .
o

SUPREME COURT REPORTS ['1986] 2 s.c.R.
306

A
~
which is unfair, unreasonable and unconscionable 1s ;..-
bad in law. Such a term in a contract of employment
entered into by the State is, therefore, also bad
in la'll and can be struck down under Article 14•

. Dur-ing the ~ourse. of the hearing of these Appeals the
Central . Inland Water Transport Corporation Officers'
Association made an application for permission to intervene in
these Appeals and permission to intervene was granted to it by
this . Court. The said Association supported the stand taken by
the contesting Respondents. . · ··

c· We will na'll examine the correctness of the rival
submissions advanced at the Bar. ·
•. • ~• J • • .. .., • ': .,I

The word "State" has different meanings depending upon
the context in which it is used. In the .sense of being a
polity, it is defined in the Shorter OKf<;>rd English
D Diet ionary, Third Edition, Volume ,II, page 2005, . as "a body of
people occupying a defined territory and organized under a
sovereign government". The same dictionary . defines the 1

expression "the State" as ."the body politic as organized for ~
supreme civil rule and government; the pol~tical organization
t which · is the basis of civil gov~rnment, ;, hence, the supre~
E civil power, and government vested in a country . or nation •

'
I
According to Black's Law Dictionary.,Flfth Edition, page 1262,
"In its largest sense, a 'state' : is a body . politic or 4
society of men". According to Black the term "State" maY
refer. "either to the body politic of a nation (e.g. United
States) or to an individual governmental unit of such nation~
F· (e.g.· California)". In modern international practice, whether
a collllllnity is deemed a State or not depends upo~ the general

l recognition accorded to it by . the existing group of other
States. A State must have a relatively permanent legal
organization, deterudning its structure and , the relative
powers of its major governing bodies or organs. This legal
c organizational permanence of a State is . to be found in its
Constitution. With . rare exceptions, such 88 the United ...~
Kingdom, most States now have 8 written Constitution• nte
Constitutional structure of a State may be either unitary, as
when it has a single system of government applicable to all
its parts, or federal when it has one system of gove["'U111!!11t
H operating in certain respects and in .certain matters in all
J
1
r.~
(
• C.I.W.T.CORPN. v. B.N. GANGULY 307
~
~
~· ·

rl. its parts and also separate governments operating in other A
~ respects in distinct parts of the whole. In such a case the
i~ . uni ts · or sub-divisions having separate governments are
variously called
t
'states' as in lndiaj U.S.A. and Australia j
'provinces as in Canada, 'cantons' as in Switzerland) or
designated by other names.
B
"... .
; .'1. CUr Constitution is federal in structure. Clause (1) of
Article 1 of the Constitution . provides that "India, that is
Bharat; shall be a Union of States" and clause (2) of that
~ Article provides that "The States and the territories thereof

!
·~'· shall be as specified in the «'irst Schedule". The word
"States.. used ; in Article 1 thus refers to the federating
units, India itself being a State consisting of these units.
c
f'' The ·term "States" is · defined variously in some of . the other
Articles of the Constitution as the context of the particular
Part of the ConstitutiOil in which it is used requires. Part . VI
of ·the Constitution is headed ·"The States" and provides for
the ~ form of the ~ three ·.' organs of · a '· State, namely, the
D
Executive;. the ~gislature and the Judiciary. Article 152,
which is the opening ·Article in Part · VI of the Constitution,
·• provides as follows : ' ·'
" . •. . , ..

"152. Definition. -

In this Part, unless the context otherwise
requires; the · expression 'State' does not include
the State of Jammu and Kashmir.u
•
~ The State of Jammu and Kashmir is excluded because that State,
.•, · though one of the States which constitute the Union of India, F
had, in pursuance of the provisions of Article 3 70 of the
Constitution read with the Constitution (Application to Jammu
and · l<astunir) 1' 0rder, · 1954 (C.O. 48), set up a Constituent
Assembly for the internal Constitution of the Scate and it had
framed the Constitution of Jammu and Kashmir which was adopted
and enacted · by that Constituent Assembly on November 17, 1965. G
r- Article 152 also, therefore, uses the expression "State" as
meaning the federating units which constitute the Un~on of
India. Part XlV of the Constitution deals with services under
the Union and the States. Article 308 provides as follows :

H
308 SUPREME COURT REPORTS . [1986] 2 S.C.R.
r
..A "308. Interpretation. -

In . this Part • unless the context otherwise
requires, the expression 'State' does ~t include
. the State of Jall111.1 and Kashmir."

This definition read with the other provisions of Part XIV
eb~ that ·the word "State" applies to the federating units ·
(ot~r . than the State of JaiDlll and Kashmir for the reason
mentioned above) which together constitute the Union of India
because in the other Articles of Part XIV Wherever the Union
of India is referred to, •it is described as "the Union"~ A
Article 366 of the Constiution defines certain expressions
used in the Constitution of India. That Article, however, does
not contain any definition of th~ term "State". Under Article
367(1), unless the context otherwise requires, the General
Clauses Act, 1897 (Act No. X o~ 1897), . subject· to any
adaptations and modifications that may be made therein by the
D President of India under . Article 372 · t:o . bring that Act into
accord with the provisions of the Constitution, applies for
the interpretation of the Constitution. Clause (58) of section
3 of the General Clauses Act defines the term "State" as
follows :

E .. (58) 'State' -

(a) as ~espects any period before the commencement
of the Constitution (Seventh Amendment) Act, 1956,
shall mean a Part A State, a Part B State or a Part
C State, and
P'
(b) as respects any period after such commencement,
shall mean a State specified in the First Schedule
to the Constitution and shall include a Union
Territory.''

This definition, therefore, also confines the term "State" to ·
the federating units which together fo~ the Union of Indi4•

We are concerned in these Appeals with Article 12·
Article 12 forms part of Part Ill of the Constitution which
deals with Fundamental Rights and pr id f
ov es as allows :
i
I
C•l.W.T.CORPN. v.; B.N. GANGULY [MADON, J.] 309
r
I

~) "12.; Definition. - A
~

i
In this Part, unless the context otherwise
~ requires, 'the State' includes the Government and
Parliament of India and the Government and the
Legislature of each of the States and all local or
B
! other authorities ~thin the territory of India or
~ . under the control of the Government of India. 11
; :)
. . . .
'. {Emphasis supplied)
I
~ · The same definition applies to the expression "the State" when
used in Part IV of the Constitution which provides for the
Directive Principles of State Policy, for the opening Article
c
t
~
~
of Part IV, namely, Article 36, provides :

"36. Definition. -

In this Part, unless the context otherwise
D
requires, 1 the State' has the same meaning as in
Part III."
~
lhe expression "local authority" is defined in clause · (31) of
section 3 of the General Clauses Act as follows :
E
"{31) 'Local authority' shall mean a municipal
coumittee, district board, body of port cOliiDis-
sioners or other authority legally entitled to, or
entrusted by the Government with, the control or
management of a mWl.icipal or local fund•"
'
~ ,--~
.. . F
Thus, the expression "the State" when used in Parts Ill and IV
of the Constitution is not confined to only the federating
States or the Union of India or even to both• By the express
terms of Article 12 the expression "the State" includes -

(1) the Government of India,

(2) Parliament of India

(3) the Government of each of the States which
constitute the Union of India,
310 • . .:, SUPREME COURT REPORTS [1986] 2 s.c.R.

A
(4) the Legislature of · each,. of the States which
constitute the Union of India,
r
• • ~• • I •
l
'
(5) all local :authorities within . the territory of 1

.J •• •• ,.. . India, · · :~ . _ , · I
:) . . .. :-. # • •
• , I • f'- o . ' .,. C•

B· . (6) all · local authorities under the control of the
Government of India, _ · :.;

.: (7) all other authorities within the territory of 'j
India, and "t.

c ·. (8) all other au~horities under the ..control of the~
. . Government of India. ··
"
There are three aspects of Article 12 which require to be •
particularly noticed. These aspects are :
D (1) the definition given in Article 12 is not an
l
·-

,
· : explanatory and restrictive definition but an .
extensive definition, i
(ii) it is the definition of the expression "the
State". an.d not of the term "State11 or "States 11 , and
E
~ - (iii) it is · inserted in the Constitution for the
purposes of Parts Ill and IV thereof.
I

· As pointed out in Craies on Statute Law, Seventh Edition, l
page 213, where an interpretation clause defines a word to t, 1
F mean a particular thing, the definition is explanatory and ~
prima facie restrictive; and whenever an interpretation clause
.defines a term to include something, the · definition is
extensive. While an explanatory and restrictive definition
eonfinea the meaning of the word defined to What is stated in
the interpretation clause, so that wherever the word defined
G is used in the particular statute in which that interpretation
clause occurs, it will bear only that meaning unless where, as :;
is usually provided, the subject or context other.rlse
requires, an extensive definition expands or extends the
meaning of the word defined to include within it what would
otherwise not have been comprehended in it"" when the word
defined is used in its ordinary sense. Article 12 uses the

__________________
, - -- - --
C.I.W.T.CORPN. v. B.N. GANGULY [MADON, J.} 311

A
word "includes". It thus extends the meaning of the expression
"the State" so as to include within it also what otherwise may
not have been comprehended by that expression when used in its
ordinary legal sense.

Article 12 defines the expression 11 the State" while the B
other.Articles of the Constitution referred to above, such as
~ Article 152 and Article 308, and clause (58) of section 3 of
the General Clauses Act defines the term nstate". The
deliberate Use of the expression "the State" in Article 12 as
also in Article 36 would have normally shown that this
expression was used to denote the State in its ordinary and
Constitutional sense of an independent or sovereign State and c
the inclusive clause in Article 12 would have extended this
t meaning to include within its scope ~1tever has been
expressly set out in Article 12. The definition of the
expression "the State" in Article 12, is however, for the
purpOses of Parts Ill and IV of the Constitution. The contents
of these two Parts clearly show that the expression "the D
State" in Article 12 as also in Article 36 is not confined to
its ordinary and Constitutional sense as extended by the
.inclusive portion of Article 12 but is used in the concept of
=l: "'{ the State in relation to the Fundamental Rights guaranteed by
Part III of the Constitution and the Directive Principles of
State Policy contained in Part IV of the Constitution which E
Principles are.declared by Article 37 to be fundamental to the
governance of the country and enjoins upon the State to apply
in making laws.
'r
What then does the expression "the State" in the context
\ of Parts III and IV of the Constitution mean? F

Men's concept of the State as a polity or a political
unit. or entity and what the functions of the State are or
should be have changed over the years and particularly in the
course of this century. A man cannot obstinate~y cling to the
same ideas and concepts all his life. As Emerson said-in his G
essay on "Self-Reliance", "A foolish consi.stency is the
hobgoblin of little minds". Man is by nature ever restless,
ever discontent, ever seeking something new, ever dissatisfied
with what he has. This inherent trait in the nature of man is
reJlected in the society in which he lives for a society is a
c..onglomerate of men who live in it· Just as man by nature is H
312 SUPREME COURT REPORTS (1986] 2 S.C. R.

A dissatisfied, so is society. Just as man seeks something new,
ever hoping that a change will bring about something better,
so does society. Old values, old ideologies and old systems
are thus replaced by new ideologies, a new set of values and a
new system, they in their turn to be replaced by different
ideologies, different values and a different system. The ideas
that seem revolutionary become outmoded with the passage of
B time and the heresies of today become the dogmas of tomorrow. ),.
What proves to be adequate and suited to the needs of a 7
society at a given time and in particular circumstances turns
out to be wholly unsuited and inadequate in different times
and under different circumstances.

c The story of mankind is pWlctuated by progress and f.
retrogression. Empires have risen and crashed into the dust of ~
history. Civilizations have flourished, reached their peak and ·
passed away. In the year 1625, Carew, C.J., while delivering
the opinion of the House of Lords in Re tbe Earlda. of Oxford,
[1625] W.Jo. 96, 101. s.c. (1626) 82 E.R. 50, 53, in a dispute
D relating to the descent of that Earldom, said :

"·.. and yet time hath his revolution, there must
be a period and an end of all temporal things, '¥
finis rerum, an end of names and dignities, and
whatsoever is terrene ••• ".
E
The cycle of change and experiment, rise and fall, growth and
decay, and of progress and retrogression recurs endlessly in
the history of man and the history of civilization. T.S. Eliot ~
in the First Cllorus from 11The Rock" said :

F "O Perpetual revolution of configured stars,
0 Perpetual recurrence of determined seasons,
0 world of spring and autumn, birth and dying!
The endless cycle of idea and action,
Endless invention, endless experiment".

G The law exists to serve the needs of the society which is
governed by it. If the law is to play its allotted role of
serving the needs of the society, it must reflect the ideas
and ideologies of that society. It must keep time with the
heartbeats of the society and with the needs and aspirations

H
C.I.W.T.CORPN. v. B.N. GANGULY [MADON, J.) 313

A
of the people. As the society changes, the law cannot remain
immutable. The early nineteenth century essayist and wit,
Sydney Smith~ said, '~en I hear any man talk of an
unalterable law, I am convinced that he is an unalterable
fool." The law ID.lst, therefore, in a changing society march in
tune with the changed ideas and ideologies. Legislatures are, B
however, not best fitted for the role of adapting the law to
'f the necessities of the time, for the legislative process is
too slow and the legislatures often divided by politics,
slowed down by periodic elections and overburdened with myriad
other legislative activities. A constitutional document is
even less suited to this task, for the philosophy and the
ideologies underlying it must of necessity be expressed in c
1 broad and general terms and the process of amending a
r Constitution is too cumbersome and time-consuming to meet the
immediate needs. This task must, therefore, of necessity fall
upon the courts because the courts can by the pt'ocess of
judicial interpretation adapt the law to suit the needs of the
society. D

A large number of authorities were cited before us to
show how the courts have interpreted the expression, "the
State" in Article 12. As these authorities are decisions of
this Court, we DUSt perforce go through the whole gaaut of
them though we may preface an examination of these authorities E
with the observation that they only serve to show how the
concepts of this Court have changed both with respect to
Article 12 and Article 14 to keep pace with changing ideas and
r altered circwastances. Before embarking upon this task we
would, however, like to quote the following passage (which has
' become a classic) from the opening paragraph of Justice Oliver F
Wendell Holmes's "The Co11100n Law" which contains the lectures
delivered by him while teaching law at Harvard and which book
was published in 1881 just one year before he was appointed an
Associate Justice of the Massachusetts Supreme Judicial Court:

G
" It is something to show that the consistency of a
system requires a particular result, but it is not
all. The life of the law has not been logic: it has
been ~xp~rience. The felt necessities of the ~i~e,
the preval~nt aoral ai)C;l poli-~ical theoriet,
in~u~tions of public policy, 4v~e4 or q.~o~ci®s,
314 SUPREME COURT REPORTS [ 1986] 2 S. C. R.

A
even the prejudices which judges share with their
fellow111en, have had a good deal more to do than
the syllogism in determining the rules by which men
should be governed. The law embodies the story of a
nation's development through many centuries, and it
cannot be dealt with as if it contained only the
B axioms and corollaries of a book of mathematics.
In order to know what it is, we must know what it
has been, and what it tends to become. We must +'
alternately consult history and existing theories
of legislation. But the most difficult labor will
be to understand the combination of the two into
c new products .at every stage. The substance of the .
law at any given time pretty nearly corresponds, so f
far as it goes, with what is then understood to be--\
convenient; but its form and machinery, and the
degree to which it is able to work out desired
results, depend very much upon its past."
D
We will, therefore, briefly sketch the temper of the
times in which our Constitution was enacted and the purposes
for which Parts III and IV inserted in our Constitutiop.
¥
The· bombs which had rained down upon the cities of
E- Europe, Africa and Asia and the Islands in the Pacific had
changed, and changed dramatically, not only the political but
also the sociological, ideological and economic map of the
world. A world reeling from the horrors of the Second World
War and seeking to recover from the trauma caused by its 1
atrocities sought to band all nations into one Family of Man
F and for this purpose set up the United Nations Organization in #
order to save succeeding generations from the ~courge of war
which had twice in this century brought untold sorrow to
mankind and in order to reaffirm faith in fundamental human
rights, in the dignity and worth of the human person and in
the equal rights, of man and woman and of nations large
G or small, and thus to give concrete shape to the dream of
philosophers and poets that the war-drums would throb no
longer and the battle-banners would be furled. in the ~
Parliament of Man and the Federation of the World. But much .
. had gone before. There was the signing of the Inter-Allied )
Declaration of June 12, 1941, at St. James's Palace in London
H
C.I.W.T.CORPN. v. B.N~ GANGULY [MADON, J.] 315

A
by the representatives of the United Kingdom, the
Commonwealth, General de Gaulle and the governments in exile
of the European countries conquered by Nazi Germany; there was
the Atlantic Charter of August 14, 1941; there was the
Declaration of the United Nations signed on New Year's Day of
1942 at Washington, D.C., by twenty-six nations who were B
fighting . the Axis; there was the Declaration made at the
~ Moscow Conference in October 1943 and at the Teheran
Conference on December 1, 1943; there was the Dumbarton Oaks
Conference held in Washington, D.C., in Augustr and September
1944; there was the Yalta Conference in February 1945; all
these culminating in the adoption on June 25, 1945, of the
Charter of the United Nations in the Opera House of San c
·1 Francisco and the affixing of signatures thereon the next day
f in the auditorium of ·the Veterans' Memorial Hall. Thereafter,
in pursuance of Article 68 of the Charter of the United
.States, the Economic and Social Council set up the ~n
Rights Commdssion in 1946. This- Commdssion began its work in
January 1947 under the chairmanship of Mrs. Eleanore 0
Roosevelt, the widow of President Franklin D. Roosevelt. The
Universal Declaration of Human Rights prepared by the
Commdssion was adopted by the General Assembly on December 10,
Y 1948, at its session held in the Palais de Chaillot in Paris.
Of the fifty-eight nations represented at that Session, none
voted against it, two were absent, and eight abstained from E
voting.

It was thus in an atmosphere surcharged with human
suffering and yet a firm resolve not to succumb to it that the
' Constituent Assembly which was set up to frame the F
Constitution of India embarked upon its task on December 9,
1946, re-assembled after the midnight of August 14, 1947, as
the sovereign Constituent Assembly for India. After Partition
and fresh elections in the new Provinces of West Bengal and
East Punjab, it re-assembled on October 31, 1947, and
thereafter on November 26, 1949 adopted and enacted the G
Constitution of India•.

Before cotm~encing its work, the Constituent Assembly
adopted a Resolution laying down its objectives :
H
316 SUPREME COURT REPORTS [1986] 2 s.c.R.

