Holding

The Supreme Court held that the termination clause was valid, a policy decision to abolish storage agencies had been taken and approved, and the High Court was not justified in quashing the termination notice.

Summary

The Food Corporation of India (FCI) entered into a storage agency agreement with Jagannath Dutta in 1967, which contained a clause allowing either party to terminate the contract with two months' notice without assigning a reason. In 1985, FCI decided, through a series of meetings and letters, to abolish private storage agencies in West Bengal and communicated this policy to its regional managers. Accordingly, the District Manager issued a termination notice to Dutta in June 1987, effective August 31, 1987. Dutta challenged the notice before the Calcutta High Court, alleging that clause 37 was arbitrary, violated Article 14, was unilateral and void under Section 24 of the Indian Contract Act, and that the termination was not based on a valid policy decision. The High Court set aside the notice, holding that no policy decision had been taken. The Supreme Court reversed this, holding that the contract permitted termination, that a policy decision had indeed been made and approved, and that the High Court should not have interfered with contractual matters under its writ jurisdiction. Consequently, the appeal was allowed, the High Court judgment was set aside, and the writ petition dismissed with costs.

Issues considered

Whether clause 37 of the storage agency agreement, allowing termination without assigning a reason, is arbitrary and violative of Article 14 of the Constitution.
Whether clause 37 is unilateral, against natural justice, unlawful and void under Section 24 of the Indian Contract Act.
Whether the Food Corporation of India had taken a valid policy decision authorising the termination of storage agencies in West Bengal.
Whether the High Court could entertain a writ petition under Article 226 concerning contractual obligations.

Legislation cited

Constitution of Indias. Article 14, s. Article 226
Indian Contract Act, 1872s. Section 24

Subjects

contract terminationArticle 14Article 226policy decisionarbitrarinesspublic interestFood Corporation of Indiastorage agencyIndian Contract Actwrit petitionSupreme Court

Judgment

FOOD CORPORATION OF INDIA AND ORS. A
v.
JAGANNATH DUTTA AND ORS.

MARCH 18, 1993

[KULDIP SINGH AND N.M. KASLIWAL, JJ.] B

Constitution of India 1950: Articles 14 and 226-Contractual agreement
for clearing, transporting, storing and distribution of foodgrains-FCJ-Ter-
minating agreement-Relief in writ petition-Whether pem1issib/e--He/d con-
tractual agreement tenninated pursuant to policy decision. C
The Food Corporation of India - appellant entered into an agree-
ment dated August 14, 1967 with the respondent No. 1 entrusting him the
work of clearing, transporting, storing and distribution of foodgrains on
behalf of the Corporation viz. a storage agency by the Corporation. Clause
37 of the agreement provided that either party was at liberty without D
assigning any reason to terminate the agreement on giving two months
prior notice in m-iting.

The Managing Director of the Corporation in the meeting of the
Zonal Managers, Senior Regional Managers and other officers held on
September 20/21, 1984 pointed ol!t that the private storage agencies were
E
responsible for high transit losses of the foodgrains in the State of West
Bengal, and directed that the desirability of continuing the system of
storage agents be examined. Immediately a Committee was formed to go
into this question. The Committee reported against continuing the storage
agency system, and the report was accepted in principle, a final decision F
to abolish the storage agency was taken, and a target date for abolition
was fixed for compliance. This decision was contained in the letter of the
Zonal Manager dated 14th March 1985.

The District Manager by his notice dated June 25, 1987 terminated G
the storage agency agreement with the respondent with effect from August
31, 1987. The respondent challenged the validity of the notice by way of a
writ petition under Article 226 of the Constitution before the High Court.
The respondent challenged the termination notice on the grounds that :
(i) clause 37 of the agreement was arbitrary and as such violative of
Article 14 of the Const~tution, (ii) clause 37 was unilateral, against natural H
497
._J

498 SUPREME COURT REPORTS [1993] 2 S.C.R.

A justice, unlawful and as such was void under section 24 of the Indian
Contract Act, and (iii) the action of the Corporation was arbitrary against
public policy and public interest.

