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PETITIONER: CENTRAL INLAND WATER TRANSPORTCORPORATION LTD. & ANR. ETC.

       Vs.

RESPONDENT: BROJO NATH GANGULY & ANR.

DATE OF JUDGMENT06/04/1986

BENCH: MADON, D.P. BENCH: MADON, D.P. SEN, A.P. (J)

CITATION:  1986 AIR 1571            1986 SCR  (2) 278  1986 SCC  (3) 156        1986 SCALE  (1)799  CITATOR INFO :  R          1987 SC 111  (3,4)  F          1988 SC 286  (5)  E&D        1989 SC1977  (8)  R          1990 SC 808  (7)  E&F        1991 SC 101  (10,20,45,65,84,88,94,100,182,  RF         1992 SC   1  (133)  RF         1992 SC  76  (3)

ACT:      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.      B.  Words   and  phrases  -  ’Unconscionable  bargain", "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.      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 Government company  is "the  State" under  Article 12 of the Constitution.      D.  The  Central  Inland  Water  Transport  Corporation Limited (A  Government  of  India  Undertaking)  -  service, Discipline and  Appeal Rules,  1979, Rule  9(1) Validity  of 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.

HEADNOTE:      The Central  Inland Water  Transport Corporation  which was 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 Association and the Articles of Association of the said 279

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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 running of  river service  as the  corporation is  doing was 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 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  can  be reasonably taken over by the said transferee 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 bonafide discretion;      (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  admissible and  that such moneys shall be provided  by   the  Government  of  India  to  the  existing transferor company who will pay these dues.      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  Appeal No.  4413 of  1985 was  also working in the said company  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  Ganga"  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 280 by  the  Corporation.  Service  rules  were  framed  by  the Corporation for  the first time in 1970 and were replaced by new rules  in  1979  known  as  "The  Central  Inland  Water Transport Corporation  Limited  -  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 or  in other  State or Union Territory except those  employees who  were covered  by  the  Standing orders under  the Industrial  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 Employee is to retire on completion of  the age  of 58  years though  in  exceptional cases and  in the  interests of the Corporation an extension may be  granted with the prior approval of the Chairman-cum- Managing Director  and  the  Board  of  Directors.  Rule  33 provides for  suspension of an employee where a disciplinary proceeding against  him is  contemplated or  Dis 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

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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 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  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 February 26, 1983 signed by the Chairman-cum-Managing Director 281 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 immediate effect. Along with the  said letter  a cheque  for three months’ basic pay and dearness allowance was enclosed.      The First  Respondent in  Civil Appeal No. 4413 of 1985 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  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 February 1,  1983, issued  a charge-sheet  against  Sengupta intimating to  him that  a 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,  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 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,  terminating  his service with  the Corporation  with immediate  effect. Along with the  said letter  a cheque  for three month’s basic pay and dearness allowance in lieu of notice was 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 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 Bench of  the said  High Court  against the  said ad interim orders. On  January 28,  1985 the  Division Bench ordered in

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both these Appeals that the 282 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. It also  quashed the  impugned orders of termination dated  February 26,  1983. hence  the appeals by special leave by the Court . Arguments for the Appellants :-      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 certificate  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 have the monopoly of inland 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 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 : 283      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.      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 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  of  the  expression  "the  State"  contained  in Article 12.      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 can be struck down under 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 down under Article 14.      Dismissing the appeals, the Court, ^

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    HELD :  1.1 The  word "State"  has  different  meanings depending  upon  the  context  in  which  it  is  used.  The expression "The  State" when  used in  Parts III & 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  India; (ii)  Parliament of  India; (iii)  the Government of  each 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 284 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 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 sense. Article 12 uses the 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. [310 F-H; 311 A-B]      1.3 The  definition of  the expression  "the State"  in 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 guaranteed  by Part  III of  the Constitution and the Directive Principles of State Policy contained in Part IV of the Constitution which principles are declared by Article 37 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 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 collectively form  the Union  into  a  Merchant  buying  and selling 285 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  III of  the  Constitution  and  is  exercisable  in accordance with  and for  the furtherance  of the  Directive Principles of  State Policy  prescribed by  Part IV  of  the Constitution. [322 E-G]