A
" 1. This Constituent Assembly declares its firm
and solemn resolve to proclaim India as an
Independent Sovereign Republic and to draw up for
her future governance a Constitution; • • •

4. Wherein all power and authority of the Sovereign
B Independent India, its constituent parts and organs
of govenment, are derived from the people; and

5. Wherein shall be guaranteed and secured to all
the people of India justice, social, economic and
political : equality of status, of opportunity, and
c before the law; freedom of thought, expression,
belief, faith, worship, vocation, association, and
action, subject to law and public morality; and

6. Wherein adequate $afeguards shall be provided
for minorities, backward and tribal areas, and
D depressed and other backward classes; and

7. Whereby shall be maintained the integrity of
the territory of the Republic and its sovereign
rights on land, sea, and air according to justice y
and the law of civilised nations; and
E
8. This ancient land attains its rightful and
honoured place in the world and makes its full and
willing contribution to the promotion of world
peace and the welfare of mankind". i

F
In its strict legal sense the written Constitution of a
I
country is a document which defines the regular form or system
of its government, containing the rules that directly or
indirectly affect the distribution or exercise of the
sovereign power of the State and it is thus mainly concerned
c; with the creation of the three organs of the State - the
executive, the legislature and the judiciary, and the
distribution of governmental power among them and the }-
definition of their mutual relation (See Sri Saokari Prasad
S!Qgh Deo v. UDion of ladia aad State of Bihar, (1952] S.C.R.
89, 106, o. Hood Phillips• "Constitutional and Administrative
H
C.I.W.T.CORPN. v. B.N. GANGULY [MADON, J.] 317

A
Law", Sixth Edition, page 11; Dicey's 11An Introduction to the
Study of the Law of the Constitution", Tenth Edition, page 23;
and Jowitt's Dictionary of English Law, Second Edition, Volume
I, page 430).

The framers of our Constitution did not, however, want to B
frame for the Sovereign Deoocratic Republic which was to
i emerge from their labours a Constitution in the strict legal
sense. They were aware that there were other Constitutions
which had given expression to certain ideals as the goal
t~ards which the country should strive and which had defined
the principles considered fundamental to the governance of the
country. They were aware of the events that had culminated c
i in the Charter of the United Nations. They were aware that
rthe Universal Declaration of Human Rights had been adopted by
the General Assembly of the United Nations, for India was a
signatory to it. They were aware that the Universal
Declaration of Human Rights contained certain basic and
fundamental rights appertaining to all men. They were aware D
that these rights were born of the philosophi~al speculations
of the Greek and Roman Stoics and nurtured by the jurists of
ancient Rome. They were aware that these rights had found
'Y expression in a limited form in the accords entered into
between the rulers and their powerful nobles, as for instance,
the accord of 1188 entered into between King Alfonso IX and E
the Cortes of Leon, the Magna Carta of 1215 wrested from King
John of England by his barons on the Meadow of Runnymede and
~ to which he was compelled to affix his Great Seal on a small
r island in the Thames in Buckinghamshire -- still called Magna
Carta Island, and the guarantees which King Andrew II of
\ Hungary was forced to give by his Golden Bull of 1822. They
F
were aware of the international treaties of the mddseventeenth
century for safeguarding the right of religious freedom and
the rights of aliens. They were aware of the full blossoming
of the concept of Human Rights in the writings of the
"philosophesu such as Voltaire, Rousseauf Diderot, Rayai,
d'Alembert and others, and of the concrete expression given to
G
it in the various Declarations of Rights of the American
Colonies (particularly Virginia) and in the American
Declaration of Independence. They were aware that in 1789,
during the early years of the French Revolution, the French
National Assembly had in "The Declaration of the Rights of Man
318 SUPREME COURT REPORTS [19861 2 s.c.R.

A
and of the Citizen" proclaimed these rights in lofty words and
that Revolutionary France had translated them into practice
with bloody deeds. They were aware of the treaties entered
into between various States in the nineteenth century
providing protection for religious and other mdnorities. They
were aware that these rights had at last found universal
B recognition in the Universal Declaration of Human Rights ..
They were aware that the first ten Amendments to the
Constitution of the United States of America contained certain
rights akin to Human Rights. They knew that the Constitution
of Eire contained a chapter headed "Fundamental Rights" and
another headed "Direct! ve Principles of State Policy". They
c were aware that the Constitution of Japan also contained a
chapter headed "Rights and Duties of the People". They were !
aware that the major traditional functions of the State have ~
been the defence of its territory and its inhabitants against '
external aggression, the maintenance of law and order; the
administration of justice, the levying of taxes and the
D collection of revenue. They were also aware that
increasingly, and particularly in modern times, several States
have assumed numerous and wide-ranging functions, especially
in the fields of education, health, social security, control
and maintenance of natural resources and natural assets, ,
transport and communication services and operation of certain
E industries considered basic to the economy and growth of the
nation. They were also aware that section 8 of Article 1 of
the Constitution of the United States of America contained "a
welfare clause" empowering the federal government to enact
laws for the overall general welfare of the people. They 1
were aware that countries such as the United States, the
F United Kingdom and Germany had passed social welfare ;
legislation. ·

The framers of our Constitution were men of vision and
ideals, and many of them had suffered in the cause of freedom.
G They wanted an idealistic and philosphic base upon which to
raise the administrative superstructure of the Constitution.
They, therefore, headed our Constitution with a preamble which \
declared India's goal and inserted Parts III and IV in the I,I
Constitution. '

H
C.I.W.T.CORPN. v. B.N. GANGULY [MADON, J.] 319

The Preamble to the Constitution, as amended by the
Constitution (Forty-second Amendment) Act, 1976, proudly
proclai~:

"WE, THE PEOPLE OF INDIA, having solemnly resolved
to constitute India into a SOVEREIGN SOCIALIST
B
SECULAR DF.MOCRATIC REPUBLIC and to secure to all
its citizens :

JUSTICE, social, economic and political;

c
,. LIBERTY of thought, expression, belief, faith and
worship;·

EQUALITY of status and of opportunity; and to
promte a100ng them all
D

FRATERNITY assuring the dignity of the individual
and the unity and integrity of the Nation;

E
IN OUR CONSTITUENT ASSEMBLY this twentysixth day of
November, 1949, do HEREBY ADOPT, ENACT AND GIVE TO
OURSELVES THIS CONSTiniTION."

Part III of the Constitution gives a Constitutional
mandate for certain Human Rights -- called Fundamental Rights F
' in the Constitution -- adapted to the needs and requirement of
a country only recently freed from foreign rule and desirous
of forging a strong and powerful nation capable of taking an
equal place among the nations of the world. It also provides
a Constitutional mde of enforcing them. A&>ngst these Rights
is the one contained in Article 14 which provides : G

"14. Equality before t . . -

H
320 SUPREME COURT REPORTS [1986] 2 s.c.R.

A
The State shall not deny to any person equality
before the law or the equal protection of the laws
within the territory of India."

B Part IV of the Constitution prescribes the Directive
Principles of State Policy. 'These Directive Principles have +
not received the same Constitutional mandate for their
enforcement as the Fundamental Rights have done. In the
context of the Welfare State which is the goal of our
Constitution, Articles 37 and 38(1) are important. They are
c as follows :

-~
n37. Applieation of tbe Pri.Dd.ples eootained in
this Part. -

D The provisions contained in this Part shall not be
enforceable by any court, but the principles
therein laid down are nevertheless fundamental in
the governance of the country and it shall be the
duty of the State to apply these principles in ,.
making laws."
E
"38. ( 1) State to secure a soc:ia1 order for the
pn.>tioil of welfare of tbe people. -

p (1) The State shall strive to promote the welfare j
of the people by securing and protecting as- -
effectively as it may a social order in which
justice, social, economic and political, shall
inform all the institutions of the national life."

G Under clause {a) of Article 39, the State is, in particular,
to direct it~ policy towards securing that the citizens, men
and women equally, have the right to an adequate means of ,_____
livelihood. Article 41 directs that the State shall, within
the liaf.ts of its economic capacity and develo.,.ent, make
effective provision for securing the right to work.
C.!.W.T.CORPN. v. B.N. GANGULY [MADON, J.] 321
A
The difference between Part III and Part IV is that While
Part III prohibits the State from doing certain things
(namely, from infringing any of the Fundamental Rights), Part
IV enjoins upon the State to do certain things. This duty,
however, is not enforceable in law but none the less the Court
cannot ignore what has been enjoined upon the State by Part B
IV, and though the Court may not be able actively to enforce
-tthe Directive Principles of State Policy by compelling the
State to apply them in the governance of the country or in the
making of laws, the Court can, if the State commits a breach
of its duty by acting contrary to these Directive Principles,
prevent it from doing so.
c
~ In the working of the Constitution it was found that
1some of the provisions of the. Constitution were not adequate
for the needs of the country or for ushering in a Welfare
State and the constituent body empowered in that behalf
amended the Constitution several times. By the very first
amendment made in the Constitution, namely, by the D
Constitution (First Amendment) Act, 1951, clause (6) of
Article 19 was amended with retrospective effect. Under this
amendment, sub-clause (g) of clause (l) of Article 19 Which
~guarant~es to all citizens the right to carry on any
o.cc~pa.tion, trade or business, was not to prevent the State
fram.making any· law relating to the carrying on by the State, E
or by a corporation owned or controlled by the State, of any
trade, business, industry or service, whether to the
exclusion, complete or partial, of citizens or otherwise. This
ramendment also validated the operation of all existing laws in
so far as they had made similar- provisions. Article 298, as
.,originally enacted, provided that the executive power of the F
~nion and of each State was to extend, subject to any law made
by the appropriate Legislature, to the grant, sale,
disposition or mortgage of any property held for the purposes
of the Union or of such State, as the case may be, and to the "·
'.t.V
purchase or acquisition of property for those purposes
respectively, and to the making of contracts; and it further G
provided that all property acqui.red for the purposes of the
1
--,union or of a State was to vest in the Union or in such State,
as the case may be. Article 298 was substituted by the
Constitution (Seventh Amendment) Act, 1956. As substituted, it
provides as follows :
H
322 SUPREME COURT REPORTS I 1986] 2 s. c. R.

A
"298. Power to carry on trade, etc. -

The executive power of the Union and of each State
shall extend to the carrying on of any trade or
business and to the acquisition, holding and
disposal of property and the making of contracts
B
for any purpose :