A Division Bench of the High Court did not go into any of the
aroresaid grounds contended by the respondent and instead examined the
B correspondence and various office orders placed before it by the Corpora-
tion, and came to the conclusion that in fact no policy decision was taken
by the FCI before terminating the agreement, and set aside the notice
dated June 25, 1987.

C Allowing the appeal of the FCI, this Court,

HELD : 1. The High Court was not justified in quashing the notice
especially when the terms and conditions of the Contract permitted the
termination of the agreement by either of the parties. [501G]

D 2. The High Court should n0t have gone into the question of con·
. tractual obligation in its writ jurisdiction under Article 226 of the Con-
stitution. [501G]

3. The High Court misread the documents on record and grossly
E erred in reaching the conclusion that no policy decision was taken by the ;>.
FCI to terminate the storage agencies in the State of West Bengal. [501H]

In the instant case, there is no manner of doubt that a policy
decision was taken at the level of the Zonal Manager to abolish the storage
agencies and the said decision was approved by the Head Ollke of the
F FCI. The letter dated March 14, 1985 of the Zonal Manager indicates the
plan to be worked ont for abolishing the storage agencies in the West ;;·
Bengal Region. [504B-D]

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 977 of
G 1991.
From the Judgment and Order dated 31.5.89 of the Calcutta High
Court in Appeal No. 662 of 1987.

K.T.S. Tutsi, Additional Solicitor General, Vivek Gambhir and S.K.
H Gambhir for the Appellants.
F.C.I. v. JAGAN NATH DUTTA [KULDIP SINGH, J.] 499

R.K. Jain, Ascom Mehrotra, Sunil K Jain, Vijay Hansaria and Ms. A
Sangeet Mehrotra for the Respondents.

The Judgment of the Court was delivered by
I
KULDIP SINGH, J. Food Corporation of India (FCI) entered into
an agreement dated August 14, 1967 with Jagarinath Dutta entrusting him B
the work of clearing, transporting, storing and distribution of foodgrains
on behalf of the FCI. In other words he was given a storage agency by the
FCI. The District Manager, FCI by his notice dated June 25, 1987, ter-
minated the agreement with effect from August 31, 1987. Jagannath Dutta
challenged the validity of the notice by way of a writ petition under Article
226 of the Constitution of India before the Calcutta High Court. A Division
c
_Bench of the High Court by its judgment dated May 31, 1989 allowed the
writ petition and set aside the notice dated June 25, 1987. This appeal by
way of special leave is against the judgment of the l;ligh Court.

Clause 37 of the agreement dated August 14, 1967 is as under : D
11
N otwithstanding anything herein contained, either
party may be at liberty without assigning any reason to
terminate this agreement on giving two months' prior
notice in writing so to terminate this agreement."
E
The operative part of the notice dated June 25, 1987 terminating the
agreement is as under :-

"According to the Article 37 of the Agreement.. the
Food Corporation of Indian has the right to termmate the
Agreement and relinquish your Agency with two months F
prior Notice without assigning any reason.

The Food Corporation of India has taken the policy
of terminating the storing Agencies gradually and I have
been directed by the Food Corporation authorities to give
G
effect to that policy early.

Under the circumstances, I, Dr. Priti Madhab Dey,
District Manager, Food Corporation of India, Hoogly...
Serve this notice upon you under the provisions made in
para 37 of the said Article of Agreement terminating your H
500 SUPREME COURT REPORTS [1993] 2 S.C.R.

A storing Agency at Belmuri with effect from 31st day of
August, 1987."