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    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 trading and  business activities  of  the  State  constitute "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.  The  immunities  and  privileges possessed by  bodies so  set up  by the  Government in India cannot, however,  be the  same as 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-D]      Sukhdev  Singh   &  Ors.   v.  Bhagatram  Sardar  Singh Baghuvanshi & 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 earlier  case fit  in with the new set of circumstances. 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-F]      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 286 instrumentalities and agencies of the State, whatever be the form 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  the purposes  of 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  squarely   falls   within   these observations and  it also  satisfies the various tests which have been  laid down.  Merely because  it has so far not the monopoly of inland water 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  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 Governments - Central Government and the Governments of West Bengal and  Assam 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 is thus a veil behind which  the   Central   Government   operates   through   the instrumentality of  a  Government  company.  The  activities

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carried  on   by  the  Corporation  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 considered that it is a Government of India Undertaking. The complete heading of the impugned Rule is "The  Central Inland  Water Transport 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 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. [343 E-G; 346 E-G] 287      Sukhdev  Singh  &  Ors.  v.  Bhagat  Ram  Sardar  Singh Raghuvanchi &  Anr., [1975]  3 S.C.R.  619;  Ramana  Dayaram Shetty v.  The International  Airport Authority  of India  & Anr., [1979] 3 S.C.R. 1014; Managing Director, Uttar Pradesh Ware Housing  Corporation &  Anr. v.  Vinay Narain Vajpayee, [1980] 2  S.C.R.  773;  Ajay  Hasia  etc.  v.  Khalid  Mujib Sehravardi & Ors. etc., [1981] 2 S.C.R. 79; Prakash Rekhi v. Union of  India &  Anr., [1981] 2 S.C.R. 111; B.S. Minhas v. Indian Statistical  Institute &  Ors [1983]  4  S.C.C.  582; Manmohan Singh  Jaitla v.  Commissioner, Union  Territory of Chandigarh &  Ors., [1984]  Supp.  S.C.C.  540;  Workmen  of Hindustan Steel  Ltd. & Anr. v. Hiodustan Steel Ltd. & Ors., [1984] Supp. S.C.C. 554, 560; - P.K. Ramachandra Iyer & Ors. v. Union of India & Ors., [1984] 2 S.C.R. 141; A.L. Kalra v. Project and  Equipment Corporation  of India  Ltd., [1984] 3 S.C.R. 316 and West Bengal State Electricity Board & Ors. v. Desh Bandhu Ghosh & Ors., [1985] 3 S.C.C. 116 followed.      Praga Tools  Corporation v. C.A. Imanual & Ors., [1969] 3 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; Sabhajit Tewary v. Union  of India  & Ors.,  [1975] 3  S.C.R. 616;  and S.C. Dhanoa v.  Municipal Corporation  Delhi  &  Ors.,  [1981]  3 S.C.C. 431 distinguished.      Rai Sahib  Ram Jewaya  Kapur & Ors. v. State of Punjab, [1955] 2  S.C.R. 225;  Rajasthan  State  Electricity  Board, Jaipur v. Mohan Lal & Ors., [1967] 3 S.C.R. 377; Gurugobinda Basu v.  Sankari Prasad  Ghosal & Ors., [1964] 4 S.C.R. 311, 315; Rylands v. Fletcher, [1868 L.R. 3 H.L. 330 and Donoghue v. Stevenson, [1932] A.C. 562 referred to.      2.1 The word "unconscionable" is defined when used with reference to  actions 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.  If  a contract or  term thereof  is unconscionable at the time the contract is  made, the  Court  may  refuse  to  enforce  the contract. An  unconscionable 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 Pickering v.  IIfracombe, [1868] L.R. 3 C.P. 235; Occidental Worldwide Investment  Corpn. v.  Skibs A/S  Avanti, [1976] 1 Llyod’s Rep.  293; North  Ocean Shipping Co. Ltd. v. Hynddai Construction Co.  Ltd., [1979]  Q.B. 705;  Pao On v. Lau Yin Long, [1980] A.C. 614; and Universe Tankships of Manrovia v. International Transport  workers Federation,  [1981] 1  C.R. 129 reversed in [1981] 2 W.L.R. 803 referred to.      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

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also  by  regulatory  control  of  private  and  contractual transactions even  though this  might involve some sacrifice of individual liberty. [360 C-D]      When our  Constitution states  that it is being enacted to give  to all  the citizens  of  India  "Justice,  Social, economic and  political", when  clause (I)  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  national  life,  when  clause  (2)  of Article 38  directs the State in particular, to minimise the inequalities in  income, not  only amongst  individuals  but also amongst  group 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 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  reasons of  production to  the common detriment  and that  there should equal 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]      Lingappa Pochanna  Appelwar v.  State of  Maharashtra & Anr., [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 289 recognised that the freedom of contract is absent. In such A cases, judicial review is permitted and consequential relief allowed. [361 F-G]      Gillespie Brothers  & Co.  Ltd. v. Roy Bowles Transport Ltd., [1973] 1 Q.B. 400; Lloyds Bank Ltd. v. Bundy, [1974] 3 All. E.R. 757; A. Schroeder music Publishing Co. Ltd. v. Macaulay (Formerely  Instone), [1974]  1  W.L.R.  1308;  and Levison &  Anr. v.  Patent Steam  Carpet Co.  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 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 disparity  in the  economic  strength  of  the contracting parties.  It will  apply where the inequality is the result  of circumstances, 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 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 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. This principle will not apply  when the  bargaining  power  of  the  contracting parties is  equal or  almost equal.  mis principle  may  not apply where both parties are businessmen and the contract is