Provided that - -t-

c
(a) the said executive power of the Union shall, in
so far as such trade or business or such purpose is
not one with respect to Which Parliament may make
laws, be subject in each State to legislation by ~·
-
~~~;~ ~

(b) the said executive power of each State shall,
in so far as such trade or business or such purpose
D is not one with respect to which the State
Legislature may make laws, be subject to
legislation by Parliament."

Artie!~ 298, as so substituted, therefore, expands the ~
executive power of the Union of India and of each of the
E States which collectively constitute the Union to carry on any
trade or business. By extending the executive power of the
Union and of each of the States to the carrying on of any ·•
trade or business, Article 298 does not, however, convert
either the Union of India or any of the States which i
collectively form the Union into a merchant buying and sell-
F ing goods or carrying on either trading or business activity, 1
for the executive power of the Union and of the States Lt
whether in the field of trade or business or in any other
field, is always subject to Constitutional limitations and
~" particularly the provisions relating to Fundamental Rights in
\li'
Part III of the Constitution and is exerciseable in accordance
G with and for the furtherance of the Directive Principles of
State Policy prescribed by Part IV of the Constitution.
)-
The State is an abstract entity and it can, therefore,
only act through its agencies or instrumentalities, whether
such agency or instrumentality be human or juristic. The
H trading and business activities of the State constitute
C.I.W.T.CORPN. v. B.N. GANGULY [MADON, J.] 323
A
·.!'~"public enterprise". The structural forms in which the
Government operates in the field of public enterprise are many
and varied. These may consist of Government departments,
statutory bodies, statutory corporations, Government
companies, etc. In this context, we can do no better than cite
the following passage from "Government Enterprise - A B
Comparative Study" by w. Friedmann and J.F. Garner, at page
-f507 :

.. "The variety of forms in which the various States
have, at different times, proceedt:m to establish
public enterprises is almost infinite, but three
c
main types emerge to which almost every public
enterprise approximates: (1) departmental
·administration; (2) the joint stock company
controlled completely or partly by public
authority; and finally (3) the public corporation
proper, as a distinct type of corporation different
from the private law company. Each of these three D
types will be briefly analysed in a comparative
perspective.

As the tasks of Government multiplied, as a result
of defence needs, post-war crises, economic
depressions and new social demands, the framework E
of civil service administration became increasingly
insufficient for the handling of the new tasks
which were often of a specialised and highly
technical character. At the same time,
'bureaucracy' came under a cloud. In Great Britain
the late Lord Hewart had written of 'the new F
despotism,' and Dr. C.K. Allen of 'bureaucracy
triumphant'. In France the Confederation Generale
clu Travail (CGT) had stated in its Programme in
1920 that 'We do not wish to increase the functions
of the State itself nor strengthen a system which
would subject the basic industry to a civil service G
regime, with all its lack of responsibility and its
----1 basic defects, a process which would subject the
forces of production to a fiscal monopoly • • • • '
This distrust of government by civil service,
justified or not, was a powerful factor in the
development of a policy of public administration H
324 SUPREME COURT REPORTS [1986] 2 S.C.R.

A
through separate corporations which would operate ~
largely according to business principles and be
separately accountable. In the common law
countries, where the Government still enjoys
considerable immunities and privileges in the
fields of legal responsibility, taxation, or the
binding force of statutes, other considerations
played their part. It seemed necessary to create+-
bodies which, if they were to compete on fair terms
in the economic field, had to be separated and
distinct from the Government as regards immunities ~
and privileges."
a '

The immunities and privileges possessed by bodies so set~~
up by the Government in India cannot, however, be the same as4
those possessed by similar bodies established in the private
sector because the setting up of such bodies is referable to
the executive power of the Government under Article 298 to
D carry on any trade or bGsiness. As pointed out by Mathew, J.,
in Sukhdev ·Singh and others v. Bbagatr• Sarclar Sf.ngb
lagbuvanshi and another, [1975] 3 S.C.R. 619 (at page 648),
"The governing power wherever located tD.ISt be subject to the
fundamental constitutional limitations". The privileges and)'
immunities of these bodies, therefore, are subject to
E Fundamental Rights and exercisable in accordance with and in
furtherance of the Directive Principles of State Policy.

It is in the context of what has been stated above that
we will now review the authorities cited at the Bar. When wei
consider these authorities, we will see how as Constitutional
F thinking developed and the conceptual horizen widened, new~
vistas, till then shrouded in the ~st of conventional legal
phraseology and traditional orthodoxy, opened out to the eye
of judicial interpretation, and many different facets of
several Articles of the Constitution, including Article 12 and
14, thitherto unperceived, became visible. There, however,
G still remain vistas yet to be opened up, veils beyond which we
today cannot see to be lifted, and doors to which we still
have found no key to be unlocked. ~
In Bai Sahib Ram Jawaya Kapur and others-v. The State of
Punjab, [1955] 2 S;C.R. 225, the State of Punjab, which used
H to select books published by private publishers for
C.I.W.T.CORPN. v. B.N. GANGULY [MADON, J.} 325
A
----1 prescribing them as te>et-books and for this purpose used to 1
invite offers from publishers and authors, altered- that
practice and amended the notification in that behalf so that
thereafter only authors were asked to submit their books for
approval as te>et-books. The validity of this notification was
challenged .inter alia on the ground that the executive power B
of a State under Article 162 extended only to e}{ecuting the
t laws passed by the legislature or supervising the enforcement
of such laws. Under Article 162, subject to the provisions of
the Constitution, the executive power of a State extends to

- the matters with respect to which the Legislature of the State
has power to make laws, namely, the matters enumerated in the
State List (List II) in the Seventh Schedule to the c
1_ Constitution. Under the proviso to that Article, in any matter
!with respect to which the Legislature of a State and
Parliament have power to make laws, that is, the matters
enumerated in the Concurrent List (List III) in the Seventh.
Schedule to the Constitution, the executive power of the State
is to be subject to, and limited by, the executive power D
expressly conferred by the Constitution or by any law made by
Parliament upon the Union or authorities thereof. Under
Article 154(1), the executive power of the State is vested in
~ the Governor and is to be exercised by him either directly or
through officers subordinate to him in accordance with the
Constitution. The corresponding provisions as regards the E
executive power of the Union of India are contained in Article
• 73 and Ar~icle 53(1). Repelling the above contention,
'r- Mukherjea, C.J., who spoke for the Constitution Bench ·of the
Court observed (at page 230) :

"A modern State is certainly expected to engage in F
all activities necessary for the promotion of the
social and economic welfare of the conmunity."

The following passage (at pages 235-36) from the judgment of
the Court in that case with respect to the meaning of the
expression "executive function" is instructive and requires to G
be reproduced :
---{
11
It may not be possible to frame an exhaustive
definition of what executive function means and
implies. Ordinarily the executive power connotes
H
the residue of governmental functions that remain
326 SUPREME COURT REPORTS [1986} 2 S.C.R.
A

\ after legislative and judicial functions are taken ~
away. The Indian Constitution has not indeed
recognised the doctrine of separation of powers in
its absolute rigidity but the functions of the
different parts or branches of the Government have
been sufficiently differentiated and consequently
B
it can very well be said that our Constitutlon does
not contemplate assumption, by one organ or part of t
the State, of functions that essentially belong to
another. The executive indeed can exercise the
powers of departmental or subordinate legislation
when such powers are delegated to it by the legis-
c
lature. It can al~o, when so empowered, exercise ,
judicial functions in a limited way. The executive ...~
Government, however, can never go against the,~
provisions of the Constitution or of any law. This ,
is clear from the provisions of article 154 of the
Constitution but, as we have already stated, it
D
does not follow from this that in order to enable
the executive to function there -.st be a law
already in existence and that the powers of the
executive are limited .:!rely to the earrying out of
these laws.'' t
E
(Emphasis supplied.)

In Rajasthan State Electricity Board, Jaipur v. Hoban La1
and others, [1967] 3 S.C.R. 377 a Constitution Bench of this
Court by a majority held that the Electricity Board of~
Rajasthan constituted under the Electricity (supply) Act, 1948
F
(Act No. 54 of 1948) was "the State" as defined in Article 12 {
because i.t was "other authority" within the meaning of thaL
Article. The Court held that the expression "other authority..
was wide enough to include within it every authority created
by a statute, on which powers are conferred to carry out
governmental or quasi -governmental functions and functioning
G
within the territory of India or under the control of the
Government of India and the fact that some of the powers
conferred may be for the purpose of carrying on conmercial }----
activities is not at all material because under Articles
19(l)(g) and 298 even the State is empowered to carry on any
H trade or business. The Court further held that tn interpreting
the expression "other authority" the principle of ejusdem
C.I.W.T.CORPN. v. B.N. GANGULY [MADON, J.} 327

---1 I
A
generis should not be applied, because, for the application of
that rule, there must be distinct genus or category running
through the bodies previously named; and the bodies specially
named in Article 12 being the Executive Government of the
Union and the States, the Legislatures of the Union and the
States and local authorities, there is no common genus running
through these named bodies, nor could these bodies be placed B
~ in one single category on any rational basis.

.. Praga Tools Corporation V• C.A. I-anuaJ and others,
[1969] 3 s.c.R. 773 was a case heavily relied upon by the
Appellants. Fraga Tools Corporation was a company incorporated
under the Companies Act, 1913, and therefore, a company within
-4 the meaning of the Companies Act, 1956. At the material time c
f the Union of India held fifty-six per cent of the shares of
the company and the Government of Andhra Pradesh held
thirty-two per cent of its shares, ~he balance of twelve per
cent shares being held by private individuals. As being the
largest shareholder, the Union of India had the power to
nominate the company's directors. The company had entered into D
two settlements with its workmen's union. These settlements
were arrived at and recorded in the presence of the
~ Commissioner of Labour. Subsequently, the company entered into
another agreement with the union, the effect of which was to
enable the company, notwithstanding the earlier two
settlements, to retrench ninety-two of its workmen. Some of E
_the affected workmen thereupon filed a writ petition under
Article 226 of the Constitution in the Andhra Pradesh High
)'- Court_ challenging the validity of the subsequent agreement. A
learned Single Judge of the High Court dismissed the petition
Ton merits. In appeal, a Division Bench of that High Court held
'- that the company being one registered under the Companies Act F
and not having any statutory duty or function to perform was
not one against which a writ for aand-Js or any other writ
could lie. The Division Bench, however, held that though the
writ petition was not maintainable the High Court could grant
a declaration in favour of the petitioners that the impugned
agreement · was illegal and void and granted the said G
--1 de·claration. In appeal by the company, a t¥1o-Judge Bench of
this Court held that the Company being a non-statutory body
and one incorporated under the companies Act there was neither
a statutory nor a public duty imposed on it by a statute in
respect of which enforcement could be sought by means of a
H
328 SUPREME COURT REPORTS [19861 2 s.c.R.

A
mandan•s. So far as declaration given by the'Division Bench of~
the High Court was concerned, the Court held (at page 780) :

"In our view once the writ petition w~s held to be
misconceived on the ground that it could not lie
against a company which was neither a statutory
B company nor one having public duties or
responsibilities imposed on it by a statute, no+-
relief by way of a declaration as to invalidity of

-
an impugned agreement between it and its employees
could be granted. The High Court in these
circumstances ought to have left the workmen to
c resort to the remedy available to them under the
Industrial Disputes Act by raising an industrial ~-
dispute thereunder." "'"

Though this case was strongly relied upon by the Appellants,
we fail to see how it is relevant to the submissions advanced
D by the Appellants. The subsequent agreement enabling the
company to retrench some of its workmen was challeng~d on the
ground that it was in breach of the earlier settlements
entered into between the company and the workmen's union. No
question of violation of any of the Fundamental Rights was at ~
all raised in that case. The only question which fell for
E determination was whether a writ of mandanJ•s can issue to
compel the performance of the earlier settlements or to
restrain the enforcement of the impugned subsequent agreement
and the dispute, therefore, was one which fell within the
scope of the Industrial Disputes Act, 1947 (Act No. l4 of 'i
1947).
F
1'
In State of Bihar v. Union of India and another, [1970] l-
S.C.R. 522 the State of Bihar filed nine suits under Article
131 in connection with the delayed delivery of iron and steel
materials for the construction work of the Gandak project. In
all these suits the first defendant was the Union of India
G while the second defendant in six of these suits was the
Hindustan Steel Ltd. and in the remaining three,. the Indian
Iron and Steel Company Ltd. This Court held that the ~~
specification of the parties in· Article l31 was not of an
extensive kind and excluded the idea of a private citizen, a
firm or a corporation figuring as a disputant either alone or
H even along with a State or with the Government of India in the
C.I.W.T.CORPN. v. B.N. GANGULY [MADON, J.] 329

A
---\ category of a party to the dispute under Article 131. The
Court further held that ~he enlarged definition of the
1
expression "the State" given in Parts III and IV of the
Constitution did not apply to Article 131 and, therefore, a
body like the Hindustan Steel Ltd. could not be considered as
11
a State" for the purpose of Article 131. We fai 1 to see in B
what way this decision is at all relevant to the point. The
~ question before the Court in that case was whether the
Hindustan Steel Ltd. or the Indian Iron and Steel Company Ltd.

..
1
was a State to enable a suit to be filed against it under
Arti..cle 131 and not whether either of these companies fell
within the scope of the definition of the expression "the
State" in Article 12. c

~nother. authority relied upon by the Appellants was S.L.
Agarwal v. General Manager, Hindustan Steel Ltd., [ 1970] 3
S.C.R. 363. The facts of that case and the contentions raised
thereunder show that this authority is equally ir~elevant. In D
that case an employee of the Hindus tan Steel Ltd., whose
services were terminated, filed a petition under Article 226
claiming that such termination was wrongful as it was really
'"1 by way of punishment as the provisions of Article 311(2) of
the Constitution had not been complied with. This Court held
that the protection of clause (2) of Article 311 was available E
only to the categories of persons mentioned in that clause and
• that though the appellant held a civil post as opposed to a
military post, it was not a civil post under the Union or a
).-- State and, therefore, he could not claim the protection of
Arttcle 311(2). The contention which was raised on behalf of
' the appellant was that as Hindustan Steel Ltd. was entirely F
- financed by the Government and its management was directly the
responsibility of the Government, the post was virtually under
the Government of India. This contention was rejected by the
Court holding that the company had its independent existence
and by law relating to corporations it was distinct from its
members and, therefore, it was not a department of the Govern- G
ment nor were its employees servants holding posts under the
.--1 Union. No question arose in that case whether the company was
: the State" within the meaning of Article 12 and all that was
11

sought to be contended was that it was a department of the
Government.
H
330 SUPR&\IE COURT REPORTS [ 1986] 2 S.C. R.

A
In Sabbajit Tewary v. Union of India and others, [1975} >----
3 S.C. R. 616 this Court held that the Council of Scientific
and Industrial Research which was a society registered under
the Societies Registration Act was not an authority within the
meaning of Article 12 and, therefore, certain letters written
by it to the petitioner with respect to his remuneration could
B not be challenged as being discriminatory and violative of
Article 14. The contention raised in that case was that the j..
rules governing the said Council showed that it was really an
agent of the Government. This Court rejected the said
contention in these words (at page 617) :

c "This contention is unsound. The Society does not
have a statutory character like the Oil and Natural ,~
Gas Commission, or the Life Insurance Corporation'
or Industrial Finance Corporation. It is a society
incorporated in accordance with the provisions of
the societies Registration Act. The fact that the
D Prime Minister is the President or that -the
Government appoints nominees to the Governing Body
or that the Government may terminate the membership
will not establish anything more than the fact that
the Government takes special care that the 'r
promotion, guidance and co-operation of scientific
and industrial research, the institution and
financing of specific researches, establishment or
development and assistance to special institutions
•
or departments of the existing institutions for
scientific study of problems affecting particular --1
industry in a trade, the utilisation of the result
F of the researches conducted under the- auspices of)'"
the Council towards the development of industries-·
in the country are carried out in a responsible.
manner."

We now come to a case of considerable importance, namely,
G Sukbdev Singh and. others v. Bbagatr- -Sardar Singh laghuvansbi
and another. TWo questions fell to be determined in this case,
namely, (i) whether statutory corporations are comprehended ~ --.
within the expression "the State" as defined in Article 12,
and (ii) whether the regulations framed by a statutory
corporation in exercise of the power conferred by the statu~e
H. creating the corporation have the force of law. The majority
C.I.W.T.CORPN. v. B.N. G\NGULY [MAllON, J.1 331

of a Constitution Bench of this court answered both these A
questions in the affirmative. The statutory corporations
before the Court in that case were 'the Oil and Natural Gas
Commission established under the Oil and Natural Gas
Conmission Act, 1956, the Life Insurance Corporation
established under the Life Insurance Corporation Act, 1956,
and the Industrial Finance Corporation established under the
B
t- Industrial Finance Corporation Act, 1948. Ray, C. J., speaking
for himself and Chandrachud and Gupta, JJ., pointed out (at
page 634) that "The State undertakes cotiiilercial functions in
combination with Governmental functions in a welfare State."
The majority held that "the State" as defined in Article 12
comprehends bodies created for the purpose of promoting
~~ economic interests of the people and the circum$tance that c
+- statutory bodies are required to carry on some activities of
the nature of trade or commerce does not indicate that they
must be excluded from the scope of the expression 11the State",
for a public authority is a body which has public or statutory
duties to perform and which performs those duties and carries
on its transactions for the benefit of the public and not for D
private profit and by that fact such an authority is not
excluded from making a profit for the public benefit. Mathew,
f J., in his concurring judgment held that a finding of State
financial support plus an unusal degree of control over the
management and policies might lead one to characterize an
E
_operation as State action. The learned Judge observed (at page
651-52) :

"Institutions engaged in matters of high public
interest or performing public functions are by
virtue of the nature of the function performed
F
government agencies. Activities which are too
fundamental to the society are by definition too
important not to be consi.dered government
function. This demands the delineation of a theory
which requires government to provide all persons
with all fundamentals of life and the
determinations of aspects which are fundamental. G
The State today has an affirmatlve duty of seeing
that all essentials of life are made available to
all persons. The task of the State today is t~ make
possible the achievement of a Good life both by
removing obstacles in the path of such achievements
H
332 SUPREME COURT REPORTS [1986 ] 2 S.C. R.

A and in assisting individual in realizing his ideal
of self-perfection. Assuming that indispensable
functions are government .~unctions, the problem
remains of defining the line between fundamentals
and non-fundamentals. The analogy of the doctrine
of 'business affected with a public interest'
inunediately comes to mind."
B
After referring to the relevant provisions of the Acts under 1
which the above statutory bodies were established, Mathew, J.,
continued (at pages 654-5) :

"The fact that these corporations have independent
c personalities in the eye of law does not mean that }
they are not subject to the control of government ~
or that they are not instrumentalities of the
government. 'lbese corporations are inst~tali
ties or agencies of tbe state for carrying on
businesses which otherwise would have been run by
D the state departmentally. If the state had chosen
to carry on these businesses through the medium of
goverrunent departments, there would have been no
question that actions of these departments would be
'state actions'. Why then should actions of these ~
corporations be not state actions? • • •
E
The ultimate quest~on which is relevant for our
purpose is whether such a corporation is an agency
or instrumentality of the government for carrying ~
on a business for the benefit of the public. In
other words, tbe question is, for wbose benefit vas
F tbe corporation c:arryiDg 0o the busiDesa! When it
is seen from the provisions of that Act that on
liquidation of the Corporation, its assets should
be divided among the shareholders, namely, the
Central and State governments and others, if any,
the implication is clear that the benefit of the
G accumulated income would go to the Central and
State Governments. Nobody will deny that an agent )..
has a legal personality different from that of the
principal. The fact that the agent is subject to
the direction of the principal does not mean that
he has no legal personality of his own. Likewise,
H
C. I.W. T.CORPN. v. B.N. GANGULY [MADON, J.} 333

A
•rely because a corporation has legal personality
of its <ND, it does not follow that the corporation
cannot be an agent or instruaientality of the state,
if it is subject to control of government in all
important matters of policy. No doubt, there might
be some distinction between the nature of control B
exercised by principal over agent and the control
..\· exercised by government over public corporation•
That, I think is only a distincti.on in degree. The
crux of the matter is that public corporation is a