Jagannath Dutta challenged the termination-notice on the grounds
that (i) clause 37 of the agreement was arbitrary and as such violative of
Article 14 of the Constitution, (ii) clause 37 was unilateral, against natural
B justice, unlawful and as such was void under section 24 of the Indian
Contract Act and (iii) the action of the FCI was arbitrary against public
policy and public interest. The High Court did not go into any of these
questions and instead set aside the impugned notice on the short ground
that the FCI had not taken any policy decision before terminating the
C agreement. The High Court examined the correspondence and various
office-orders placed before it by the FCI and came to the conclusion that
in fact no policy decision was taken by the FCI. The High Court held that
the impugned notice having been issued apparently as a result of a policy
decision by the FCI and there being no such decision on the record the
D impugned notice was liable to be quashed. We reproduce the High Court
reasoning hereunder :

"From the foregoing facts, it appears that the
desirability of abolishing the system was raised by the
Managing Director and the entire correspondence shows
E that ·it was an issue which was pending at the Head-
quarters's level and the decision was expected to be taken
at the level of the Managing Director. The Zonal Manager
(East) or the Zonal Office did not and could not take any
decision in the matter. The issue always remained pending
F for decision at the level of the Managing Director ....

Even assuming that the letter dated 14th March, 1984
does, contain a policy decision and the letter dated 30th
March/2nd April, 1985 contains the Headquarters' ap-
proval to the above decision, the said policy decision as
G contained in the letter dated 14th March, 1985 is not a
valid policy decision. If a phase-wise or a gradual abolition.
of a system is to take place there must be a plan this plan
must be preconceived. The preconceived plan must .be
reasonable and rational with particular reference to the
H local conditions. Implementation of any such policy must
F.C.I. v. JAGAN NAIB DUTIA [KULDIP SINGH, J.] 501

depend on an action plan drawn up and implemented on A
a rational basis with reference to the arising situation and
circumstances ...

For the foregoing reasons we are of the view that the
case of the F.C.I to the effect that the policy decision was
taken in the Zonal Office and endorsed and/or approved B
by Chief Commercial Manager, New Delhi, runs wholly
contrary to the records of the case and therefore cannot
be accepted ...

As we have already observed that no policy decision c
was finalised by the F.C.I. and they were proceeding
arbitrarily by picking and choosing for the purpose of
terminating the storing agency. In some cases, termina-
tions were made not on the ground of policy decision, but
on the ground· of misappropriation. In some cases, as we
D
have already referred to, the order of ter1ninatiOn was
withdrawn or kept in abeyance. Where the Court has
passed ad-interim order staying the order of termination,
no further steps have be>n taken by the F.C.I. In one of
the cases we have referred to hereinbefore, would show
that termination was kept in abeyance on a considerat~on E
that the concerned storing agent would provide the FCI

-
with a godown. Therefore, the termination of this par-
ticular agreement by invoking clause 37 has to be justified
by the F.C.I. on the basis of policy decision and implemen-
tation on the policy uniformly in cases of the storing F
agents. Such termination cannot be justified with refer-
11
ence to other extraneous considerations.

We are of the view that the High Court was not justified in quashing the
impugned notice especially when the terms and conditions of the contract
permitted the termination of the agreement by either of the parties. The High G
Court should not have gone into the question of contractual-obligation in its
writ jurisdiction under Article 226 of the Constitution. Even otherwise the
High Court misread the documents on the record and grossly erred in
reaching the conclusion that no policy decision was taken by the FCI to
terminate the storage agencies in the State of West Bengal. We may refer to H
SUPREME COURT REPORTS (1993) 2 S.C.R.

A some of the documents on the record.
The Managing Director, FCI, in a meeting of Zonal Managers, Senior
Regional Managers and other officers held on September 20/21, 1984
pointed out that the private storage agencies were responsible for high transit
losses of the foodgrains in the State of West Bengal. He directed that the
B desirabilitiof continuing the system of storage agents be examined. Immedi-
ately thereafter the Senior Regional Manager, West Bengal formed a Com-
mittee to go into the question. The Senior Regional Manager by his letter
dated January 21, 1985 forwarded the report of the Committee to the higher
authorities. The Committee had reported against continuing the storage
c agency system. The report of the Committee was accepted in principle
Deputy Zonal Manager in the office note da(ed February 23, 1985 examined
the Committee-report and suggested fixation of target date for abolition of
the storing agencies. The Deputy Manager (Finance) on March 4, 1985 also
recommended the abolition of storing agency by giving additional reasons. A
meeting was held in the chamber of the Zonal Manager in the first week of
D March, 1985 which was attended by five senior zonal officers including the
Zonal Manager. In the said meeting the report of the Committee was ac-
cepted and the final decision to abolish the storage agency was taken. The
Zonal Manager by his letter dated March 14, 1985 communicated the
decision to the Senior Regional Manager for compliance. The said letter is
E reproduced hereunder :

"No. E. 12(1)/81-Stg. Dated : 14.3.1985

To

Shri B.K. Mukhopadhyay,
F
Senior Regional Manager,
Food Corporation of India,
Calcutta.