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a commercial  transaction. In today’s complex world of giant corporations with  their vast  infrastructural organisations and  with   the  State  through  its  instrumentalities  and agencies entering  into almost  every branch of industry and commerce, 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 H the Specific Relief Act, 1963. [370 A-G] 290      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 influence" as defined by section 16(1) of 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 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 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 23 of the Indian Contract Act, as opposed to public policy. [371 C-H]      2.6  The  Indian  Contract  Act  does  not  define  the expression "public  policy" or  "opposed to  public policy". From  the  very  nature  of  things,  such  expressions  are incapable of  precise 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 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 policy. The principles governing public policy must be and are 291 capable on  proper occasion,  of expansion  or modification. Practices which were considered perfectly normal at one time have  today   become  abnoxious  and  oppressive  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  all, in  deciding any  case which  may not be covered by  authority Indian  Courts have  before  them  the beacon light  of the  Preamble to  the Constitution. Lacking

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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]      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 unreasonable that  they 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  Music Publishing  Co.  Ltd.  v.  Macaulay (Formerely  Instone),   [1974]  1  W.L.R.  1308;  Janson  v. Driefontein Consolidated  Mines Limited,  [1902]  A.C.  484, 500; Richardson v. Mellish [1824] 2 Bing. 229, 252; s.c. 130 E.R. 294,  303 and  [1824-34] All  E.R.  Reprint  258,  266; Enderby Town  Football Club  Ltd.  v.  Football  Association Ltd., [1971]  Ch. 591,  606; and Kedar Nath Metani & Ors. v. Prahlad Bai & Ors., [1960] 1 S.C.R. 861 referred to.      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 v  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. 292 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 power upon the  corporation. It  does not even state who on behalf of the  Corporation is  to exercise that power. There are no guidelines  whatever   laid  down   to  indicate   in   what circumstances  the  power  given  by  rule  9(i)  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 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-F]      West Bengal  State Electricity  Board &  Ors.  v.  Desh Bandhu Ghosh  & Ors.,  [1985] 3  S.C.C. 116;  Union of India etc. v.  Thusiram  Patel  etc.,  [1985]  3  S.C.C.  398  and Swadeshi Cotton  Mills V.  Union of  India, [1981]  2 S.C.R. 533, 591.      3.2 The  power conferred  by  Rule  9(i)  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. 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 corporation  can do  when  the  same circumstances exist  as would  justify  the  corporation  in

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holding under  Rule 38  a regular  disciplinary inquiry into the alleged misconduct of the employee. In the instant case, both the  contesting Respondents  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 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). [378 C-E]      Employees cannot  be equated  with goods  which can  be bought and  sold. It  is equally  not possible  to equate  a contract of employment with a mercantile transaction between 293 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]      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 each other  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. [380 A-B]      3.3 Rule 9(i) is both arbitrary and unreasonable and it also wholly  ingonre and  sets aside the audi alteram partem 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 him  three months’ notice in writing or by paying him the equivalent  of three  months’  basic  pay  and  dearness allowance in lieu of such notice. [381 D; 387 B-C]      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 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 instrumentality  or agency of the State must, therefore,  be   in  conformity   with  Article  14  of  the Constitution. [380 D-F]      Sukhdev  singh   &  Ors.   v.  Bhagatram  Sardar  Singh Raghuvanshi &  Anr., [1975]  3 S.C.R.  619;  Ramana  Dayaram Shetty v.  The International  Airport Authority  of India  & Ors., [1979  3 S.C.R.  1014; Ajay Hasia etc. v. Khalid Mujib Sehravardi &  Ors. etc.,  [1981] 2  S.C.R. 79;  and Union of India v.  Thulsiram Patel etc., [1985] 3 S.C.C. 398 referred to.      Radhakrishna Agarwal  & Ors.  v. State of Bihar & Ors., [1977] 3 S.C.R. 249 distinguished.      OBSERVATION 294 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  "securing that the citizens, men and women,  equally 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."  An