oev type of institution which bas sprurJg fro. the
oew social and ecoDOIIlic functions of gover•uuent aod
that it therefore does mt ueatly fit into old c
legal categories. Instead of forcing it into them,
tbe later should be adapted to the needs of
changing tiEs and conditions."

(Emphasis supplied.)
D
Various aspects of the question which we have to
decide were exhaustively considered by this Court in Ramana
~ar• Sbetty v. "!be International Airport Authority of India
"1 and others, [1979] 3 s.c.R. 1014. In that case the Court
observed (at page 1032), "Today the Govem.ent, as a welfare
State, is the regulator and dispenser of special services and E
.. provider of a large mmber of benefits, incl.udiog jobs,
contracts, licences, quotas, mineral rights, etc." The ques-
t _tion in that case was whether the International Airport
Authority constituted under the International Airports
Authority Act, 1971, came within the meaning of the expression
·\ "The State" in Article 12. Under the said Act, the Authority F
was a body corporate having perpetual succession and a common
seal and was to · consist of a Chairman and certain other
members appointed by the Central Government. The Central
Government had the power to terminate the appointment of or
remove any member frqm the Board. Although the authority had
no share capital of its own, capital needed by it for G
carrying out its functions was to be provided only by the
·central Government. While considering the question whether
such a body corporate was included within the expression "the
Stat~", this Court said (at page 1036) :

"A corporation .ay be created in one of tw ways. H
334 SUPREME COURT REPORTS [1986] i S.C.R.

A
It -.y be either established by. statute or f.Deor-
porated UDder a l n such as tbe Cowlpaofes Act 19.56
or the Societies Registration Act 1860. Where a
Corporation is wholly controlled by Government not
only in its polic~r making but also in carrying out
the functions entrusted to it . by the law
B establishing it or · by the Charter of its
incorporation, there can be no doubt that it would
be an instrumentality or agency of Governme~t. But
ordinarily where a corporation is established by
statute, it is autonomous in its working, subject
only to a provision, often times made, that it
c shall be bound by any directions that may be issued
from time to time by Government in respect of
policy matters. So also a corporation incorporated~
under law is managed by a board of direet~rs or
committee of management in accordance with the
provisions of the statute under which it is
D incorporated. When does such a corporation ~
an iostru.entality or ageac:y of GovermEOt?"

(Emphasis supplied.)
)'"'
After considering various factors and the case law on the
E subject, the Court thus summed up the position :

"It will thus be seen that there are several •
factors which may have to be considered in
determining whether a corporation is an agency or ....f
instrumentality of Government. We have referred to
F some of these factors and they may be summarised as
under : Whether there is any financial assistance !
given by the State, and if so what is the magnitude
of such assistance whether there is any other form
of assistance, given by the State, and if so,
whether it is of the usual kind or it is
G extraordinary, whethe~ there is any control of the
management and policies of the corporation by tne
State and what is the nature and extent of such
control, whether the corporation enjoys State
conferred or State protected monopoly status and
whether the functions carried out by th~
H
/
corporation are public functions closely related t~
C.I.W.T.CORPN. v. B.N. GANGULY [MADON, J.} 335

A
governmental functions. This particularisation of
relevant factors is however not exhaustive and by
its very nature it cannot be, beca,JSe with
increasing assumption of new tasks, growing
complexities of management and administration and
the necessity of continuing adjustment in relations B
between the corporation and Government calling for
flexibility, adaptability and innovative skills·, it
is not possible to make an exhaustive enumeration
of the tests which would invariably &nd in all
.. cases provide an Wlfailing answer to the question
whether a corporation is governmental instrumenta-
lity or agency. Moreover even amongst these factors (,
which we have described, no one single factor will
yield a satisfactory answer to the question and the
court will have to consider the cumulative effect
of these various factors and arrive at its decision
on the basis of a particularised inquiry into the
facts and circumstances of each case." D
In the course of its judgment; the Court distinguished the
case of Praga Tools Corporation as also the decision in
""1 S.L. Agm:val v. General Manager, H:i.Ddustan Steel Ltd. in very
much the same manner as we have done. So far as the case o.f
Sabbajit Tewary V• lkdon of India aod otbers i~; concerned, the E
Court said as follows :

"Lastly, we must refer to the decision in
Sarabbajit Tevari v. lhion of India & Ora. where
the question was whether the Council of Scientific
and Industrial Research was an •authority' within F
the meaning of Article 12. The Court no doubt took
the view on the basis of facts relevant to the
Constitution and functioning of the Council that it
was not an 'authority', but we do not find any
discussion in this case as to what are the features
which must be ptesent before a corporation can be G
regarded as an 'authority' within the meaning of
I Article 12. This decision does not lay down any
principle or test for the purpose of determining
when a corporation can be said to be an
'authority'. If at all any test can be gleaned from
H
336 SUPREME COURT REPORTS [19861 2 S.C.R.

A
the decision, it is whether the Corporation is )...
"really an agency of the Government". The Court
seemed to hold on the facts that the Council was
not an agency of the Government and was, therefore,
not an 'authority'."

B In Managing Director, Uttar Pradesh Warehousing Corpora-
tion and another v. Vinay Narayan Vajpayee, [1980] 2 S.C.R.
773 an employee of the corporation successfully challenged his ~
dismissal from service. The appellant corporation was
established under the Agricultural Produce (Development and
Warehousing) Corporation Act, 1956, and was deemed to be a
...
c Warehousing Corporation for a State under the Warehousing
Corporation Act, 1962. In his concurring judgment, Chinnappa }--.
Reddy, J.,said (at page 784) : ~

"I find it very hard indeed to discover any
distinction, on principle between a person directly
D under the employment of the Government and a person
under the employment of an agency or
instrumentality of the Government or a Corporation,
set up under a statute or inoorporated but wholly
CJIIIIleC! by the Government. It is self evident and r
trite to say that the function of the State has
E long since ceased to be confined to th~ . ..
preservation of the public peace, the exaction of ~-·:· ·
taxes and the defence of its frontiers. It is now ~
the function of the State to secure 'social,
economic and political justice', to preserve -+
'liberty of thought, expression, belief, faith and
F worship', and to ensure 'equality of status and of 7
opportunity' • " -·
(Emphasis supplied)

In Ajay Hasia etc. v. Khal.id Hujib Sehravardi and others
etc., [1981} 2 S.C.R. 79 the Regional Engineering College
G which was established and administered and managed by a
society registered under the Jammu and Kashmir Registration of
Societies Act, 1898, was held to be "the State" within the
meaning of Article 12. In that case the Court said (at pagej
91)

H "It is undoubtedly true that the corporation isj
C.I.W.T.CORPN. v. B.N. ·GANGULY [MADON, J.] 337

distinct .juristic entity with a corporate structure A
of its own and it carries on its functions on
business principles with a certain amount of
autonomy which is necessary as well as useful from
the point of view of effective business management,
but behind the formal ownership which is cast in
the corporate mould, the reality is very much the B
deeply pervasive presence of the Government. It is
~· really the Government which acts through the
instrumentality or agency of the corporation and
the juristic veil of corporate personality worn for
the purpose of convenience Qf management and
administration cannot be allowed to obliterate the
true nature of the reality behind which is the c
Government. Now it is obvious tbft if a corporation
is an instnamtality or agency of the Gov~~
it lllSt be subject to the sue lild.taUons in the
field of constitutional law as tbe Govertllllellt
itself, though in tbe eye of the law it would be a
disti.nc.:t and independent legal entity. If the D
Government acting through its offi.cers is subject
to certain constitutional limitations, it must
follow a fortiorari that the Government acting
through the instrumentality or agency of a corpora-
tion should equally be subject to the same
limitations." E
(Emphasis supplied.)

~ After referring to various authorities, the court summarized
the relevant tests which are to be gathered from the
~ International Airport Authority of India 'a case as follows (at
t pages 96-7) : F

"(1) 'One thing is clear that if the entire share
capital of the corporation is held by Government it
would go a long way towards indicating that the
corporation is an instrumentality or agency of
Government. ' G

(2) 'Where the financial assistance of the State is.
so much as to meet almost entire expenditure of the
corporation, it would afford some indication of the
corporation being impregnated with governmental
character.' H
338 SUPREME COURT REPORTS [1986] 2 s.c.R.

A
(3) 'It may also be a relevant factor • • • whether )...
the corporation enjoys monopoly status which is the
State conferred or State protected.'

(4) 'Existence of deep and pervasive State control
may afford an indication that the Corporation is a
B State agency or instrumentality.'

(5) 'If the functions of the corporation of public ~
importance and closely related to governmental
functions, it would be a relevant factor in
classifying the corporation as an instrumentality ~
c or agency of Government'."

The right, title and interest of the Burmah Shell Oil )'
Storage and Distributing Company of India Limited in relation ~
to its undertakings in India were transferred to and vested in
the Central Government under section 3 of the Burmah Shell
D (Acquisition of Undertakings in India) Act, 1976. Thereafter,
under section 7 of the said Act, the right, title, interest
and liabilities of the said company which had become vested in
the Central Government, instead of continuing so to vest in
it, were directed to be vested in a Government company, as
defined by section 617 of the Companies Act, 1956, namely, 1'
E Bharat Petroleum. In So. Prakash Jekbi v. lhion of India and
another, [1981] 2 S.C.R. 111 this Court held that Bharat
Petroleum fell within the meaning of the expression "the
State" used in Article 12. The following passage (at pages
124-5) f~om the judgment in that case is instructive and i
requires to be reproduced
F
"For purposes of the Companies Act, 1956, a j
government company has a distinct personality which _:
cannot be confused - with the State. Likewise, a
statutory corporation constituted to carry on a
commercial or other activity is for many purposes a
G distinct juristic entity not drowned in the sea of
State, although, in substance, its existence may be
but a projection of the State. What we wish to
emphasise is that merely because a company -or other
legal person bas fUDCtiooal and jural i.Ddividuality
for certain purposes aod in certain areas of law,j
H it does not necessarily follow tbat for tid
C.I.W.T.CORPN. v. B.N. GANGULY {MADON, J.] 339

A
effective enforeement of fundamental rights under
our constitutional scheme, we should not scan the
real character of that entity; and if it is found
to be a mere agent or surrogate of the State, in
fact owned by the State, in truth controlled by the
State and in effect an incarnation of the State, B
constitutional lawyers must not blink at these
facts and ·frustrate the eoforee.ent of fnnda.atal
rights d~pite the ioclusive definition of Art. 12
that any authority controlled by the Government of

- India is itself State. Law has many dimensions and
fundamental facts must govern the applicability of
fundamental rights in a given situation." C

(Emphasis supplied.)

At the first blush it may appear that the case of S.S.
IJumoa v. ~cipal Corporation, Delhi and others, [ 1981} 3
s.c.c. 431 runs counter to the trend set in the authorities 0
cited above but on a closer scrutiny it turns out not to be
so. The facts in that case were that the Cooperative Store
Limited, which was a society registered under the Bombay
,r Cooperative Societies Act, 1925, had established and was
· managing Super Bazars at different places including at
Connaught Place in New Delhi. Under section 23 of the said E
Act, the society was a body corporate by the name under which
... it was registered, with perpetual succession and a co11110n
seal. The Super Bazars were not owned by the Central
t- Government but were owned and managed by the said society,
· though pursuant to an agreement executed between the said
(society and the Union of India, the Central Government had F
1advanced a loan of rupees forty lakhs to the said society for
establishing and managing Super Bazars and it also held more
than ninety-seven per cent of the shares of the said society.
The appellant who was a member of the Indian Administrative
Service was sent on deputation as the General Manager of the
Super Bazar at Connaught Place. He along with other officials G
of the Super Bazar were prosecuted under the Prevention of
· Food Adulteration Act, 1954. He raised a preliminary objection
. before the Metropolitan Magistrate, Delhi, before whom he was

t ummoned to appear that no cognizance of the alleged offence
ould _~ taken br hi~. f~r w~~t of sanction under section 197
f the Code. of ·Cr~ainal P~ocedure, 1973. On his contention H
340 SUPREME COURT REPORTS [19861 2 s.c.R.

A
being rejected, he appealed to this Court. Under the said
section 197, when any person who is or was inter alia a public
servant not removable from his office save by or with the
sanction of the Government is accused of any offence alleged
to have been comitted by him while acting or purporting to
act in the discharge of his official duty, no court is to take
B cognizance of such offence except with the previous sanction
in the case of a person who 1s eq>loyed or, as the case may
be, was at the time of comission of the alleged offence f.
employed, in connection with the affairs of the Union or of

c
the Central Government. As stated in the opening paragraph of
the judgment in the said case, the question before the Court
was whether the appellant was a public servant within the
meaning of Clause Twelfth of section 21 of the Indian Penal
-
Code for purposes of section 197 of the Code of Criminal
Procedure. The relevant provisions of Clause Twelfth of
section 21 are as follows :

D "21. Public servant. -

The words 'publie servant' denote a person falling
under any of the descriptions hereinafter
following, namely : -

E X X X X X X X

Twelfth. - Every person -

(a) in the service or pay of the Government or ·1
remnerated by fees or commission for the
F performance of any public duty by the Government;
7
(b) in cbe service or pay of a local authority, a
corporation established by or under a Geoeral,
Proviueial or State Act or a GoverDIIellt COIIPaDY as
defined in section 617 of the Cowpanfes Act, 1956."
G
The Court pointed out that Clause Twelfth did not use the
words "body corporate" and, therefore, the q\leStion was
whether the expression "cocyoration" contai~ed therein _.~~en
in collocation of the words "established by or under a · Cf!nt.t al
or Provincial or State Act" would bring within its. ·eweep a
H cooperative society. The Court said (at page 437) :
C.I.W.T.CORPN. v. B.N. GANGULY [MADON, J.] 341

A

"In our opinion, the expression 'corporation' must,
in the context, mean a corporation created by the
legislature and not a body or society brought into
existence by an act of a group of individuals. A
cooperative society is, therefore, not a B
corporation established by or under an Act of the
Central or State legislature."

The Court then proceeded to point out that a corporation is an
ar~ificial being created by law, having a legal entity
l entirely separate and distinct from the individuals who c
1 compose it, with the capacity of continuous existence and
t succession. The Court held that corporations established by or
under an Act of Legislature can only mean a body corporate
which owes its existence, and not merely its corporate status,
to the Act. An association of persons constituting themselves
into a company under the Companies Act or a society under the D
Societies RegistraLion Act owes its existence not to the act
of Legislature but to acts of parties, though it may owe its
status as a body corporate to an Act of legislature. The
observation of the Court in that case with respect to
companies were not intended by it to apply to Government
companies as defined in section 617 of the Companies Act, E
1956, for by the express terms of sub-clause (b) of Clause
Twelfth of section 21 of the Indian Penal Code every person in
the service or pay of a Government company as defined in
section 617 of the Companies Act, 1956, is a public servant.
./
The second part of the question which the Court was called
\ upon to decide in that case was whether the appellant can be F
said to be a person who was employed in connection with the
affairs of the Union. The Court held that the Super Bazar was
not an instrumentality of the State and, therefore, it could
not be said that the appellant was e~ployed in connection with
the affairs of the Union within the meaning of the section 197
of the Code of Crimiqal Procedure. This observation was again G
made with reference tQ_ the argument that the appellant was
employed in connecti6~i·· ' with the affairs of the Union. He
undoubtedly was not employed in connection with the affairs of

H
342 SUPREME COURT REPORTS [ 1986] 2 S.C. R.

A ~
the Union just as a person employed in a corporation is not
and cannot be said to be holding a civil post under the Union
or a State as held by this Court in s.L. Agarwal v. General
Manager, Hi.ndustan Steel Ltd. In S.S. lhanoa's case the Court
was not called upon to decide and did not decide whether a
Government company was an instrumentality or agency of the
B State for the purposes of Parts Ill and IV of the Consti-
tution and thus, "the State" within the meaning of that A
expression as used in Article 12 of the Constitution.

The Indian Statistical Institute is a society registered
under the Societies Registration Act, 1860, and is governed. by
c the Indian Statistical Institute Act, 1959, under which its
control completely vests in the Union of India. The society is
also wholly financed by the Union of India. In B.S. ~nbas v.
Indian Statistical Institute and others, [1983] 4 s.c.c. 582
this Court, following Ajay Hasia's case, held that the said
society was an "authority" within the meaning of Article 12
D and hence a writ petition under Article 32 filed against it
was competent and maintainable. In Hanmoban Singh Jaitla v.
Ctwnissioner, Union Territory of OJandigarh and otbers, [1984]
Supp. S.C. C. 540 this Court once again following Ajay llasia 's
case held that an aided school which received a Government )--
grant of ninety-five per cent was an "authority" within the
E meaning of Article 12 and, therefore, amenable to the Wl"it
jurisdiction both of this Court and the High Court. ..
In Workmen of Hindustan Steel Ltd. and another v. _.,.
Hiodustan Steel Ltd. and others, [1984] Supp. s.c.c. 554, 560
the Court held that the Hindustan Steel Ltd. was a public ~J.
F sector undertaking and, therefore, was "other authority" t
within the meaning of that expression in Article 12.

In P.K. Ra8achandra Iyer and others v. Union of India aDd
others, [1984] 2 S.C.R. 141 once again following Ajay
Hasia' s case, the Court held that the Indian Council
G of Agricultural Research which was a society registered under
the Societies Registration Act was an instrumentality of the
State falling under the expression 'other authority' within
the meaning of Article 12. The said Council was wholly
financed by the Government. Its budget was voted upon as part
of the expenses incurred in the Ministry of Agriculture. The
H
C.I.W.T.CORPN. v. B.N. GANGULY [MADON, J.] 343
A
control of the Government of India permeated through all its
activities. Since its inception, it was set up to carry out
the reconnnendations of the Royal Coonnissiotl on Agriculture.
According to this Court, these facts were sufficient to make
the said Council an instrumentality of the State.
B
In A. L.. Kalra v. Project and Equipment Corporation of
A India Ltd., [1984] 3 S.C.R. 316,319,325 the said co~poration
was held to be an instrumentality of the Central Government

- 1
and hence falling within Article 12. The Project and'Equipment
Corporation of India Ltd. was a wholly owned subsidiary
company of the State Trading Corporation but was separated in
1976 and thereafter functioned as a Government of India c
undertaking. The finding that it was an instrumentality of the
; Central Government was, however, based upon concession made by
the said corporation. '

In West Bengal State Electricity Board and others v. Desh
Bandho Ghosh and others, [1985] 3 s.c.c. 116 _the West Bengal D
State Electricity Board was held to be an instrumentality of
the State.

""f As pointed out earlier, the Corporation which is the
First Appellant in these Appeals is not only a Government
company as defined in section 617 of the Companies Act, 1956, E
• but is wholly owned by three Governments jointly. It is
financed entirely by these three Governments and is completely
~ under the control of the Central Government, and is managed by
the Chairman and Board of Directors appointed by the Central
( Government and removable by it. In every respect it ts thus a
1 veil behind which the Central Government operates through the F
instrumentality of a Government company. The activities
carried on by the Corporation are of vital national
importance. The Fifth Five Year Plan 1974-79 states that the
"outlay of Rs.l4. 73 crores for the next two years includes
development of Rajabagan Dockyard and operati.on of the Central
Inland Water Transport Corporation and operation of river G
. . -.f services on the Ganga." According to the Sixth Five Year Plan,
1980-85, inland water transport is recognized as the cheapest
mode of transport for certain kinds of conmodities provided
the points of origin and destination are both located on the
water front; that it is one of the most energy efficient modes
of transport and has considerable potential in limited areas H
344 SUPREME COURT REPORTS [1986] 2 S.C. R.

A
which have a net-work of waterways. This Plan further ~~
emphasises that in the North-Eastern Region where other
transport infrastructure is severely lacking and more
expensive, inland water transport has an additional importance
as an instrument of development. The said Plan goes on to
state, "In the Central Sector, an outlay of Rs.45 crores has
B been made for IWT. The most important programne relates to the
investment proposal of Central Inland Water Transport .t.._
Corporation ( CMC)". The Annual Plan 1984-85 of the
Government of India Planning Commission states as follows in
paragraph 10. 33 : ..

c "Inland Water Transport

Against the approved outlay of Rs.12 crores in~
1983-84, the revised expenditure in the Central
Sector is estimated at Rs.10.40 crores. Bulk of the
allocation was for the scheme of Central Inland
D Water Transport Corporation (CIWTC) for acquisition
of vessels, development of Rajabagan Dockyard,
creation of infrastructural facilities etc."

The Annual Report 1984-85 of the Government of India, Ministry )'-'
of Shipping and Transport, states in paragraph 6.1.2. as
E follows :

"The Inland Water Transport Directorate is an
attached office of this M[o!stry headed by a Chief
Engineer-cum-Administrator. It has a complement of ~
technical officers who are charged with the
F responsibility for planning of techno-economic /
studies on waterways and conducting hydrographic--
surveys. The Directorate has a Regional Office at
Patna Two sub-offices of this Regional Office have
also been sanctioned. One of the sub-offices has
been set up at Gauhati and arrangements are under
G way to set up the other at Varanasi. The Ministry
has also under its control a public sector under-
taking, namely, the Central Inland Water Transport r- ~
Corporation which is the only ..ajor COIIIpaDJ' in
inland water transport in tbe country."

H (Emphasis supplied.)
C.I.W.T.CORPN. v. B.N. GANGULY [MADON, J.] 345

-~ A