Sub : Abolition of Storing Agency in West Bengal Region,
G . FCI.

Sir,

Please refer to the correspondence resting with your
lette~ No. E/25/(17)/82-Stg. (c)/74 dated 21st January,
H 1985 regarding abolition or otherwise of Storing Agency
F.C.I. v. JAGAN NA1H DUTIA [KULDIP SINGH, J.) 503

System in West Bengal Region. The matter has been A
examined in consultation with the Zonal Finance and the
following decisions have been taken.

1. Immediate abolition of Storing Agency depots in the
Districts falling under the M.R. areas where CWC,
SWC and owned godowns including JM(PO) exists. B

2. Where there is no existence of SWC, CWC and owned
godowns, FCI should make arrangement for hiring
godowns to replace the storing agents godowns in
phases keeping in view the distribution in M.R. areas C
and rake points to accommodate stockS from Northern
India.

3. Storing Agents godowns in S.R. areas of Calcutta Com-
plex may continue for some time for maintaining supply·
line, but all our efforts should be made by SRM, West D
Bengal for sending as less stocks as possible to S.A.
godowns in Calcutta Complex. As for example, in
Calcutta (South) with the opening of Kalighat siding
and two feeding depots like Lake and Behala, Storing
Agents need be used only if absolutely necessary. E

You are, therefore, requested to take action on the

- line as aforesaid and draw out an Action Plan and confirm
the same to this Office under intimation to H~adquarters.

You are also requested to send us a detailed list of all F
the existing Storing Agents godowns both for M.R. and
S.R. areas district-wise on the line as indicated above in
(1), (2) & (3) as per proforma enclosed.

Approved by Zonal Manager.
G
Your faithfully

Sd/- V.Ballachandran
Dy. Zonal Manager
For Zonal Manager (East)." H
,
SUPREME COURT REPORTS (1993] 2 S.C.R.

A Further the letter dated March 30, 1985 by Chief Commercial ,....,
Manager "(in the Head Office) to the Zonal Manager shows that the
decision of ·t~e Zonal Manager to abolish the Storage agency was approved
by the Bead Office.

The sequence of proceedings narrated by us leaves no manner of
B doubt that a policy decision was taken at the level of the Zonal Manager
lo aboiish the storage agencies and the said decision was approved by the
Head Office of the FCI. We are, therefore of the view that the High Court
was not justified in reaching the conclusion that there was no policy
decision by the FCI
c
The High Court, without noticing any specific instance, made general
observations to the effect that clause 37 of the contract was not uniformly
invoked by the FCI: The High Court failed to appreciate that the policy .~
decision contained in the letter dated March 14, 1985 indicates the plan to
be worked out for abolishing the storage agencies. Although the decision
D to abolish the storing agencies with immediate effect was taken but it was
stated in para 2 therein that FCI should make arrangement for hiring
godowns to replace the storing agents in phases keeping in view the
distribution of the foodgrains arriving from Northern India. It was also part
of the decision that storing agents godowns in the Calcutta Complex were
E to continue for sometime for maintaining the supply line. It \Vas, therefore,
in the nature of the policy decision that the agreements with the storage
agents were to be revoked in phased manner.

F
It IS not disputed that with effect from September 30, 1985 the West
Bengal Government has taken over the public distribution system in the
State of West Bengal. The State of West Bengal has taken over the
-
godowns from the FCI and is operating the same. There is thus no scope }/ -
for operating the private storage agencies in the State of West Bengal. /

We, therefore, allow the appeal, set aside the judgment of the High
G Court and dismiss the Writ petition filed by respondent- Jagannath Dutta
with costs. We quantify the costs as Rs.10,000.

N.V.K. Appeal allowed.