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adequate means  of  livelihood  cannot  be  secured  to  the citizens by  taking away  without any  reason the  means  of livelihood. The  mode of  making  "effective  provision  for securing the  right to  work" cannot be by giving employment 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  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-H; 386 A- B]      (2) Rule  9 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  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 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 Rules. [386 D-G] 295

JUDGMENT:      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.      Shanti Bhushan,  Subrata  Ray  and  A.K.  Sil  for  the 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.      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 officers. These questions are           1) Whether  a Government  company  as  defined  in           section 617  of the  Companies Act,  1956, is "the           State" within  the meaning  of Article  12 of  the           Constitution?           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           Government company,  is also  void  as  infringing           Article  14   of  the   Constitution  in   case  a           Government company is "the State" under Article 12           of the Constitution?

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    Although the record of these Appeals is voluminous, the 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 Corporation"), was incorporated 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 296 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.l of 1956), provides as follows :           "617. Definition of ’Government Company’.-           For the  purposes of  this Act  Government company           means any company in which not less than fifty-one           per cent  of the  paid-up share capital is held by           the Central Government, or by any State Government           or  Governments,   or  partly   by   the   Central           Government  and   partly  by  one  or  more  State           Governments and  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 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 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 Leave in  these Appeals, it is currently engaged in carrying out the following activities, namely,           (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           descriptions;           (iii)  repairing  vessels  of  various  sizes  and           descriptions; and           (iv) undertaking general engineering activities. 297      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  of the  Articles of Association confers upon the President of 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  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 immediate effect to such directions and instructions. Under Article 51A, the President has the power to call  for such  returns, accounts  and other  information

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with respect to 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  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 power 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, resignation, death or 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 Chairman of the Board of 298 Directors or  to the  office of  the Managing Director or to both 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 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 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  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  may authorize  in that behalf and for the purposes of  such  audit  to  require  such  information  or additional information  to 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 authorized share  capital was  rupees four  crores.  It  was raised to  rupees ten  crores by a special resolution passed at the  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.      The above  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

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owned by  the Central  Government and  two State Governments but is  a Government  company which  is under  the  complete control and management of the Central Government. 299      A company  called the  "Rivers Steam Navigation Company 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  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 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           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.           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           admissible and  that such moneys 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 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.  The First  Respondent in Civil Appeal No. 4413 of  1985, Tarun Kanti Sengupta, was also working in the said 300 Company 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 Ganga". It is unnecessary 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  service  rules framed by  the 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  this 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 framed  by the Corporation 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 will  hereinafter be referred to in short as "the said Rules". The said Rules apply to all employees in the service

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of the Corporation in all units in West Bengal, Bihar, Assam or in  other State or Union Territory except those employees who are  covered by the Standing Orders under the Industrial Employment (Standing  Orders) Act,  1946, or those employees in respect  of  whom  the  Board  of  Directors  has  issued separate orders.  Rule  9  of  the  said  Rules  deals  with termination of  employment for acts other than misdemeanour. The relevant  provisions of  the said  Rule  9  relating  to permanent employees are as follows :           "9. TERMINATION  OF EMPLOYMENT FOR ACTS OTHER THAN           MISDEMEANOUR. -           (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           three months’ basic pay and dearness allowance, if           any, in lieu of notice or may deduct a like amount           when the employee has failed to give due notice.           (ii) The  services of  a permanent employee can be           terminated on the grounds of "Services no longer 1           required in the interest of the Company" without 301           assigning any  reason. A  permanent employee whose           services are terminated under this clause shall be           paid 15 days’ basic pay and dearness allowance for           each completed  year of  continuous service in the           Company as  compensation. In  addition he  will be           entitled to encashment of leave at his 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. RESIGNATION. -           Employees who wish to leave the Company’s services           must give  the Company  the  same  notice  as  the           Company is required to give them under Rule 9." 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 period  of  suspension.  Rule  36  sets  out  the  different penalties which  can be  imposed  on  an  employee  for  his misconduct. These penalties are divided into minor and major penalties. Rule 37 is as follows :           "37. ACTS OF MISCONDUCT.-           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  of any  rules           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 by the H 302 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