As shown by the Statement of Objects and Reasons to the Legis-
lative Bill, which when enacted became the National Waterway
(Allahabad-Halda Stretch of the Ganga-Bhagirathi -Hooghly
River) Act, 1982 (Act No. 49 of 1982), published in the Gazet-
te of India Extraordinary, Part II, Section 2, dated May 6, B
1982, at page 15, the Central Government had set up various
).. coomittees in view of the advantages in the mode of inland
water transport such as its low cost of transport, energy

- efficiency, generation of employment among weaker sections of
the community and less pollution. These committees had recom-
mended that the Central Government should declare certain
~ waterways as national waterways and assume responsibility for c
their development. A beginning in respect of this matter was
t thus made by the enactment of the said Act No. 49 of 1982.
Under the said Act, the said stretch was declared to be a
national waterway and it was the responsibility of the Central
Government to regulate and develop this national waterway and
to secure its efficient utilization for shipping and naviga- D
tion. In the Demands for Grant of the Ministry of Shipping and
Transport 1965-86 additional provision was made for an overall
increase in Budget Estimates 1985-86 mainly for equity parti-
~ cipation/investment in the Corporation. The activities carried
on by the Corporation were thus described in the said Demands
for Grant E

"Central Inland Water Transport Corporation - CIWI'C
runs river services between Calcutta and Assam and
Calcutta and Bangladesh. It undertakes movement of
oil from Haldia to Budge-Budge/Paharpur for the
Indian Oil Corporation. It also undertakes F
lighterage, stevedoring operations, ship building,
ship repairing and other engineering services. To
meet cash losses over riverine and engineering
operations, construction of vessel and for purchase
of machinery/equipment etc., budget estimates
1985-86 provide Rs. 13.50 crores for loan and Rs. G
15.41 crores for equity investment in the
Corporation."

Last year Parliament passed the Inland Waterways Authority of
India Act, 1985. This Act received the assent of the President
on December 30, 1985. Under this act, an Authority called the H
346 SUPREME COURT REPORTS [1986] 2 s.c.R.

A )--_
Inland Waterways Authority of India is to be constituted and
it is to be a body corporate by the name aforesaid, having
perpetual succession and a common seal, with power, subject to
the provisions of the said Act, to acquire, hold and dispose
of property, both movable and immovable, and to contract and
to sue and be sued by the said name. It is to consist of a
B Chairman, a Vice.....ch.airman and other persons not exceeding
five. The Chairman, Vice-chairman and the other persons are to~
be appointed by the Central Government. The term of office and
other conditions of service of the members of the Authority
are to be prescribed by the rules. The Central Government has ~
also the power to remove any member of the Authority or to
c suspend him pending inquiry against him. Under the said act, ~
the Authority is, in the discharge of its functions andF'
duties, to be bound by such directions on questions of policy~
as the Central Government may give in writing to it from time
to time.

D It may be mentioned that neither the said Act nor Act
No.49 of 1982 appears to have been yet brought into force.

There can thus be no doubt that the Corporation is .a
Government undertaking in the public sector. The Corporation r
itself has considered that it is a Government of India
E undertaking. The complete heading of the said Rules is
"Central Inland Water Transport Corporation Limited (A
Govenunent of India Undertaking) - Service, Discipline &
Appeal Rules - 1979".

In the face of so mch evidence it is ridiculous to .
F describe the Corporation as a trading company as thet
Appellants have attempted to do. What has been set out abov~·
is more than sufficient to show that the activities of the
Corporation are of great importance to public interest,
concern and welfare, and are activities of the nature carried
on by a modern State and particularly a modern Welfare State.
G
It was, however, submitted on behalf of the Appellants,)r
that even though the cases, out of those referred to above, ,...
upon which the Appellants had relied upon were either
distinguishable or inapplicable for determining the question
whether a Government company was "the State" or not,' the case
H of A.L. lalra v. Project aod llquit-nt Corporation of Iudia
C.I.W.T.CORPN. v. B.N. GANGULY (MADON, J.] 347

-~ A
Ltd. relied upon by the Respondents was based upon a
concession and there was thus no direct authority on the point
in issue. It was further submitted that all the other cases in
which various bodies were held to be "the State" under Article
~ 12 were those which concerned either a statutory authority or
a corporation established by a statute. B

,.A. It is true that the decision in A.L. Kalra v. Project aod
Equipuent Corporation of India lbl. was based upon a
£oncession made by the respondent corporation but the case of
Worben of Hindustan Steel lbl. and auotber V• Bindustan Steel
Ltd. and others was that of a Government company for Hindustan
__...Steel Limited is a Government company as defined by section C
~ 617 of the Companies Act as pointed out in Quugobi.Dda Basu V•
rSankari Prasad Gbosal aod others, [1964] 4 S.C.R. 311,315. The
case of the Workmen of Hindustan Steel Ltd. related to a
question whether a . disciplinary inquiry was validly dispensed
with under Standing Order No. 32 of the Hindustan Steel
Limited. Under that Standing Order, where a workman had been D
convicted for a criminal offence in a court of law or where
the General Manager was satisfied, for reasons to be recorded
in writing, that it was inexpedient or against the interest of
'1 security to continue to employ the workman, the workman may be
removed or dismissed from service without following the
procedure for holding a disciplinary inquiry laid down in E
... Standing Order No. 31. The order of removal from service of
the concerned workman did not set out any reason for the
,_.satisfaction arrived at by the disciplinary authority but
merely stated that such authority was satisfied that it was no
longer expedient to employ the particular workman any further
~:and the order then proceeded to remove him from the service of F
\he company. In these circumstances, this Court held that the
order of removal from service was bad in law. In the course of
its judgment, this Court observed as follows (at page 560) :

"It is time for such a public sector undertaking as
Hindustan Steel Ltd. to recast s.o. 32 and to bring G
it in tune with the philosophy of the Constitution
failing which it being other authority and
therefore a State under Article 12 in an
appropriate proceeding, the vires of s.o. 32 will
have to . be examined. It is not necessary to do so
in the present case because even on the terms of H
348 SUPREME COURT REPORTS [ 1986] 2 S. C. R.

A
s.o. 32 the order made by the General Manager is~
unsustainable. 11

The only reason given by the Court for holding that
Hindustan Steel Limited was "other authority" and, therefore,
"the State" under Article 12 was the fact that it was a public
B sector undertaking. In the entire judgment, there is no other
discussion on this point except what is stated in the passageA
quoted above. Thus, to the extent that there is no authority
of this Court in which the question, namely, whether a
Government company is "the State" within the meaning of
Article 12 has been discussed and decided, the above
c submission is correct.
k
Does this, therefore, make any difference? There is ~
basic fallacy vitiating the above subnission. That fallacy
lies in the assumption which that submission makes that merely
because a point has not fallen for decision by the Court, it
D should, therefore, not be decided at any time. Were this
assumption true, the law would have remained static and would
have never advanced. The whole process of judicial
interpretation lies in extending or applying by analogy the
ratio decidendi of an earlier case to a subsequent case which~
differs from it in certain essentials, so as to make the

-
principle laid down in the earlier case fit in with the new
set of circwnstances. The sequitur of the above assumption
would 'De that the Court should tell the suitor that there is
no precedent governing his case and, therefore, it cannot give;
him any relief. This would be to do gross injustice. Had thiBt
not been done, the law would have never advanced. For
F instance, had Kylands v. fletcher, [18681 L.R. 3 H.L. 330 no'
been decided in the way in which it was, an owner or occupier
of land could with impunity have brought and kept on his land
anything likely to do mischief if lt escaped and would have
himself escaped all liability for the damage caused by such
escape if he had not been negligent. Similarly, but for
G Doaogbue Y• Stevenson, [ 1932] A. C. 562 manufacturers would
have been immune from liability to the ultimate consumers and
users of their products. ~ •
What is the position before us? Is it only one case
decided on a concession and another based upon an assumption
H. that a Government company is "the State" under Article 12?
C.I.W.T.CORPN. v. B.N. GANGULY (MAOON , J. l
349
' '
I

L~.,.-.,- l That .is the posi tion in fact but
· ·
not in substance. As we have A
seen, . ·authorities . constituted · unde.....~, . and corporat1 ons
established · by, statutes have been held to be instrumental!-
. ties . and · agencies of the Government . in a long catena of
~ decisions of this Court. The observations in several of these

I decisions, which have been emphasised by us ·in the passages
extracted from the judgments in those cases, are general in. B
·. ~. 1 their · nature · and take · in their · sweep . all instrumentalities
f, ·and ··agencies .of the State, - whatever be the form which such
i instrumentality or ~ agency may ·have assumed. :.. Particularly

;. ·
: relevant. in · this connection ·are the observations of Mathew,
;...__J.J•, · in . Sukhdev Singh and others v • . Bbagatram Sardar Singh
Baglwvansbi and . another • of . Bhagw~ti, J. , in the Int~rnational . : C

I; · Airport Authority's · case and AJaY Hasia's case . and . · of
. Chinnappa Reddy, J., · in Uttar · Pradesh . Warehousing
!'( ?Corporation's case •.· If t.here is an instrumentality or agecy of
the state which has assumed the garb of a Government company
. t as defined in section 617 of t~ Companies Act, .- it does not
follow that it thereby ceases to be an instrumentality or D
agency of the State. For the· purposes ot Article ·12 one must
necessarily : · see · through the corporate - veil to ascertain
whether behind that veil -is the face of an instrumentality or
·. .,-agency of the State. The Corporation) which is the Appellant
in these two · Appeals before us, - .squarely falls within these . !
observations and it also satisfies t.~ various tests which E
r have been laid down. Merely because it has so far not the
I
;• divest monopoly of inland water transportation is not sufficient to
it of its character of an instrumentality or agency of
the State. It is nothing but the Government operating behind a

. · c;orporate veil, carrying out a governmental · act! vity and
..-.tovernmental fWlctions of vital public importance. There can
~ thus be no doubt that the Corporation is 11the State" within
F

I
1
~
· the meaning of Article 12 of the Constitution.

· · We now turn to
determinatio~ · in
the second question which falls for ·
these . Appeals, namely, · : whether an
unconscionable term in a contract of employment entered into G
. with the Corporation, which is "the State" within t.he meaning
~of the expression in Article 12. is void as being violative of
Article 14. What is challenged under this head is clause (i) ·
of Rule 9 of the said Rules. This challenge levelled by the
Respondent in each of these two Appeals succeeded in the High
wurt. H
-= - 350 ;· SUPREME COURT REPORTS
~

[ 1986] 2 S.C. R• .:. r.
The fi~st point . which · falls · for consideration on this~.. ~~
A
part of the case is whether Rule 9(i) is unconscionable. In
order to ascertain this, we must ~irst examine the facts
leading to the making of the said Rules and then the setting
in which Rule 9(1) occurs. To recapitulate brief ly, each of
the contesting Respondents was in the service of the Rivers
Steam Navigation Company Limited. Their services were taken
B
over by the Corporation after the Scheme of Arrangement was .. . \
sanctioned by the Calcutta High Court. Unde r the said Scheme
of Arrangement if their services had not been taken over, they
would . have been entitled to compensation payable to them,
either under the Industrial Disputes Act, 1947, or otherwise .
~--e- .
legally admissible, by the said company, and the Government OL •

c lndia was to provide to the said company the aJOOunt of such ' .
compensation. Under the letters of a ppointment issued to t hese . ~
Respondents, the age of superannuation was fifty-five .. ~
Thereafter, Service Rules were framed by the Corporation in
'r·
1970 which were replaced in 1979 by new rules namely, the said
Rules .. The said Rules did not apply to employees covered by l
D tne . Industrial Employment ~(Standing Orders) Act, 1946, that l
is, to . ~orkmen, or to those in respect of whom the Board of.
Directors had issued separate orders. At all relevant times, ·. I '"'
these ·, Respondents were employed mainly in · a managerial ,-. r-
capacity. No separate orders were issued by the Board of '~-
Directors in their case. TI1ese Respondents were, therefore,
E admittedly governed by the said Rules. Under Rule 10 of the . ~
said Rules, they were to retire from the service of the ...,
Corporation on completion of the age of fifty-eight years
though in exceptional cases and in the interest of the )
-
Corporation an extension might have been granted to them with !
the prior approval of the Chairman-cum-t-1anaging Director an.d.-\. ...
F the Board of Directors of the Corporation. The said Rules,
however, provide four different modes in which the services of
. the Respondents could have been terminated earlier than the
age of superannuation, namely, the completion of the age of
fifty-eight years. These modes are those provided in Rule
9(1), Rule 9(ii), sub-claur,e (iv) of clause (b) of Rule 36
G read with Rule 3B · and lUJle 37. Of these four modes the first · ""
two apply to permanent employees and the other t..:O apply to ·•·· / •
all employees. Rule 6 classifies employees ns either Permanent ·
or Probationery or Temporary or Casual or Trainee. Clause (i} l
of Rule 6 defines the expression "Permanent employee" as ..
meaning "an employee whose services have been confirmed . in
H
C.I.W.T.CORPN. v. B.N. GANGULY [~~N, J.] 351
A
~ writing according to the Recruitment and Promotion Rulesu.
Under Rule 9(i) which has been extracted above, the employment
of a permanent employee is to be subject to termination on
three months' notice in writing on either side. If the
Corporation gives such a notice of termination, it may pay to
the employee the equivalent of three months' basic pay and B
dearness allowance, if any, in lieu of notice, and where a
permanent employee terminates the employment without giving
,\. due notice, the Corporation may deduct a like amount from- the
amount due or payable to the employee. Under Rule 11, an
employee who wishes to leave the service of the Corporation by
resigning therefrom, is to give to the Corporation the same .
notice as the Corporation is required to give to him under \ c
~le 9, that is, a three months' notice in writing. Under rule
4·-9(ii), the services of a permanent employee can be terminated
~ on the ground of "Services no longer required in the interest
of the Company" (that is, the Corporation). In such a case, a
permanent employee whose service is terminated under this
clause is to be paid fifteen days' basic pay and dearness D
allowance for each completed year of continuous service in the
Corporation and he is also to be entitled to encashment of
leave to his credit. Rule 36 prescribes the penalties which
can be imposed, "for good and sufficient reasons and · as
""'( he'reinafter provided" in the said Rules, on an e~l:Oyee for
his misconduct. Clause (a) of Rule 36 sets .out .Jhe· · Jirl.rior E
penalties and clause (b) of Rule 36 sets out the major
- penalties. Under sub-clause (iv) of clause (b) ·of Rule 36,
dismissal from service is a major penalty. None of the major
+penalties including the penalty of dismdssal is to be imposed
· except after holding an inquiry in accordance with the provi-
sions of Rule 38 and until after the inquiring authority, F
~where it is not itself the disciplinary authority, has
-forwarded to the disciplinary authority the records of the
inquiry together with its report, and the disciplinary autho-
rity has taken its decision as provided in Rule 39. Rule 40
prescribes the procedure to be followed in imposing minor
penalties. Under Rule 43, notwithstanding anything contained G
in Rules 38, 39 or 40, the disciplinary authority may dispense
i with the disciplinary inquiry in the three cases set out in
Rule 43 and impose upon an employee either a major or minor
penalty. We have reproduced Rule 43 earlier. Rule 45 provides
for an appeal against an order imposing any of the penalties
specified in Rule 36. Under Rule 37, the Corporation has the H
' 352 SUPREME COURT REPORTS [19861 2 s.c.R.
A
right to terminate the service of any employee at any time .)..
without any notice if the employee is found guilty of any
insubordination, intemperance or other misconduct or of any
breach of any rules pertaining to service or conduct or
non-performance of his duties. The said Rules do not require
that any disciplinary inquiry should be held before terminat-
B ing an employee's service under rule 37.

Each of the contesting Respondents in these Appeals was A
asked to submit his written explanation to the various
allegations made against him. Ganguly, the First Respondent in
Civil Appeal No. 4412 of 1985, gave a detailed reply to the
c said show cause notice. Sengupta, the First Respondent in
Civil Appeal No. 4413 of 1985, denied the charges made against ~
him and asked for inspection of the documents and copies of ~
statements of witnesses mentioned in the charge-sheet served ·~
upon him to enable him to file his written statement. Without
holding any inquiry into the allegations made against them,
D the services of each of them were terminated by the said
letter dated February 26, 1983, under Rule 9(1). The action
was not taken either under Rule 36 or Rule 37 nor was either
of them dismissed after applying to his case Rule 43 and
dispensing with · he disciplinary inquiry.
E It was submitted on behalf of the Appellants that there
was nothing unconscionable about Rule 9(i), that Rule 9(i) was
not a nudum pactum for it was supported by mutuality inasmuch .....
as it conferred an equal right upon both parties to terminate
the contract of employment, that the grounds which render an-+·
agreement void and unenforceable are set out in the Indian
F Contract Act, 1872 (Act No. IX of 1872), that ,
unconscionability was not mentioned in the Indian Contract Act f
as one of the grounds which invalidates an agreement, that the··
power conferred by Rule 9(i) was necessary for the proper
functioning of the administration of the Corporation, that in
the case of the Respondents this power was exercised by the
G Chairman-cum-Managing Director of the Corporation, and that a
person holding the highest office in the Corporation was not
likely to abuse the power conferred by Rule 9{i).

The submissions of the contesting Respondents, on the
other hand, were that the parties did not stand on an equal
H footing and did not enjoy the same bargaining power, that the
1 .. C.I.W.T. CORPN. v. B.N. GANGULY [MADON, J.]
353
.;.~ contract . contained in the service rules was one imposed upon
the~e Respondents, that the power conferred by rule 9(i) was A
arb1trary and uncanalized as it did not set out any guidelines
for the exercise of that power and that even assuming it may
not be void as a contract; in any event it offended Article 14
as it conferred an absolute and arbitrary power upon the
Corporation.
B
.-::-- As the question before us is of the validity of clause
[ (i) of Rule 9, we will refrain from expressing. any opinion
I with respect to the validity of clause (ii) of Rule 9 or Rule
l _. 37 or 40 but will confine ourselves only to Rule 9(i).
-~·~.

l The said Rule constitute a part of the contract of
.J employment between the Corporation and its employees to whom C
,.•. (the said Rules apply, and they thus form a . part of the

I .I
I
l
contract of employment between the Corporation and each of the
two contesting Respondents. The validity of Rule 9(i) would,
therefore, first fall to be tested by the principles of the
law of contracts. . D
l
., Under section 19 of the Indian Contract Act, when
1'\ consent to an agreement is caused by coercion, fraud or

r misrepresentation, the agreement is a contract voidable at the
j option of the party whose consent was so caused. It is not the
1 case of either of the contesting Respondents that there was E
1 any coercion brought to bear upon him or that any fraud or
? misrepresentation had been practised upon him. Under section
19A, when consent to an agreement is caused by undue
influence, the agreement is a contract voidable at the option
_pf the party whose consent was so caused and the court may set
·r aside any such contract either absolutely or if the party who F
was entitled to avoid it has received any benefit thereunder, .
upon such terms and conditions as to the court may seem just.
Sub-section ( 1) of section 16 defines ''Undue influence" as
follows :

"16. 'Undue influence• defined. - G
.....
(1) A contract is said to be induced by 'undue
influence' where the relations subsisting between
the parties are such that one of the parties is in
a position to dominate the will of the other and
uses that position to obtain an unfair advantage H .
over the other."
,_

354 SUPREME COURT REPORTS
'l
[1986] 2 S.C.R. t

are~
A The material provisions of s ub-section (2) of section 16
as fallows :
11
(2) In particular and without prejudice to the
I
generality of the foregoing principle, a person is 1
deemed to be in a position to dominate the will of
another -
B
(a) where he holds a . real or apparent authority i.:
over the other • • • 11

We need not trouble ourselves with the other sections of the
Indian Contract Act except sections 23 and 24. Section 2J.,.J
c states that the consideration or object of an agreement is
lawful unless inter alia the Court regards it as opposed to .
public policy. This section further provides that every~l l
agreement of which the object or consideration is unlawful is ·l
void. Under section 24, if any part of a single consideration
for one or more objects, or any one or any part of any one of
D several considerations for a single object is unlawful, the
agreement is vo.id. The agreement is, however, not always void
in its entirety for it is well settled that if several .
distinct proudses are made for one and the same lawful .•
consideration, and one or more of them be such as the law will
not enforce, that will not of itself prevent the rest from
E being enforceable. The general rule was stated by Willes, J.,
in Pickering v. lliracombe Ry. Co., [ 18681 L. R. 3 C. P. 235 (at ~
page 250) as follows :

"The general rule is that, where you cannot sever .
the illegal from the legal part of a covenant, thf\.,•
F contract is altogether void; but where you can
sever them, whether the illegality be created bY
statute or by the coiiiiOOn law, you may reject the
bad part and retain the good" ••

Under which head would an unconscionable bargain fall? If
c it falls under the head of undue influence, it would be ,l
voidable but if it falls under the head of being opposed to.._-
public policy, it would be void. No case of the type before us .
appears to have fallen for decision under the law of contractS ·.
before any court in India nor has any case on all fours of 8 ;
<:OlJrt in any other country been pointed out to us. The word;
H "un~nscionable" is defined in the Shorter Oxford Englis~ ~
Dir.tionary, Third Edition, Volume U, page 2288, when use.J'-
•x....e t .. ·
C. I.W. T.CORPN. v. B. N. GANGULY [MAOON, J.] 355
A
..C with reference to ac~ions etc. as "showing no regard for
conscience; irreconcilable with what is right or reasonable".
An unconscionable bargain would, therefore, be one which is
irreconcilable with what is right or reasonable.

Although certain types of contracts were illegal o~ void, B
as the case may be, at Cormnon Law, for instance, those
contrary to public policy or to commit a legal wrong such as a
~crime or a tort, the general rule was of freedom of contract.
This rule was given full play in the nineteenth century on the
