When the state performed only sovereign functions like declaring wars and quelling riots, it was above the law. But when it transformed into a welfare state and even when it entered the field of crass commerce, the arms of the law began to envelop its different activities. Auction of national resources and terms of government contracts have come under the judicial scanner.
However, the extent to which the courts can interfere in the government’s foray into the market place and the procedure to do so have been grey areas for a long time. For instance, if the government or one of its companies commits a breach of contract, should the aggrieved party take the long and crowded route to the civil court or a short cut to the high court alleging through a writ petition that its rights have been violated? This is a question that the Supreme Court frequently faces. The latest instance was the case, Central Bank of India vs Devi Ispat Ltd.
The dispute was between the government bank and a company that took loans from it. After some time, the bank suspected irregularities in the conduct of the company and its associates. So, it asked the company to shift its loan account to some other bank. The company chose the State Bank of India and repaid the loan. But Central Bank did not return the security documents to the company. So, the company chose to move the Calcutta High Court. It directed the bank to release the documents. The bank raised technical objections against the order and moved the Supreme Court, which, in turn, ordered the bank to return the title deeds within two weeks.
Central Bank, which is owned by the government, is “state” for purposes of law and a writ petition would lie against it under the Constitution. But the bank argued that the company should have gone to a civil court or the debt recovery tribunal instead of moving the high court through a writ petition. A contract is in the realm of private law and governed by the Contract Act. Moreover, there would be disputed questions of law, requiring the examination of documentary evidence and witnesses, and these are not the functions of a high court according to the Constitution. A high court can intervene only if the government action falls in the realm of public law.
But the issue is not as simple as it seems. Demarcating the frontier between private and public law has strained the brains of judges for centuries. The dilemma has been discussed in a Supreme Court decision in the case, LIC of India vs Escorts Ltd. It gave an illustration: if the state or an instrumentality of a state ventures into the corporate world and buys shares of a company, it assumes the role of an ordinary shareholder with all the rights available to a shareholder. In that judgment, the court suggested that “the question must be decided in each case with reference to the particular action, the activity in which the state or its instrumentality is engaged in and a host of other relevant circumstances”.
In the Central Bank case, the Supreme Court reviewed the precedents and re-stated the rules of the game: “If the instrumentality of the state acts contrary to public good, public interest, unfairly, unjustly, unreasonably discriminatory and violative of Article 14 of the Constitution in its contractual or statutory obligation, a writ petition would be maintainable. However, a legal right must exist and there must be a correspondent legal duty on the part of the state. A writ petition is maintainable even in contractual matters in such circumstances.”
It is true that ordinarily, the high courts would decline to take up disputes where evidence and witnesses have to be examined since they are the functions of a civil court. But there is no absolute rule that in all cases in which disputed facts are involved, the matters should be relegated to the civil court. The high court can call for affidavits to decide issues. The Supreme Court also does this.
Normally, there is an arbitration clause in commercial contracts. In that case, the course is clear. An alternative mode of dispute resolution has to be chosen. In such cases, the writ court should not invoke its jurisdiction. “The existence of an alternative remedy provided in the contract itself is a good ground to decline to exercise the court’s extraordinary jurisdiction,” the present judgment emphasised.
If there is no arbitration clause in the contract, government companies, banks and other state entities wearing business suits cannot commit breach of a solemn undertaking to the prejudice of the other party that acted on the undertaking or promise and put itself in a disadvantageous position. That liability is carried by the government when it forays into commerce.