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altogether. The said Rule 43 provides as follows :           "43. SPECIAL PROCEDURE 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 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           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           iii) where  the Board  is satisfied  that  in  the           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 to  the said  Rules and  Rule 45-A  provides for  a review.      We are  concerned in these Appeals with the validity of clause (i) of Rule 9 only.      So far as Ganguly, the First Respondent in Civil Appeal No. 4412  of 1985, is 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  hours   to  the   allegation  of   negligence  in  the maintenance of 303 Provident Fund  Accounts. 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-cum-Managing  Director of  the  Corporation,  a notice under  clause (i)  of Rule  9 of  the said  Rules was given  to   Ganguli  terminating   his  service   with   the Corporation with  immediate  effect.  Along  with  the  said letter a  cheque for  three months’  basic pay  and dearness allowance was enclosed.      So far  as Sengupta,  the  First  Respondent  in  Civil Appeal No.  4413 of  1985, is  concerned, he 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.  According to Sengupta, he could  not  appear  before  the  Selection  Board  as  he received the  letter calling him for the interview after the date fixed  in D 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  said post  and on February 1, 1983, he issued a  charge-sheet against  Sengupta intimating  to  him that a  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,  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  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

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Rule 9  of the  said Rule,  terminating his service with the Corporation with  immediate  effect.  Along  with  the  said letter a  cheque for  three months’  basic pay  and dearness allowance in lieu of notice 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 ex parte interim order staying 304 the operation  of the  said notice of termination was passed by a  learned Single Judge of the High Court. The Appellants before us  went in  Letters Patent  Appeal before a Division 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. 1604 of  1983 and in the case of Sengupta being F.M.A.T. No. 649 of 1983. On January 28, 1985, the Division Bench ordered 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 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. It also quashed the impugned orders  of termination  dated February 26, 1983. It is against the said judgment and orders of the Calcutta High Court that  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 summarized :           (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  certificate 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 have the monopoly of           inland water  transport  but  is  only  a  trading           company as is shown by the objects clause in its u           Memorandum of Association. 305           (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           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.      The arguments  advanced on  behalf  of  the  contesting Respondents in broad outlines were as follows :           (1) The  definition of  the expression "the State"

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         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   agencies,   whether   such           instrumentality  or   agency   be   one   of   the           Departments  of   the  Government,   a   statutory           corporation, a statutory authority or a Government           company incorporated under the Companies Act.           (3) Merely because a Government company carries on           a trading  activity or is authorized to carry on a           trading activity does not mean that it is excluded           from the  definition of the expression "the State"           contained in Article 12.           (4) A  Government company being "the State" within           , the meaning of Article 12 is bound to act fairly           J and  reasonably and  if it  does not  do so, its           action can  be struck  down under  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 H 306           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 down           under Article 14.      During the  course 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.      We will  now  examine  the  correctness  of  the  rival submissions advanced at the Bar.      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  Oxford  English Dictionary, 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 expression "the State" as "the body politic as organized for supreme   civil   rule   and   government;   the   political organization which  is the basis of civil government; hence, the supreme  civil power  and government vested in a country or nation".  According  to  Black’s  Law  Dictionary,  Fifth Edition, page  1262, "In  its largest  sense, a ’state’ is a body politic  or a  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   (e.g.  California)".   In   modern international practice,  whether a  community  is  deemed  a State or  not depends  upon the general recognition accorded to it  by the  existing group  of other States. A State must have a  relatively permanent legal organization, determining its structure and the relative powers of its major governing bodies or  organs. This legal organizational permanence of a State  is  to  be  found  in  its  Constitution.  With  rare exceptions, such as the United Kingdom, most States now have a written  Constitution. The  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  government  operating  in  certain respects and in certain matters in all

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307 its parts  and also  separate governments operating in other respects in  distinct parts of the whole. In such a case the units  or  sub-divisions  having  separate  governments  are variously called ’states’ as in India, U.S.A. and Australia, ’provinces’ as  in Canada,  ’cantons’ as  in Switzerland, or designated by other names. B      Our 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 First  Schedule". me word  "States"   used  in  Article  1  thus  refers  to  the federating units,  India itself  being a State consisting of these units.  The term "States" is defined variously in some of the  other Articles of the Constitution as the context of the particular  Part of the Constitution in which it is used requires. Part VI of the Constitution is headed " me States" and provides  for the  form of  the three organs of a State, namely, the  Executive, the  Legislature 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." The State  of Jammu  and Kashmir  is excluded  because  that State, though  one of  the States which constitute the Union of India, had, in pursuance of the provisions of Article 370 of the  Constitution read with the Constitution (Application to Jammu  and Kashmir)  Order, 1954  (C.O.  48),  set  up  a Constituent Assembly  for the  internal Constitution  of the State and  it had  framed  the  Constitution  of  Jammu  and Kashmir which  was adopted  and enacted  by that Constituent Assembly on  November 17, 1965. Article 152 also, therefore, uses the  expression "State" as meaning the federating units which constitute  the  Union  of  India.  Part  XIV  of  the Constitution deals  with services  under the  Union and  the States. Article 308 provides as follows : 308           "308. Interpretation. -           In  this   Part,  unless   the  context  otherwise           requires, the  expression ’State’ does not include           the State of Jammu and Kashmir." This definition  read with  the other provisions of Part XIV shows that  the word "State" applies to the federating units (other than  the State  of Jammu  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". Article  366  of  the  Constiution  defines  certain expressions used in the Constitution of India. That Article, however,  does  not  contain  any  definition  of  the  term "State". Under  Article 367(1), unless the context otherwise requires, the General Clauses Act, 1897 (Act No. X of 1897), subject to  any adaptations  and modifications  that may  be made therein  by the President of India under Article 372 to 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 :           "(58) ’State’ -           (a) as respects any period before the commencement           of the Constitution (Seventh Amendment) Act, 1956,           shall mean  a Part A State, a Part State or a Part