ground that the parties were the best judges of their own
interests, and if they freely and voluntarily entered into a
contract the only function of the court was to enforce it. It
c
1 was considered immaterial that one party was economically in a
_.,_stronger bargaining position than the other; and if such a
tparty introduced qualifications and exceptions to his
liability in clauses which are today known as "exemption
clauses" and the other party accepted them, then full effect
would be given to what the parties agreed. Equity, however, D
interfered in many cases of harsh or unconscionable bargains,
such as, in the law relating to penalties, forfeitures and
mrtgages. It also interfered to asset aside harsh or
.unconscionable contracts for salvage services rendered to
~ a vessel in distress, or unconscionable contracts with
expectant heirs in which a person, usually a money-lender,
E
gave ready cash to the heir in return for the property which
• he expects to inherit and thus to get such property at a gross
undervalue. It also interfered with harsh or unconscionable
t contracts entered into with poor and ignorant persons who had
not received independent advice (See Chitty on Contracts,
TWenty-fifth Edition, Volume I, paragraphs 4 and 516).
./ F
t_
Legislation has also interfered in many cases to prevent
one party to a contract from taking undue or unfair advantage
of the other. Instances of this type of legislation are usury
laws, debt relief laws and laws regulating the hours of work
and conditions of service of workmen and their unfair
G
discharge from service, and control orders directing a party
to sell a particular essential commodity to another.
i
In this connection, it is useful to note what Chitty has
to say about the old ideas of freedom of contract in modern
times. The relevant passages are to be found in Chi tty on
H
Contracts, TWenty-fifth Editiont Volume I, in paragraph 4, and
are as fol~ows :
356 SUPREME COURT REPORTS [1986) 2 s.c.R.
A

"These ideas have to a large extent lost their )....
appeal today. 'Freedom of contract, • it has been
said, 'is a reasonable social ideal only to the
extent that equality of bargaining power between
contracting parties can be assumed, and no injury
B is done to the economic interests of the community
at large.' Freedom of contract is of little value
when one party has no alternative between accepting 1
a set of terms proposed by the other or doing
without the goods or services offered. Many
contracts entered into by public utility
c undertakings and others take the form of a set of
terms fixed in advance by one party and not open to ~
discussion by the other. These are called___)'-
' contracts d 'adhesion' by French lawyers. Traders 1
frequently contract, not on individually negotiated
terms, but on those contained in a standard form of
D contract settled by a trade association. And the
terms of an employee's contract of employment may
be determined by agreement between his trade union
and his employer, or by a statutory scheme of
employment. Such transactions are nevertheless ,
contracts notwithstanding that freedom of contract 1r
E is to a great extent lacking.

Where freedom of contract is absent, the
disadvantages to consumers or members of the public
have to some extent been offset by administrative -t
procedures for consultation, and by legislation.
F Many statutes introduce terms into contracts which,_
the par.ties are forbidden to exclude, or declare 1
that certain provisions in a contract shall be-
void. And the courts have developed a number of
devices for refusing to implement exemption clauses
imposed by the economically stronger party on the
G weaker, although they have not recognised in
themselves any general power (except by statute) to
declare broadly that an exemption clause will not .
be enforced unless it is reasonable. Again, more r
recently, certain of the judges appear to have
recognised the possibility of relief from
H ~ontractual obligations on the ground of
'inequality of bargaining power."
C.I.W.T.CORPN. v. B.N. GANGULY [MADON, J.] 357

What the French call "contracts d 'adhesion', the American call A
~ "adhesion contracts" or "contracts of adhesion." An "adhesion
contract" is· defined in Black's Law Dictionary, Fifth Edition,
at page 38, as follows

'"Adhesion contract'. Standardized contract form
offered to consumers of goods and services on B
essentially 'take it or leave it' basis without
affording consumer realistic opportunity to bargain
and under such conditions that consumer cannot
obtain desired product or services except by
acquiescing in form contract. Distinctive feature
of adhesion contract is that weaker party has no
realistic choice as to its terms. Not every such c
contract is unconscionable."
4~
t The position under the American Law is stated in
"Reinstatement of the Law - Second" as adopted and proiiillgated
by the American Law Institute, Volume II xx which deals with
the law of contracts, in section 208 at page 107, as follows : n

"$ 208. Unconscionable Contract or Term

If a contract or term thereof is unconscionable at
the time the contract is made a court may refuse to E
enforce the contract, or may enforce the remainder
• of the contract without the unconscionable term, or
may so limit the application of any unconscionable
term as to avoid any unconscionable result."
t
. In the Comments given under that section it is stated at page F
1107
"Like the obligation of good faith and fair dealing
( ~ 205), the policy against uncoDBcionable
contracts or ten. applies to a wide variety of
types of cooduct. The determination that a contract
or term is or is not unconscionable is made in the G
light of its setting, purpose and effect. Relevant
factors include weaknesses in the contracting
process like those involved tn more specific rules
as to contractual capacity, fraud and other
invalidating causes; the policy also overlaps with
rules which render particular bargains or terms H
unenforceable on grounds of public policy. Policing
35H SUPREME COURT REPORTS [1986) 2 s.c.R.

A against unconscionable contracts or ter.~ bas
sometimes been accomplished by adverse construction ~
of language, by manipulation of the rules of offer
and acceptance or by determinations that tbe clause
is contrary to public policy or to the dominant
purpose of the contract'. Uniform Con:mercial Code
$ 2-302 Comment 1. • • • A bargain is not
B unconscionable merely because the parties to it are
nnequal in bargaining position, nor even because;..
the inequality results in an allocation of risks to
the weaker party. But ~oss inequality of
bargaining power, together with terE unreasonably
favourable to the stronger party, may confirm
c indications 'that the transaction involved elements
of deception or compulsion, or may show that the ~·
weaker party had no D:!aningful choice, no real~
alternative, or did not in fact assent or appear to
assent to the unfair terms."
(Emphasis supplied.)
D
There is a statute in the United States called the Universal
Commercial Code which is applicable to contracts relating to
sales of goods. Though this statutes is inapplicable to
contracts not involving sales of goods, it has proved very)-
influential in, what are called in the United States, ·
E "non-sales" cases. It has many times been used either by
analogy or because it was felt to embody a general accepted
social attitude of fairness going beyond its statutory
application to sales of goods. In the Reporter's Note to the
said section 208, it is stated at page 112 : ~-

F "It is to be emphasized that a contract of adhesion{
--
is not unconscionable per se, and that al~
unconscionable contracts are not contracts of
-
adhesion. Nonetheless, tbe more standardized the
agree.ent and the less a party may bargain
meaningfullyt the more susceptible the contract or
G a tera will be to a claia of \DI.CODScionability. n

(Emphasis supplied.)~

The position has been thus sunmed up by John R. Pedan in "The
Law of Unjust Contracts" published by Butterworths in 1982, at
H. pages 28-29 :
C.I.W.T.CORPN. v. B.N. GANGULY [MADON, J.] 359
11
.. Unconscionability represents the end of a
• • A
cycle comnMmcing with the Aristotelian concept of
justice and the Roman law iaesio enormis, which in
turn fonred the basis for the medieval church's
concept of a just price and condemnation of usury.
These philosophies permeated the exercise, during
the seventeenth and eighteenth centuries, of the B
Chancery court's discretionary powers under which
it upset' all kinds of unfair transactions.
1 Subsequently the movement towards economic
individual ism in the nineteenth century hardened
the exercise of these powers by emphasizing the
freedom of the parties to make their own contract.
While the principle of pacta sunt servanda held c
dominance, the consensual theory still recognized
exceptions where one patty was overborne by a
fiduciary, or entered a contract under duress or as
the result of fraud. However, these exceptions were
limited and had to be strictly proved.
D
It is suggested that the judicial and legislative
trend during the last 30 years i.n both civil and
connnon law jurisdictions has almost brought the
wheel full circle. Both courts and parliaments have
provided greater protection for weaker parties from
harsh contracts. In several jurisdictions this E
included a general power to grant relief from
unconscionable contracts, thereby providing a
launching point from which the courts have the
opportunity to develop a mbdern doctrine of
unconscionability. Amercian decisions on article
2. 302 of the UCC have already gone some distance F
into this new arena • • • • "

The expression "laesio enormis" used in the above passage
refers to "laesio ultra dimidium vel enormis" which in Roman
law meant the injury sustained by one of the parties to an
onerous contract when he had been overreached by the other to G
the extent of more than one-half of the value of the
i , subject~tter, as for example, when a vendor had not received
half the value of property sold, or the purchaser had paid
mre then double value. The maxim "pacta sunt servanda"
referred to in ·the above passage means "contracts are to be
kept". H
360 SUP!<.EME COUl<.T REPORTS [1986] 2 S.C,R.

It would appear from certain recent English cases that
the courts in that country have also beguJ;l to recognize the )I.-
possibility of an unconscionable bargain which could be
B brought about by economic duress even between parties who may
not in economic terms be situate differently (see, for
instance, Occidental Worldwide Investment Corpn. v. Skibs A/S
Avanti, [1976] 1 Lloyd's Rep. 293, North Ocean Sbipping Co.
Ltd. v. Hyuodai Construction Co. Ltd., [1979] Q.B. 705, Pao On
v. Lau Yin Long [1980] A.C. 614 and ~Diverse Tankships of
c Monrovia v. International Transport Workers Federation, [ 1981 J .1
1 C.R. 129, reversed in [1981] 2 W.L.R. 803 and the
commentary on these cases in Chitty on Contracts, Twenty-fifth
Edition, Volume I, paragraph 486).

Another jurisprudential concept of comparatively modern ,
D origin which has affected the law of contracts is the theory Jk-
of .,distributive justice". According to this doctrine, ...t
distributive fairness and justice in the possession of wealth
and property can be achieved not only by taxation but also by
regulatory control of private and contractual transactions
even though this might involve some sacrifice of individual
E liberty. In Liogappa Pochalma Appelvar v. State of Mabarashtra
&Aor., (19~5] 1 s.c.c. 479 this Court, while upholding the
constitutionality of the Maharashtra Restoration of Lands to
Scheduled Tribes Act, 1974, said (at page 493) : ~

"The present legislation is a typical illustration
F of the concept of distributive justice, as modern
jurisprudence know it. Legislators, Judges and
administrators are now familiar with the concept of ~
distributive justice. Our Constitution permits and
even directs the State to administer what may be
G
termed 'distributive justice•. The concept of t
T

distributive justice in the sphere of law-making-·
connotes, inter alia, the removal of ~conomic
inequalities and rectifying the injustice resulting
from dealings or transa.::tions between unequals in
society. Law· should be u..sed as an instrument of
distributive justice to achieve a fair division of
H wealth among the members of society based upon the
principle : 'From each according to his capacity, )'-
to each according to his needs'. Distributive
justice co.prehends more than achieving lessening
of inequalities by differential taxation, giving
debt relief or distribution of property owned by
C.I.W.T.CORPN. v. B.N. GANGULY [MADON, J.] 361

one to many who have none by imposing ceiling on
-~
holdings, both agricultural and urban, or by direct A
regulation of contractual transactions by
forbidding certain transactions and, perhaps, by
requiring others. It also woans that those who have
been deprived of their properties by unconscionable
bargains should be restored their property. All
such · laws may take the form of forced B
redistribution of wealth as a means of achieving a
fair division of material resources among the
members of society or tbere 118Y be legislative
control of unfair agree11e11ts."
(Emphasis supplied.)

Jl When our Constitution states that it is being enacted in c
order to give to all the citizens of India "JUSTICE, social,
1-economic and political", when clause (1) of Article 38 of the
Constitution directs the State to strive to promote the
welfare of the people by securing and protecting as
effectively as it may a social order in which social, economic
and political justice shall inform all the institutions of the D
national life, when clause (2) of Article 38 directs the
State, in particular, to mdnimize the inequalities in income,
not only amongst individuals but also amongst groups of people
"'(residing in different areas or engaged in different
vocations, and when Article 39 directs the State that it
shall, in particular, direct its policy towards securing that E
-• the citizens, men and women equally, have the right to an
adequate means of livelihood and that the operation of the
+economic system does not result in the concentration of wealth
and means of production to the common detriment and that there
should be equal pay for equal work for both men and women, it
lis the doctrine of distributive. justi~e which is speaking F
through these words of the Constitution.

Yet another theory which has made its emergence in recent
years in the sphere of the law of contracts is the test of
reasonableness or fairness of a clause in a contract where
there is inequality of bargaining power. Lord Denning, M.R., G
i appears to have , been the propounder, and perhaps the
originator -- at least in England, of this theory. In
Gillespie Brothers & Co. Ltd. v. Boy Bowles Transport Ltd••
[1973] 1 Q.B. 400 where the question was whether an indemnity
clause in a contract, on its true construction, relieved the
H
362 SUPREME COURT REPORTS [ 1986] 2 S. C. R.

A
indemnifier from liability arising to the indemnified from his
own negligence, Lord Denning said (at pages 415-6) :

"The time may come when this process of
'construing' the contract can be pursued no
further. The words are too clear to permit of it.
Are the courts then powerless? Are they to pend.t
the party to enforce his unreasonable clause,
B
even when it is so unreasonable, or applied so
unreasonably, as to be unconscionable? When it gets A
to this point, I would say, as I said many years
ago :

c 'there is the vigilance of the connnon law which,
while allowing freedom of contract, watches to see i
that it is not abused' : John tee & Son (Grantham)-r
Ltd. v. Railway Executive [1949] 2 All. E.R. 581, -t
584. It will not allow a party to exempt himself
from his liability at common law when it would be
D
quite unconscionable for him to do so."

(Emphasis supplied.)

In the above case the Court of Appeal negatived the defence of
the indemnifier that the indenmity clause did not cover the)-
negligence of the indemnified. It was in Lloyds Bank Ltd. v.
E
Bundy, [1974] 3 All E.R. 757 that Lord Denning first clearly
enunciated his theory of "inequality of bargaining power". He •
began his discussion on this part of the case by stating (at
page 763)
"There are cases in our books in which the courts
+
will set aside a contract. or a transfer of ,
F
property, when tbe parties have not e t on equalj
tetw~, wben tbe one is so strong in bargaining
po~~er and tbe other so weak that, as a •tter of
co an fairness • it is oot right that tbe stroag
sbould be allowed to push the weak to the wall.
Hitherto those exceptional cases have been treated
G
each as a separate category in itself. But I think
the time has come when we should seek to find a)-
principle to unite them. I put on one side
contracts or transactions which are voidable for
fraud or misrepresentation or mistake. All those
are governed by settled principles. I go only to
R
those where there has been inequality of bargaining
C.I.W.T. CORPN. v. B.N. GANGULY [MADON, J.} 363

power, such as to merit and intervention of the A
court."
(Emphasis supplied.)

He then referred to various categories of cases and ultimately
deduced therefrom a general principle in these words (at page
765) : B
"Gathering all together, I would suggest that
through all tbese instances there runs a single
thread. They rest on 'inequality of bargaining
power'. By virtue of it, the English law gives
relief to one who, without independent advice,
enters into a contract on terms which are very
unfair or transfers property for a consideT."ation c
~ which is grossly inadequate, when his bargaining
power is grievously impaired by reason of his own
t needs or desires, or by his own ignorance or
infirmity, coupled with undue influences or
pressures brought to bear on him by or for the
benefit of the other. When I use the word 'undue' I D
do not mean to suggest that the principle depends
on proof of any wrongdoing. The one who stipulates
for an unfair advantage may be moved solely by his
own self-interest, unconscious of the distress he
is bringing to the other. I have also avoided any
reference to the will of the.one being 'dominated' E
or 'overcome' by the othe~- One who is in extreme
need may kDowingly consent to a D)St i.Jiprovident
bargain, solely to relieve the straits in which be
+ finds ~elf. Again, I do not mean to suggest that
every transaction is saved by independent advice.
But the absence of it may be fatal. With these F
explanations, I hope this principle will be found
to reconcile the cases."
(Emphasis supplied.)

Though_ the House of ·lords does not yet appear to have
unanimously accepted this theory, the observations of Lord G
Diplock in A.. Schroeder t'AJ&ic Publishing Co. Ltd. v. Macaulay
-1 (Fomerely Instone), [1974) 1 W.L.R. 1308 are a clear pointer
towards this direction. In that case a song writer had entered
into an agreement with a music publisher in the standard form
whereby the publishers engaged the song writer's exclusive
services during the term of the agreement, which was five H
364 SUPREME COURT REPORTS [1986] 2 s.c.R.

A
years. Under the said agreement, the song writer assigned to ~
the publisher the full copyright for the whole world in his
musical compositions during the said term. By another term of
the said agreement, if the toal royalties during the term of
the agreement exceeded ;-s,ooo the agreement was to stand
automatically extended by a further period of five years.
B Under the said agreement, the publisher could determine the
agreement at any time by one month's written notice but no
corresponding right was given to the song writer. Further, A
while the publisher had the right to assign the agreement, the
song writer agreed not to assign his rights without the
publisher's prior written consent. The song writer brought an
c action clai~ng, inter alia, a declaration that the agreement
was contrary to public policy and void. Plowman, J., who heard ~
the action granted the declaration which was sought and the ~
Court of Appeal affirmed his judgment. An appeal filed by the ·
publishers against the judgment of the Court of Appeal was
dismissed by -the House of Lords. The Law Lords held that the
o said agreement was void as it was in restraint of trade and
thus contrary to public policy. In his speech Lord Dip lock
however, outlined the theory of reasonableness or fairness of
a bargain. The following observations of his on this part of
the case require to be reproduced in extenso (at pages ~
1315-16) :
E
t~y Lords, the contract under consideration in this
appeal is one whereby the respondent accepted •
restrictions upon the way in which he would exploit
his earning power as a song writer for the next ten +
years. Because this can be classified as a contract
F in restraint of trade the restrictions that the ,
respondent accepted fell within one of those __1
limited categories of contractual proadses in
respect of which the courts still retain the power
to relieve the promdsor of his legal duty to fulfil
them. In order to determine whether this case is
G one in which that power ought to be exercised, what
your Lordships have in fact been doing has been to
assess the relative bargaining power of the )--
publisher and the song writer at the time the
contract was made and to decide whether the
publisher had used his superior bargaining power to
H exact from the song writer promises that were
C.I.W.T. CORPN. v. B.N. GANGULY [MADON, J.} 365

unfairly onerous to him._ Your Lordships have not A
been concerned to inquire whether the public have
in fact been deprived of the fruit of the song
writer's talents by reason of the restrictions, nor
to assess the likelihood that they would be so
deprived in the future if the contract were
perttdtted to run its full course. B

It is, in my view, salutary to aCknowledge that in
refusing to enforce provisions of a contract
whereby one party agrees for the benefit of the
other party to exploit or to refrain from
exploiting his own earning power, the public policy
which the court is implementing is not some 19th- c
century economic theory about the benefit to the
general public of freedom of trade, but the
protection of those whose bargaining power is weak
against being forced by those whose bargaining
power is stronger to enter into bargains that are
unconscionable. Under the influence of Bentham and D
of laissez-£ aire the courts in the 19th century
abandoned the practice of applying the public
policy against unconscionable bargains to contracts
generally, as they had former.ely done to any
contract considered to be usurious; but the policy
survived in its application to penalty clauses and E
to relief against forfeiture and also to the
special category of contracts in restraint of
trade. If one looks at the reasoning of 19th-
century judges in cases about contracts in
restraint of trade one finds lip service paid to

'
' current economic theories, but if one looks at what
they said in the light of what they did, one finds
that they struck down a bargain if they thought it
was unconscionable as between the parties to it and
F

upheld it if they thought that it was not.

So I would hold that the question to be answered as G
respects a contract in restraint of trade of the
kind with which this appeal is concerned is : ~as
the bargain fair!" 'Die test of fairness is, no
doubt, whether the restrictions are both reasooably
necessary for the proteetion of tbe legiti.Mte
H
366 SUPREME COURT REPORTS [1986] 2 s.c.R.

A interests of the promsee and ~ate with the ~
benefits secured to the piUiisor under tbe
contract. For the purpose of this test all the
provisioos of the contract mst be taken into
consideration."

(Emphasis supplied.)
B ~
Lord Diplock then proceeded to point out that there are two
kinds of standard forms of contracts. The first is of
contracts which contain standard clauses which "have been
settled over the years by negotiation by representatives of
the commercial interests involved and have been widely adopted
c because experience has shown that they facilitate the conduct ~
of trade". He then proceeded to state, "If fairness or ;
reasonableness were relevant to their enforceability the fact
that they are widely used by parties whose bargaining power is
fairly matched would raise a strong presumption that their
terms are fair and reasonable." Referring to the other kind of
D standard form of contract Lord Diplock said (at page 1316) :

"The same presumption, however, does not apply to ,
the other kind of standard form of contract. This "r
is of comparatively modern origin. It is the result
of the concentration of particular kinds of
E busiuess in relatively few bands. The ticket cases
in the 19th century provide what are probably the
first examples. Tbe tet'IIB of this kind of standard
fona of contract bave DOt been tbe subject of+
negotiation between the parties to it, or approved
by any organisation representing the interests of j