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         State. and           (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  form the  Union of India.      We are  concerned in  these Appeals  with  Article  12. Article 12  forms part of Part III of the Constitution which deals with Fundamental Rights and provides as follows : 309           "12. definition. -           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           other authorities within the territory of India or           under the control of the Government of India."                                          (Emphasis supplied) 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 of Part IV, namely, Article 36, provides :           "36. Definition. -           In  this   Part,  unless   the  context  otherwise           requires, ’the  State’ has  the same meaning as in           Part III." The expression  "local authority"  is defined in clause (31) of section 3 of the General Clauses Act as follows :           "(31) ’Local  authority’ shall  mean  a  municipal           committee,   district    board,   body   of   port           commissioners or  other authority legally entitled           to, or  entrusted  by  the  Government  with,  the           control or  management of  a  municipal  or  local           fund." Thus, the  expression "the State" when used in Parts III 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, G           (2) Parliament of India           (3) the  Government of  each of  the States  which           constitute the Union of India, 310           (4) the  Legislature of  each of  the States which           constitute the Union of India,           (5) all  local authorities within the territory of           India,           (6) all local authorities under the control of the           Government of India,           (7) all  other authorities within the territory of           India, and           (8) all other authorities under the control of the           Government of India.      There are  three aspects of Article 12 which require to be particularly noticed. These aspects are           (i) the  definition given  in Article 12 is not an           explanatory  and  restrictive  definition  but  an           extensive definition,           (ii) it  is the  definition of the expression "the           State" and  not of  the term  "State" or "States",           and           (iii) it  is inserted  in the Constitution for the

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         purposes of Parts III and IV thereof.      As pointed  out  in  Craies  on  Statute  Law,  Seventh Edition, page  213, where an interpretation clause defines a word  to   mean  a   particular  thing,  the  definition  is explanatory  and   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 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 sense. Article 12 uses the 311 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 "the State" while the 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  "State". 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 the  inclusive clause  in Article 12 would have extended this meaning  to include  within its scope whatever 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 III  and  IV  of  the  Constitution.  The contents of these two Parts clearly 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 guaranteed  by Part  III of  the Constitution and the Directive Principles of State Policy contained in Part IV of the Constitution which 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.      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 obstinately cling to the same ideas and concepts all his life. As Emerson said in his  essay on  "Self-Reliance", "A foolish consistency is the hobgoblin  of little  minds".  Man  is  by  nature  ever restless, ever  discontent, ever seeking something new, ever dissatisfied with  what he  has. m  is inherent trait in the nature of  man is reflected in the society in which he lives for a  society is a conglomerate of men who live in it. Just as man by nature is H 312 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

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by different  ideologies, different  values and  a different system. The  ideas that  seem revolutionary  become outmoded with the  passage of  time and  the heresies of today become the dogmas  of tomorrow.  What proves  to  be  adequate  and suited to  the needs  of a  society at  a given  time and in particular circumstances turns out to be wholly unsuited and inadequate  in   different   times   and   under   different circumstances.      The story  of mankind  is punctuated  by  progress  and 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  the Earldom of Oxford, [1625] W.Jo. 96, 101. s.c. [1626] 82 E.R. 50, 53,  in a  dispute  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 . . ." 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 Chorus from "The Rock" said :           "O Perpetual  revolution of  configured  stars,  O           Perpetual  recurrence  of  determined  seasons,  O           world of  spring and  autumn, birth and dying! The           endless  cycle   of  idea   and  action,   Endless           invention, endless experiment".      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 313 Of the people. As the society changes, the law cannot remain immutable. The  early nineteenth  century essayist  and wit, Sydney Smith,  said,  ’Then  I  hear  any  man  talk  of  an unalterable law,  I am  convinced that  he is an unalterable fool." The  law must, therefore, in a changing society march in tune  with the changed ideas and ideologies. Legislatures are, however,  not best  fitted for the role of adapting the law to  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  broad and  general terms and the process of  amending a  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  process of judicial interpretation adapt the law to suit the needs of the society. n      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 must  perforce go through the whole gamut of them  though   we  may   preface  an  examination  of  these authorities 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 altered  circumstances. Before embarking

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upon  this  task  we  would,  however,  like  to  quote  the following passage  (which has  become a  classic)  from  the opening paragraph  of Justice  Oliver Wendell  Holmes’s "The Common 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:           " It  is something to show that the consistency of           a system  requires a  particular result, but it is           not all. me life of the law has not been logic: it           has been  experience. The  felt necessities of the           time, the  prevalent moral and political theories,           intuitions   of    public   policy,    avowed   or           unconscious, 314           even the  prejudices which judges share with their           fellow-men, 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  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 new products at every           stage. The  substance of the law at any given time           pretty nearly corresponds, so 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."      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 Constitution.      The bombs  which had  rained down  upon the  cities  of 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 atrocities sought to band all nations into one Family of Man  and   for  this  purpose  set  up  the  United  Nations Organization in  order to  save succeeding  generations from the scourge  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 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 315 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 fighting the  Axis; there  was the  Declaration made  at the

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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 August 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 Francisco and  the affixing  of signatures  thereon the next day 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 Human Rights  Commission in  1946. This Commission began its work in January 1947 under the chairmanship of Mrs. Eleanore Roosevelt, the widow of President Franklin D. Roosevelt. The Universal  Declaration  of  Human  Rights  prepared  by  the Commission was  adopted by  the General Assembly on December 10, 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 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 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 Constitution of India.      Before commencing  its work,  the Constituent  Assembly adopted a Resolution laying down its objectives : 316           " 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 Independent India, its constituent parts           and organs  of government,  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  before   the   law;   freedom   of   thought,           expression,  belief,   faith,  worship,  vocation,           association, and action, subject to law and public           morality; and           6. Wherein  adequate safeguards  shall be provided           for minorities,  backward and  tribal  areas,  and           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           and the law of civilised nations: and           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".      In its strict legal sense the written Constitution of a 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 with the  creation of  the three  organs of  the State - the executive,  the  legislature  and  the  judiciary,  and  the

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distribution  of  governmental  power  among  them  and  the definition of  their mutual relation (See Sri Sankari Prasad Singh Deo  v. Union  of India  and State  of  Bihar,  [1952] S.C.R.  89,  106,  O.  Hood  Phillips’  "Constitutional  and Administrative 317 Law", Sixth  Edition, page  11; Dicey’s  "An 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 frame  for the Sovereign Democratic Republic which was to 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 towards 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 in  the Charter  of the United Nations. They were  aware that  the 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 that these rights were born of the philosophical speculations of the Greek and Roman Stoics and nurtured by the jurists of ancient Rome. They were aware that these  rights had found 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  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 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 were aware of the  international treaties of the midseventeenth 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 "philosophes" such  as Voltaire,  Rousseau, Diderot,  Rayal, d’Alembert and  others, and of the concrete expression given to 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 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 minorities. They  were aware  that these  rights had at last found universal  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   "Directive Principles of  State  Policy".  They  were  aware  that  the Constitution  of  Japan  also  contained  a  chapter  headed "Rights and  Duties of the People". They were aware that the

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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 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 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 were aware that countries such as the  United States,  the 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. 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 Constitution. 319      The Preamble  to the  Constitution, as amended by the A Constitution (Forty-second  Amendment)  Act,  1976,  proudly proclaims:           "WE, THE PEOPLE OF INDIA, having solemnly resolved           to constitute  India into  a  SOVEREIGN  SOCIALIST           SECULAR DEMOCRATIC  REPUBLIC and  to secure to all           its citizens :           JUSTICE, social, economic and political;           LIBERTY of  thought, expression, belief, faith and           worship;           EQUALITY of  status and  of  opportunity;  and  to           promote among them all D           FRATERNITY assuring  the dignity of the individual           and the unity and integrity of the Nation;           IN OUR  CONSTITUENT ASSEMBLY  this twentysixth day           of November, 1949, do HEREBY ADOPT, ENACT AND GIVE           TO OURSELVES THIS CONSTITUTION."      Part III  of the  Constitution gives  a  Constitutional mandate for certain Human Rights - called Fundamental Rights 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  mode  of  enforcing  them. Amongst these  Rights is  the one  contained in  Article  14 which provides : G           "14. Equality before law .-- 320           The State  shall not  deny to  any person equality           before the law or the equal protection of the laws           within the territory of India."      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 as follows :           "37. Application  of the  Principles contained  in