F the weaker party. They bave been dictated by that_/
party whose bargaining power, either exercised
alone or in conjunction with others providing
similar goods or services, enables him to say: 'If
you want these goods or services at all, these are
the only terms on which they are obtainable. take
G it or leave it'.

To be in a position to adopt this attitude towards
a party desirous of entering into a contract to
obtain goods of services provides a classic
instance of superior bargaining power."
H (Emphasis supplied.)
C.I.W.T.CORPN. v. B.N. GANGULY [MADON, J.] 367

..... A
The observations of Lord Denning, M. R. , in ~son aDd
another v. Patent Steam Carpet Co. Ltd•• [1978] 1 Q.B. 69 are
also useful and require to be quoted. These observations are
as follows (at page 79) :

" In such circumstances as here the Law Commission B
in 1975 recommended that a term which exempts the
stronger party from his ordinary common law lia-
bility should not be given effect except when it is
reasonable: see The Law Co~ssion and the Scottish
Law Commission Report , Exemption Clauses , Second
Report (1975) (August 5, 1975), Law Com. No. 69
·~ (H.c. 605), PP• 62, 174; and there is a bill now
before Parliament which gives effect to the test of
C

t reasonableness. This is a gratifying piece of law
reform: but ·l do not think we need wait for that
bill to be passed into law. You never know what may
happen to a bill. Meanwhile the common law has its
own principles ready to hand. ln Gillespie Bros. & D

I Co. Lt.d. v •. Roy Bowles Transport Ltd.. [1973] Q.B.
400, 416, I suggested that an exemption or
limitation clause should not be given effect if it
was unreasonable, or if it would be unreasonable to
apply it in the circumstances of the case. I see no
reason why this should not be applied today, at any E
rate in contr-acts in standard forms where there is
inequality of bargaining power."
+ The Bill referred to by Lord Denning in the above
passage, when enacted, became the Unfair Contract Terms Act,
t 1977. This statute does not apply to all contracts but only
to certain classes of them. It also does not apply to
F

contracts entered into before the date on which it came into
force, namely, February 1, 1978; but subject to this it
applies to liability for any loss or damage which is suffered
on or after that date. It strikes at clauses excluding or
restricting liability in certain classes of contracts and G
~ torts and int reduces in respect of clauses of this type the
test of reasonableness and prescribes the guidelines for
determining their reasonableness. The detailed provisions of
this statute do not concern us but they are worth a study.

H
368 SUPREME COURT REPORTS [19861 2 s.c.R.

A
.~·
In Pboto Production Ltd. v. Securicor .Transport Ltd. •
[1980] A.C. 827 a case before the Unfair Contract Terms Act,
1977, was enacted, the House of Lords upheld an exemption
clause in a contract on the defendants' printed form
containing standard conditions. The decision appears to
proceed on the ground that the parties were businessmen and
B did not possess unequal bargaining power. The House of Lords
did not in that case reject· the test of reasonableness or A
fairness of a clause in a contract where the parties are not
equal in bargaining position. On the contrary, the speeches of
Lord Wilberforce, lord Diplock and Lord Scarman would seem to
show that the House of Lords in a fit case would accept that
c test. Lord Wilberforce in his speech, after referring to the l
Unfair Contract Terms Act, 1977, said (at page 843) : J
-+
"This Act applies to consumer contracts and those
based on standard terms and enables exception
clauses to be applied with regard to what is just
D and reasonable. It is significant that Parliament
refrained from legislating over the whole field of
contract. · After this Act, in coamerclal matters
generally, wben the parties are not of unequal
bargainiog power • and when risks .a.re normally borne 'r
by insurance, not only is the case for judicial
E intervention undemonstrated, but there is
everything to be said, and this seems to have been
Parliament's intention, for leaving the parties
free to apportion the risks as they think fit and +
for respecting their decisions."
(Emphasis supplied.)
F Lord DiplocK said (at page 85Q-51) : j
"Since the obligations implied by law in a conmer-
cial contract are those which, by judicial consen-
sus over the years or by Parliament in passing a
statute, have been regarded as obligations which a
G reasonable busines&llaD. would realise that be was
accepting wben be entered into a contract of a
particular kind, the court's view of the reason- )>-
ableness of any departure from the implied obli-
gations which would be involved in construing the
express words of an exclusion clause in one sense
H that they are capable of bearing rather than
C.I.W.T.CORPN. v. B.N. GANGULY [MADON, J.] 369

A
another, is a relevant consideration in deciding
what meaning the words were intended by the parties
to bear."
· (Emphasis supplied.)

Lord Scarman, while agreeing with Lord Wilberforce, described B
(at page 853) the action out of which the appeal before the
House had arisen as "a co.Ercial dispute bet:ween parties well
).. able to look after tt.e.elves" and then added, "In such a
situation what the parties agreed (expressly or impliedly) is
what matters; and the duty of the courts is to construe their
contract according to its tenor."

_~ As seen above, apart from judicial decisions, the United
c
+States and the United Kingdom have statutorily recognized, at
least in certain areas of the law of contracts, that there can
be unreasonableness (or lack of fairness, if one prefers that
phrase) in a contract or a clause in a contract where there is
inequality of bargaining power between the parties although D
arising out of circumstances not within their control or as a
result of situations not of their creation. Other l~gal
systems also permit judicial review of a contractual transac-
'T tion entered into in similar circumstances. For example,
section 138(2) of the German Civil Code provides that a
transaction is void ''when a person" exploits "the distressed E
situation, inexperience, lack of judgmental ability, or grave
• weakness of will of another to obtain the grant or promise of
pecuniary advantages • • • which are obviously disproportion-
+ ate to the performance given in return." The position accord-
ing to the French law is very IDlch the same.
F
Should then our courts not advance with the times? Should
they still continue to cling to outmoded concepts and outworn
ideologies? Should we not adjust our thinking caps to match
the fashion of the day? Should all jurisprudential development
pass us by, leaving us floundering in the sloughs of
nineteenth-century theories? Should the strong be permitted to G
push the weak to the wall? Should they be allowed to ride
i roughshod over the weak? Should the courts sit back and watch
supinely while the strong trample under foot the rights of the
weak? We have a Constitution for our country. Our judges are
bound by their oath to "uphold the Constitution and the laws".
The Constitution was enacted to secure to all the citizens of H
370 SUPREME COURT REPORTS [ 1986] 2 S.C. R.

A
this country social and economic justice. Article 14 of the ·~~
Constitution guarantees to all persons equality before the law
and the equal protection of the laws. The principle deducible
from the above discussions on this p~rt of the case is in
consonance with right and reason, intended to secure social
and economic justice and conforms to the mandate of the great
B equality clause in Article 14. This principle is that the
courts will not enforce and will, when called upon to do so,
strike down an unfa~r and unreasonable contract, or an unfair A
and unreasonable clause in a contract, entered into between
parties who are not equal in bargaining power. It is difficult
to give an exhaustive list of all bargains of this type. No
c court can visualize the different situations which can arise
in the affairs of men. One can only attempt to give some ~
illustrations. For instance, the above principle will apply~ --
where the inequality of bargaining power is the result of the~
•
great disparity in the economic strength of the contracting
parties. It will apply where the inequality is the result of
D circumstances, Whether of the creation of the parties or not.
It will apply to situations in which the weaker party is in a
position in which he can obtain goods or services or means of
livelihood only upon the terms imposed by the stronger party
or go without them. It will also apply where a man has no,
choice, or rather no meaningful choice, but to give his assent 'r
E to a contract or to sign on the dotted line in a prescribed or
standard form or to accept a set of rules as part of the
contract, however unfair, unreasonable and unconscionable a ..
clause in that contract or form or rules may be. This princi-
ple, however, will not apply where the bargaining power of the+
contracting parties is equal or almost equal. This principle
F may not apply where both parties are businessmen and the .
contract is a commercial transaction. In today's complex worldf
of giant corporations with their vast infra-structural organi.!
zations and with the State through its instrumentalities and
agencies entering into almost every branch of industry and
coiiJD.erce, there can be myriad situations which result in
G unfair and lUlreasonable bargains between parties possessing
wholly disproportionate and unequal bargaining power. These
cases can neither be enumerated nor fully illustrated. The 'r-
court must judge each case on its own facts and circumstances.

It is not as if our civil courts have no power under the
H existing law. Under section 31(1) of the Specific Relief Act,
C.I.W.T.CORPN. ~· B.N. GANGULY [MADON, J.] 371

A
1963 (Act No. 47 of 1963), any person against whom an instru-
-~ment is void or voidable, and who has reasonable apprehension
that such instrument, if left outstanding, may cause him
serious injury, may sue to have it adjudged void or voidable,
and the court may in its discretion, so adjudge it and order
it to be delivered up and cancelled. B

Is a contract of the type mentioned above to be adjudged
~voidable or void? If it was induced by undue influence, then
under section 19A of the Indian Contract Act, it would be
voidable. It is, however, rarely that contracts of the types
• to which the principle formulated by us above applies are
induced by undue influence as defined by section 16(1) of the c
!Indian Contract Act, even though at times they are between
~arties one of whom holds a real or apparent authority over
-tthe other. In the vast majority of cases, however, such
contracts are entered into by the weaker party under pressure
of circumstances, generally economic, which results in
inequality of bargaining power. Such contracts will not fall D
within the four corners of the definiton of "undue influence"
given in section 16(1). Further, the majority of such
contracts are in a standard or prescribed form or consist of a
set of rules. They are not contracts between individuals
~containing terms meant for those individuals alone, Contracts
in prescribed or standard forms or which embody a set of rules E
as part of the contract are entered into by the party with
superior bargaining power with a large number of persons who
have far less bargaining power or no bargaining power at all.
Such contracts which affect a large number of persons or a
~group or groups of persons, if they are unconscionable, unfair
and unreasonable, are injurious to the public interest. To say F
fhat such a contract is only voidable would be to compel each
Person with whom the party with superior bargaining power had
contracted to go to court to have the contract adjudged void-
able. This would only result in multiplicity of litigation
which no court should encourage and would also not be in the
public interest. Such a contract or such a clause in a G
contract ought, therefore, to be adjudged void. While the law
of contracts in England is mostly judge-made, the law of
icontracts in India is enacted in a statute, n:mely, the Indian
Contract Act, 1872. In order that such a contract should be
void, it must fall under one of the relevant sections of the
Indian Contract Act. The only relevant provision in the Indian H
Contract Act which can apply is section 23 when it states that
372 SUPREME COURT REPORTS [1986] 2 s.c.R.
A
"The consideration or object of an agreement is lawful, unless'~
• •• the court regards it as • • • opposed to public policy."

The Indian Contract Act does not define the expression
"public policy" or "opposed to public policy". From the
very nature of things, the expressions "public policy",
B "opposed to public policy" or "contrary to public policy" are
incapable of precise definition. Public policy, however, is
not the policy of a particular government. It connotes so~
matter which concerns the public good and the public interest.
The concept of what is for the public good or in the public
c
interest or what would be injurious or harmful to the public •
good or the publie interest has varied from time to time. As.
new concepts take the place of old, transactions which were,k._
once considered against public policy are now being upheld b~
the courts and similarly where there has been a
well-recognized head of public policy, the courts have not
shirked from extending it to new transactions and changed
D circumstances and have at times not even flinched from invent-
ing a new head of public policy. There are two schools of
thought - "the narrow view" school and "the .broad view"
school. According to the former, courts can not create new
heads of public policy whe.reas the latter countenances.,.-
judicial law-making in this area. The adherents of "the narrow
E view" school would not invalidate a contract on the ground of
public policy ~less that particular ground had been
well-established by authorities. Hardly ever has the voice of
the timorous spoken toore clearly and loudly than in these
words of Lord Davey in Janson v. Driefontein Coosolldated+-·
MiDes Lf.aited, [1902] A.C. 484, 500 "Public policy is always
F an unsafe and treacherous ground for legal decision." 'That w~
in the year 1902. Seventy-eight years earlier, Burrough, J~j
in RiChardson v. Mellish, [1824] 2 Bing. 229, 252; s.c. 130
E.R. 294, 303 and [1824-34] All E.R. Reprint 258, 266,
described public policy as "a very unruly horse, and when
once you get astride it you never know where it will carry
G you." The Master of the Rolls, Lord Denning, however, was not
a man to shy. away from unmanageable horses and in words which
conjure u~ before our eyes the picture of the young Alexandetr-
the Great taming Bucephalus, he said in Eaderyby TOifll Football
Club Ltd. v. Football Association Ltd., [1971] Ch. 591, 606.
'~ith a good man in th~ saddle, the unruly horse can be kept
H in control. It can jump over obstacles." Had the timorous
always held the field, not only the doctrine of public policy
C.I.W.T.CORPN. v. B.N. GANGULY [MADON, J.] 373
A
~
but even the Conmon Law or the principles of Equity would
never have evolved. Sir William Holdsworth in his "History of
English Law", Volume III, page 55, has said :

"In fact, a body of law like the co1111l0n law, which
B
has grown up gradualy with the growth of the
nation, necessarily acquires some fixed principles,
and if it is to maintain these principles it must
be able, on the ground of public policy or some
other like ground, to supress practices which,
under ever new disguises, seek to weaken or
negative them."
c
·~-It is thus clear that the principles governing public policy
tmust be and are capable, on proper occasion, of expansion or
modification. Practices which were considered perfectly normal
at one time have today become obnoxious and oppressive to
public conscience. If there is no head of public policy which
D
covers a case, then the court must in consonance with public
conscience and in keeping with public good and public interest
declare such practice to be opposed to public policy. Above
all, in deciding any case which may not be covered by
~authority our courts have before them the beacon light of the
Preamble to the Constitution. Lacking precedent, the court can
E
always be guided by that light and the principles underlying
.. the Fundamental Rights and the Directive Principles enshrined
in our Constitution.

The normal rule of Common Law has been that a party who
,seeks to enforce an agreement which is opposed to public
F
\policy will be non-suited. The case of A. Schroeder Music
Publishing Co. Ltd. v. Macaulay, however, establishes that
where a contract is vitiated as being contrary to public
policy, the party adversely affected by it can sue to have it
declared void. The case may be different where the purpose of
the contract is illegal or immoral. In Kedar Hath Hotani and
G
others v. Prahlad Rai and others, [19601 1 S.C.R. 861 revers-
ing the High Court and restoring the decree passed by the
-ftrial court declaring the appellants' title to the lands in
suit and directing the respondents who were the appellants'
benamidars to restore possession, this Court, after discussing
the English and Indian law on the subject, said (at page 873):
H
"The correct position in law, in our opinion, is
374 SUPREME COURT REPORTS [1986] 2 s.c.R.

A
that what one has to see is whether the illegality ' "'
goes so DJJch to the root of the matter that the
plaintiff cannot bring his action without relying
upon the illegal transaction into which he had
entered. If the illegality be trivial or venial, as
stated by Willistone and the plaintiff is not
B required to rest his case upon that illegality,
then public policy demands that the defendan~
should not be allowed to take advantage of the
position. A strict view, of course, must be taken
of the plaintiff's conduct, and he should not be "
allowed to circumvent the illegality by restoring
c to some subterfuge or by mis-stating the facts. If,~
however, the matter is clear and the illegality is
not required to be pleaded or proved as part of the+
cause of action and the plaintiff recanted before
the illegal purpose was achieved, then, unless it
be of such a gross nature as to outrage the
D conscience of the Court, the plea of the defendant
should not prevail."

The types of contracts to which the principle formulated by ~
above applies are not contracts which are tainted with
illegality but are contracts which contain terms which are so
E unfair and unreasonable that they shoCk the conscience of the
court. 'They are opposed to public policy and require to be ..
adjudged void.
+
We will now test the validity of Rule 9(1) ~ applying to
it the principle forDUlated above. Each of the contest!~
F Respondents was in the service of the Rivers Steam Navigatiod
Company Limited and on the said Scheme of arrangement being
sanctioned by the Calcutta High Court, he was offered
employment in the Corporation which he had accepted. Even had
these Respondents not liked to work for the Corporation, they
had not much of a choice because all that they would have got
G was "all legitimate and legal compensation payable to them
either under the Industrial Disputes Act or otherwise legall~
admissible". These Respondents were not covered by the
Industrial Disputes Act for they were not workmen but were
officers of the said company. It is, therefore, difficult to
visualize what compensation they would have been entitled to
H get unless their contract of employment with their previous
employers contained any provision in that behalf. So far as
C.I.W.T.CORPN. v. B.N. GANGULY [MADON, J.] 375
A
-f
the original terms of employment with the Corporation are
concerned, they are contained in the letters of appointment
issued to the contesting Respondents. These letters of
appointment are in a stereotype form. Under these letters of
appointment, the Corporation could without any previous notice
B
terminate their service, if the Corporation was satisfied on
medical evidence that the employee was unfit and was likely
;.. for a considerable time to continue to be unfit for the
discharge of his duties. The Corporation could also without
any previous notice dismiss either of them, if he was guilty
of any insubordination, intemperance or other misconduct, or
of any breach of any rules pertaining to his service or
conduct or non-performance of his duties. Th.e above terms are
c
· ~ followed by asset of terms under the heading "Other
t Conditions". One of these terms stated that "You shall be
subject to the service rules and regulations including the
conduct rules". Undoubtedly, the contesting Respondents
accepted appointment with the Corporation upon these terms.
D
They had, however, no real choice before them. Had they not
accepted the appointments, they would have at the highest
received some coq:>ensation which would have been probably
meagre and would certainly have exposed themselves to the
~ hazard of finding another job.

E
It was argued before us on behalf of the contesting
Respondents that the term that these Respondents would be
subject to the service rules and regulations including the
conduct rules, since it came under the heading "Other
-+ Conditions" which followed the clauses which related to the
termination of service, referred only to service rules and
F
~ regulations other than those providing for termination of
~· service and, therefore, Rule 9(1) did not apply to them. It is
unnecessary to decide this question in the view which we are
inclined to take with respect to the validity of Rule 9(1).

The said Rules as also the earlier rules of 1970 were
G
accepted by the contesting Respondents without de111r. Here
again they had no real choice before them. They had risen
i higher in the hierarchy of the Corporation. If they had
refused to accept the said Rule$, it would have resulted in
tet'llination of their service and the consequent anxiety,
harassment and uncertainty of finding alternative employment.
H
iule 9(i) confers upon the Corporation the power to
376 SUPREME COURT REPORTS [1986] 2 s.c.R.

A
terminate the service of a permanent employee by giving him ~
three months' notice in writing or in lieu thereof to pay him
the equivalent of three months' basic pay and dearness
allowance. A similar regulation framed by the West Bengal
State Electricity Board was described by this Court in Vest
Bengal State Electricity Board and others v. Desh Benclhn Qloah
B and others (at page 118) as :
~
"• •• a naked 'hire and fire' rule, the time for
banishing which altogether from employer-employee
relationship is fast approaching. Its only paralle~
is to be found in the Henry VIII clause so familiar
c to administrative lawyers."

As all lawyers may not be familiar ~ith administrative law, +
we may a~ well explain that "the Henry VIII clause" is a
provision occasionally found in legislation conferring
delegated legislative power, giving the delegate the power to
D aoend the delegating Act in order to bring that Act into full
operation or otherwise by Order to remove any difficulty, and
at times giving power to modify the provisions of other Acts
also. The Coumittee on Ministers' Powers in its report
submitted in 1932 (Cmd. 4060) pointed out that such a ~
provision had been nicknamed "the Henry VIII clause" because
E "that King is regarded popularly as the impersonation of
executive autocracy". The Committee's Report (at page 61)
criticised these clauses as a temptation to slipshod work in
the preparation of bills and recommended that such provisions
should be used only where they were justified before +
Parliament on compelling grounds. Legislation enacted by
F Parliament in the United Kingdom after 1932 does not show that J
this recommendation had any particular effect.

No apter description of Rule 9(i) can be given than to
call it "the Henry VIII Clause". It confers absolute and
arbitrary power upon the Corporation. It does not even state
G who on behalf of the Corporation is to exercise that power. It
was submitted OI\ behalf of the Appellants that it would be the
Board of Directors. The iopugn.ed letters of termination, ~
however, do not refer to any resolution or decision of the
Board and even if, they did, it would be irrelevant to the
validity of Rule 9(i). There are no guidelines whatever laid
H down to indicate in what circumstances the power given by Rule
C.I.W.T.CORPN. v. B.N. GANGULY [MADON, J.] 377

A
-1 9(i) is to be exercised by the Corporation. No opportunity
whatever of a hearing is at all to be afforded to the
permanent employee whose service is being terminated in the
exercise of this power. It was urged that the Board of
Directors would not exercise this power arbitrarily or
capriciously as it consists of responsible and highly placed B
persons. This submission ignores the fact that however highly
)... placed a person may be, he must necessarily possess human
frailties. It also overlooks the well-known saying of Lord
Acton, which has now almost become a maxim, in the Appendix
.: to his "Historical Essays and Studies", that "Power tends to
corrupt, and absolute power corrupts absolutely." As we have
~pointed out earlier, the said Rules provide for four different c
- -modes in which the services of a permanent employee can be
t terminated earlier than his attaining the age of
superannuation, namely, Rule 9(i), Rule 9(ii), sub-clause (iv)
of clause (b) of Rule 36 read with Rule 38 and Rule 37. Under
Rule 9(ii) the termination of service is to be on the ground
of "Services no longer required in the interest of the D
Company." Sub-clause (iv) of clause (b) of Rule 36 read with
Rule 38 provides for dismissal on the ground of misconduct.
Rule 37 provides for termination of service at any time
'f without auy notice if the employee is found guilty of any of
the acts mentioned in that Rule. Rule 9(i) is the only Rule
which does not state in what circumstances the power E
~ conferred by that Rule is to be exercised. Thus even where the
Corporation could proceed under Rule 36 and dismiss an
~- employee on the ground of misconduct after holding a regular
disciplinary inquiry, it is free to resort instead to Rule
; 9(i) in order to avoid the hassle of an inquiry. Rule 9(i)
t thus confers an absolute, arbitrary and unguided power upon F
the Corporation. It violates one of the two great rules of
natural justice - the audi alteraa parte. rule. It is not only
in cases to which Article 14 applies that the rules of natural
justice come into play. As pointed out in Union of India etc.
v. '1.\al.siraa Patel etc., (1985] 3 s.c.c. 398 (at page 463),
.,The principles of natural justice are not the creation of G
Article 14. Article 14 is not their begetter but their
i constitutional guardian." That case has traced in some detail
the origin and development of the concept of principles of
natural justice and of the audi alteram partem rule (at pages
463 - 480). They apply in diverse situations and not only to
cases of State action. As pointed out by 0. Chinnappa Reddy, H
378 SUPREME COURT REPORTS [19861 2 s.c.R.

A
J., in Swadeshi Cotton Mills v. Union of India, [ 1981] 2 ~
s.c.R. 533, 591 they are implicit in every decision-making
function, whether judicial or quasi-judicial or administra-
tive. Undoubtedly, in certain circumstances the principles of
natural justice can be modified and, in exceptional cases, can
even be excluded as poirited out in Tulsira. Patel's case. Rule
B 9(i), however, is not covered by any of the situations which
would justify the total exclusion of the audi alteram partem~
rule.

The power conferred by Rule 9(i) is not only arbitrary
but is also discriminatory for it enables the Corporation to
c discriminate between employee and employee. It can pick up one
employee and apply to him clause (i) of Rule 9. It can pick up~
another employee and apply to him clause (ii) of Rule 9~ It+
can pick up yet another employee and apply to him sub-clause
(iv) of clause (b) of Rule 36 read with Rule 38 and to yet
another employee it can apply Rule 37. All this the
D Corporation can do when the same circumstances exist as would
justify the Corporation in holding under Rule 38 a regular
disciplinary inquiry into the alleged misconduct of the
employee. Both the contesting Respondents had, in fact, been
asked to submit their explanation to the charges made against1r
them. Sengupta had been informed that a disciplinary inquiry
E was proposed to be held in his case. The charges made against
both the Respondents were such that a disciplinary inquiry
could easily have been held. It was, however, not held but
instead resort was had to Rule 9(i).
+
The Corporation is a large organization. It has offices
F in various parts of West Bengal, Bihar and Assam, as shown byj
the said Rules, and possibly in other States also. The saia
Rules form part of the contract of employment between the
Corporation and its employees who are not workmen. Th~se
employees had no powerful workmen's Union to support them.
They had no voice in the framing of the said rules they had no
G 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
H 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
C.I.W.T.CORPN. v. B.N. GANGULY [MADON, J.) 379

right and reason. It is wholly unconscionable. It has been A
entered into between parties between whom there is gross in-
equality of bargaining power. Rule 9(i) i.s 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 autho-
rities have a clause similar to Rule 9(i) in their contracts B
).. 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 bnion of India. The c
+ 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. D
Such a clause, therefore, is opposed to public policy and
being opposed to public policy, it is void under sect!on 23 of
the Indian Contract act.

It was, however, submitted on behalf of the Appellants
that this was a contract entered into by the Corporation like E
any other contract entered into by it in the course of its
f ·trading activities and the Court, therefore, ought not to
interfere with it. It is not possible for us to equate
employees with goods which can be bought and sold. It is
t equally not possible for us to equate a contract of employment
· with a mercantile transaction between two businessmen and much F
less to do so when the contract of eD{>loyment is between a
powerful employer and a weak enployee.

It was also submitted on behalf of the Appellants that
Rule 9(i) was supported by mutuality inasmuch as it conferred
an equal right upon both the parties, for under it just as the G
employer could terminate the employee's service by giving h!m
three months' notice or by paying him three months' basic pay
and dearness allowance in lieu thereof, the employee could
leave the service by giving three months' notice and when he
failed to give such notice, the Corporation could deduct an
H
380 SUPREME COURT REPORTS [1986] 2 S.C.R.

A equivalent amount from whatever may be payable to him. It is ~
true that there is 011tuality in clause 9(1) - the same
mutuality as in a contract between the lion and the lamb that
both will be free to roam about in the jungle and each will be
at liberty to devour the other. When one considers the unequal
position of the Corporation and its employees, the argument of
mutuality becomes laughable.
B
~
The contesting Respondents could, therefore, have filed a
civil suit for a declaration that the termination of their
service was contrary to law on the ground that the said Rule
9(i) was void. In such a suit, however, they would have got a
declaration and possibly damages for wrongful termination of
c service but the civil court could not have ordered reinstate- ~~
ment as it would have amounted to granting specific perform- +
ance of a contract of personal service. As the Corporation is
"the State", they, therefore, adopted the far more efficacious
remedy of filing a writ petition under Article 226 of the
Constitution.
D
As the Corporation is "the State" within the meaning of
Article 12, it was amenable to the writ jurisdiction of the
High Court under Article 226. It is now well-established that ~
an instrumentality or agency of the State being "the
State" under Article 12 of the Constitution is subject to the
E Constitutional limitations, and its actions are State actions
and must be judged in the light of the Fundamental Rights
guaranteed by Part III of the Constitution (see, for instance, ~
&Jkhdev Singh and others v. Bbagatr81l Sarclar Singh Raghuvansbi
and aDOtber • 'Die International Airport Authority's Case and
Ajay Basia 's Case). The actions of an instrumentality or /
F agency of the State llllSt, therefore, be in conformity with_/
Article 14 of the Constitution. The progression of the
judicial concept of Article 14 .from a prohibition against
discriminatory class legislation to an invalidating factor for
any discriudnatory or arbitrary State action has been traced
in 1Ulsiraa Patel's Case (at pages 473-476). The principles of
G natural justice have now come to be recognized as being a part
of the Constitutional guarantee contained in Article 14. In ~
7Ulsiraa Patel's Case this Court said (at page 476) :

"The principles of natural justice have thus come
to be recognized as being a part of the guarantee
H
contained in Article 14 because of the new and
C.I.W.T.CORPN. v. B.N. GANGULY [MADON, J.] 381

dynamic interpretation given by this Court to the A
concept of equality which is the subject-matter of
that Article. Shortly put, the syllogism runs thus:
violation of a rule of natural justice results in
arbitrariness which is the same as discrimination;
where discrimination is the result of State action,
it is violation of Article 14; therefore, a viola- B
tion of a principle of natural justice by a State
action is a violation of Article 14. Article 14,
however, is not the sole repository of the princi-
ples of natural justice. What :lt does is to
guarantee that any law or State action violating
them will be struck down. The principles of natural
justice, however, apply not only to legislation and c
State action but also where any tribunal, authority
or body of men, not coming within the definition of
•state• in Article 12, is charged with the duty of
deciding a matter."

As pointed out above, Rule 9(i) is both arbitrary and D
unreasonable and it also wholly ignores and sets aside the
audi alteram partem rule it, the ref ore, violates Article 14
of the Constitution.
1
On behalf of the Appellants reliance was placed upon the
case of. Radhakrlslma Agarval and others v. State of Bihar and E
- others, ~1977] 3 s.c.R. 249. The facts in that case were that
a contract, called a "lease", to collect and exploit Sal seeds
~ from a forest area was entered into between the State of Bihar
and the appellants in that case. Under one of the clauses of
· the said contract, the rate of royalty could be revised at the
texpiry of every three years in consultation with the lessee F
and was to be binding on the lessee. The State unilaterally
revised the rate of royalty payable by the appellants and
thereafter cancelled the lease. The Patna High Court dismissed
the writ petition filed by the appellants and the appellants'
appeal to this Court was also dismissed. In that case it was
held that when a State acts purely in its executive capacity, G
i it is bound by the obligations which dealings of the State
with individual citizens import into every transaction entered
into in exercise of its constitutional powers, but this is
only at the time of entry into the field of consideration of
persons with whom the Government could contract, and after the
H
382 SUPREME COURT REPORTS [1986] 2 S.C.R.

A
State or its agents have entered into the field of ordinary ~·
contract the relations are no longer governed by the consti-
tutional provisions but by the legally valid contract which
determines rights and obligations of the parties inter se. The
court then added (at page 255) :

''No question arises of violation of Article 14 or
B
of any other constitutional provision when the
State or its agents, purporting to act within this ~
field, perform any act. In this sphere, they can
only claim rights conferred upon them by contract
and are bound by the terms of the contract only ;._
unless some statute steps in and confers some
c special statutory power or obligation on the State ~
in the contractual field which is apart from ~·
contract." _.:

We fail to see what relevance that decision has to the
case before us. Employees of a large organization form a
D
separate and distinct class and we are unable to equate a
contract of employment in a stereotype form entered into by
"The State'' with each of such employees with the "lease"
executed in Radh8krisboa Agarwal's Case. Further, the contract
or the lease between the parties in that case was a legally t
E
valid contract. In that case what the appellants were doing
was to complain of a breach of contract commdtted by the State
of Bihar acting through its officers. The contesting
Respondents are not complaining of any breach of contract but
their contention is that Rule 9(i) which is a term of their Jr
-
contract of employment is void. They are not complaining that
the action of termination of their service is in breach of
F
Rule 9(i). Their complaint is not merely with respect to the f
State action taken under Rule 9(i) but also with respect to ...
the action of the State in entering into a contract of
employment with them which -contains such a clause or rather
forcing upon them a contract of employment containing such a
clause. As we have held earlier, Rule 9(i) is void even under
G
the ordinary law of' contracts.
"y
We must now turn to two decisions of the Bombay High Court
as each party has relied strongly upon one of them, namely,
s.s. liJ.ley v. J.R.D. Tata 8Dd others, [ 1980) Lab. & Ind. Cases
11; s.c. [1979] 2 Ser. L.R. 438 and Mannbar P. lbarldla.r aud
H
C.I.W.T.CORPN. v. B.N. GANGULY [MADON, J.] 383
A
--.f another v. Raghuraj arid another~ [1981] 2 Lab. L.J. 459
commonly known as the "Hakalu" Case as it related to certain
cableS!~- which were damaged in an aircraft named 'Makalu'
belonging to Air India International. The decision in Muley's
Case was relied upon by the Respondents while the decision in
Kakalu's Case was relied upon by the Appellants. Both the B
cases related to Regulation 48 of the Air India Employees'
Service Regulations framed by Air India International. Air
~ India International is a corporation established under the Air
Corporations Act, 1953 (Act No.27 of 1953) and it is indisput-

- ably "The State" within the meaning of Article 12 of the
Constitution. Under Clause (a) of the said Regulation 48, the
services of a permanent enployee can be terminated uwithout
~assigning any reason" by giving him thirty days' notice in
c

, ~writing or pay in lieu of notice. In both these cases, the
services of the concerned employees were terminated under
Regulation 48(a). The said Regulations also provided for
dismissal of an employee who was found guilty of misconduct in
0
a disciplinary inquiry held according to the procedure
prescribed in the said Regulations. In MUley's Case a learned
Single Judge of the Bombay High Court, Sawant, J., held the
said Regulation 48(a) to be void as infringing Article 14 of
1 the Constitution. In West Bengal Sl:ate Electricity Board's
Case this Court stated (at page 119), "The learned Judge
struck down Regulation 48(a) and we agree with his reasoning E

- -+ and conclusion." The reasoning upon which Sawant, J., reached
his conclusion was that there was no guidance given anywhere
in the impugned Regulation for the exercise of the power
conferred by it, that it placed untraemelled power in the
hands of the authorities, that it was an arbitrary power which
F
\.- was conferred and it did not make any difference that it was
~to be exercised by high ranking officials. In the Makalu Case
a contrary view was taken by a Division Bench of the Bombay
High Court. The Division Bench rightly held that the employees
of a statutory corporat~on did not enjoy the protection
conferred by Article 311(2). It, however, further held that
the phrase "without assigning any reason" used in the said G
Regulation 48 only meant a disclosure of the reasons to the
i euployee concerned. After going into the facts which had been
pleaded by Air India International to justify the termination
of the service of the petitioners in that case, the Division
Bench,held that the impugned orders were justified. It further
held that Regulation 48 was not a one-sided regulation since H
under Regulation 49 thr employee was also permitted to resign
384 SUPREME COURT REPORTS [ 1986 J 2 S.C. R.

A
without assigning any reason by giving the notice prescribed "t--
therein. The Division Bench applied to the said Regulation 48
the analogy of the ordinary law of master and servant under
which no servant can claim any security of tenure. It also
brought in it the analogy of the right to compulsorily retire
an employee where a provision in that behalf is made in the
B Service Rules. The Division Bench further held that it was
difficult to conceive of any authority, which was "the State"
under Article 12 of the Constitution and bound by the__._
constitutional guarantees contained in Part III of the
Constitution, terminating the services of its employees
without reason or arbitrarily. It further held that the ._
C existence of relevant reasons was a sine qua non for
exercising the power under Regulation 48. It went on to state L
that because of the complexity of modem administration and./'--.
the unpredictable exigencies which may arise in the course_.
thereof, it was necessary for an employer to be vested with
powers such as those conferred by Regulation 48. The Division
D BenCh took great pains to discern in some of the sections of
the Air Corporations Act , guidelines for the exercise of the
power conferred by Regulation 48. According to the Division
Bench, the choice of Air India International to proceed under
Regulation 48 v. , ld have to be dictated for the purpose of the
needs and exige1.1..;;ies of its administration and if that power t
E was exercised arbitrarily, the court would strike down the
action taken under Regulation 48.

We were invited by Learned Counsel for the Appellants to
peruse the judgment in that case and we did so with increasing
-
astonishment. Though the said judgment bears the date Septem- +
F ber 18, 1981, we were unable to make out whether it was a
judgment given in the year 1981 or in the year 1881 or even j
earlier. We find ourselves wholly unable to agree with the--
view taken by the Division Bench. Apart from the factual
asp~cts of the case, as to which we say nothing, we find every
single conclusion reached by the Division Be~ch and the
G reasons given in support thereof to be wholly erroneous. The
Division Bench overlooked that it was not dealing with a case
of a non-speaking order but with the validity of a regulation.
The meaning given by it to the expression 'without assigning r
any reason" was wrong and untenable. Starting with this wrong
premise, it has gone from one wrong premise to another. In the
H light of what we have said earlier about the principles of
C.I.W.T.CORPN. v. B.N. GANGULY [MADON, J.] 385
A

----fpublic policy evolved, and tested by the principle which we
have formlated, the said Regulation 48(a) could never have
been sustained. In West Bengal State Electricity Board's Case,
a three-Judge Bench of this Court said as follows (at page
119) : B
"The learned counsel for the appellant relied upon
Manohar P. lbad:har V• lagturaj to contend that
Regulation 48 of the Air India Employees' Service
Regulations was valid. It is difficult to agree
with the reasoning of the Delhi High Court that
because of the complexities of modern administra-
tion and the unpredictable exigencies arising in c
the course of such administration it is necessary
for an employer to be vested with such powers as
those under Regulation 48. We prefer the reasoning
of Sawant, J. of the Bombay High Court and that of
the Calcutta High Court in the judgment under
appeal to the reasoning of the Delhi High Court." D

The mention of the Delhi High Court in the above passage is a
slip of the pen, for it was the Bombay High Court which
decided the case. We are in respectful agreement with what
-.fnas been stated in the above passage. The Maltalu Case was
wrongly decided and requires to be overruled. We are, however, E
informed that an appeal against that judgment is pending in
.. this Court and rather than overrule it here, we leave it to
the Bench which hears that appeal to reverse it.

f We would like to observe here that as the definition of
"the St-ate" in Article 12 is for the purposes of both Part Ill F
tnd Part IV of the Constitution, State actions, including
actions of the instrumentalities and agencies of the State,
oost not only be in conformity with the Fundamental Rights
guaranteed by Part III but must also be in accordance with the
Directive Principles of State Policy prescribed by Part IV.
Clause (a) of Article 39 provides that the State shall, in G
particular, direct its policy towards "securing that the
citizens, men and women, equally have the right to adequate
~ans of livelihood." Article 41 requires the State, within
the limits of its economic capacity and development, to "make
effective provision for securing the right to work". An ade-
quate means of livelihood cannot be secured to the citizens by H
taking away without any reason the means of livelihood. The
386 SUPREME COURT REPORTS [ 1986] 2 S.C. R.

A
mode of making "effective provision for securing the right to~·
work." cannot be by giving employment to {1 person and then
without any reason throwing him out of employment. The action
of an instrumentality or agency of the State, if it frames a
service rule such as clause (a) of Rule 9 or a rule analogous
thereto would, therefore, not only be violative of Article 14
B but would also be contrary to the Directive Principles of
State Policy contained in clause (a) of Article 39 and in__(
Article 41.

The Calcutta High Court was, therefore, right in quashing
, the impugned orders dated February 26, 1983, terminating the
c services of the contesting Respondents and directing the,
Corporation to reinstate them and to pay them all arrears o~_
salary. The High Coutt was, however, not right in declari~
clause (i) of Rule 9 in its entirety as ultra vires Article 14
of the Constitution and in striking down as being void the
whole of that clause. What the Calcutta High Court overlooked
D was that Rule 9 also confers upon a permanent employee the
right to resign from the service of the Corporation. By enter-
ing into a contract of employment a person does not sign a
bond of slavery and a permanent employee can not be deprived
of his right to resign. A resignation by an employee would,)-
however, normally require to be accepted by the employer in
E order to be effective. It can be that in certain circumstances
an employer would be justified in refusing to accept the
employee's resignation as, for instance, when an employee
wants to leave in the middle of a work which is urgent or
important and for the completion of which his presence andt
-
participation are necessary. An employer can also refuse to
F accept the resignation when there is a disciplinary inquir.»
pending against the employee. In such a case, to permit an
employee to resign would be to allow him to go away from the
service and escape the consequences of an adverse finding
against him in such an inquiry. There can also be other
grounds on which an employer would be justified in not accept-
G ing the resignation of an employee. The Corporation ought to
make suitable provisions in that behalf in the said Rules.
Therefore, while the judgment of the High Court requires to ~
confirmed, the declaration given by it requires to be suitably
modified.

H In the result, both these Appeals fail and are dismissed
but the order passed by the Calcutta High Court is modified by
C.I.W.T.CORPN. v. B.N. GANGULY [MADON, J.} 387

... A
--+substituting for the declaration given by it a declaration
' that clause (i) of Rule 9 of the "Service, Discipline &Appeal
Rules - 1979" of the Central Inland Water Transport Corpora-
tion Limited is void under section 23 of the Indian Contract
Act, 1872, as being opposed to public policy and is also ultra
vires Article 14 of the Constitution to the extent that it B
confers upon the Corporation the right to terminate the
employment of a permanent employee by giving him three months'
~notice in writing or by paying him the equivalent of three
100nths' basic pay and dearness allowance in lieu of such
notice.

By interim orders passed in the Petitions for Special C
~Leave to Appeal filed by the Corporation, we had granted pend-
ing the disposal of those Petitions a stay of the order of the
-+Calcutta High Court in so far a$ •t directed the reinstatement
of the contesting Respondents. At that stage the Corporation
had undertaken to pay to th~ said Respondents all arrears of
salary and had also undertaken to pay thereafter their salary D
from month to month before the tenth day of each succeeding
mnth until. the disposal of the said Petitions. We hereby
vacate the stay order of reinstatement passed by us and direct
the Corporation forthwith to rei~state the First Respondent in
1 each of these Appeals and to pay to him within six weeks from
today all arrears of salary and allowances payable to him, if E
any still unpaid.
- The First Appellant in both these Appeals, namely, the
~ Central Inland Water Transport Corporation Limited, will pay
to the First Respondent in each of these Appeals the costs of
the respective Appeals. The other parties to these Appeals and F
tthe Intervener will bear and pay their own costs of the
Appeals.

S.R. Appeals dismissed.

I