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         this Part. -           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."           "38. (1)  State to  secure A  social order for the           promotion of welfare of the people. -           (1) The  State shall strive to promote the welfare           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." Under clause (a) of Article 39, the State is, in particular, to direct its 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 limits  of its  economic capacity  and development, make effective provision for securing the right to work.                           MANOHAR 321      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 IV,  and though  the Court  may not  be  able actively to enforce the 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.      In the  working of  the Constitution  it was found that some 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 Constitution (First  Amendment) Act,  1951,  clause  (6)  of Article 19 was amended with retrospective effect. Under this amendment, sub-clause  (g) of clause (1) of Article 19 which guarantees to  all  citizens  the  right  to  carry  on  any occupation, trade  or business, was not to prevent the State from making  any law  reIating to  the carrying  on  by  the State, 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 amendment  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 Union 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 purchase or acquisition of property for those purposes respectively, and to the making of contracts; and it  further provided  that all property acquired for the purposes of the 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 : 322           "298. Power to carry on trade, etc. -

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         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           for any purpose :           Provided that -           (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 the State; and           (b) the  said executive power of each State shall,           in so  far as  such  trade  or  business  or  such           purpose is not one with respect to which the State           Legislature  may   make  laws,   be   subject   to           Legislation by Parliament." Article 298,  as  so  substituted,  therefore,  expands  the 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 collectively form the Union into a merchant buying and sell- ing  goods   or  carrying  on  either  trading  or  business activity, for  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 III  of the Constitution and is exerciseable in accordance  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.  me trading and business activities of the State constitute 323 "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 Comparative  Study" by W. Friedmann and J.F. Garner, at page 507 :           "The variety  of forms in which the various States           have, at  different times,  proceeded to establish           public enterprises  is almost  infinite, but three           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  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  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  j the

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late Lord  Hewart had  written of ’the new l despotism,’ and Dr. C.K.  Allen of  ’bureaucracy triumphant’.  In France the Confederation Generale  du 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 regime, with all its lack of responsibility and its 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 324           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."      The immunities  and privileges  possessed by  bodies so set up  by the  Government in  India cannot, however, be the same as 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. As pointed out by  Mathew, J., in Sukhdev Singh and others v. Bhagatram Sardar Singh  Raghuvanshi and  another, [1975]  3 S.C.R. 619 (at page 648), "The governing power wherever located must be subject to  the fundamental constitutional limitations". The privileges and  immunities of  these bodies,  therefore, are subject to  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 we consider   these   authorities,   we   will   see   how   as Constitutional thinking developed and the conceptual horizen widened, new  vistas, till  then shrouded  in  the  mist  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, 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 Rai  Sahib Ram  Jawaya Kapur and others v. The State of Punjab,  [1955] 2  S.C.R. 225, the State of Punjab, which used to select books published by private publishers for 325 prescribing them  as text-books and for this purpose used to 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  text-books. The  validity of  this notification was challenged  inter alia  on the ground that the executive power  of  a  State  under  Article  162  extended  only  to executing the  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

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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  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 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 executive power of the Union  of India  are contained in Article 73 and Article 53(1). Repelling  the above contention, 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           all activities  necessary for the promotion of the           social and economic welfare of the community."      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 be reproduced :           "It may  not be  possible to  frame an  exhaustive           definition of  what executive  function means  and           implies. Ordinarily  the executive  power connotes           the residue of governmental functions that remain 326           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           it can  very well  be said  that our  Constitution           does not  contemplate assumption,  by one organ or           part of  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  lature.  It  can  also,  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 does not follow from           this that  in order  to enable  the  executive  to           function there  must be a law already in existence           and that  the powers  of the executive are limited           merely to the carrying out of these laws.           (Emphasis supplied.)      In Rajasthan  State Electricity  Board, Jaipur v. Mohan Lal and  others, [19671 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 (Act  No. 54  of 1948)  was "the  State" as  defined in Article 12  because it  was  "other  authority"  within  the meaning of  that 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

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conferred to  carry out  governmental or  quasi-governmental functions and  functioning 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  commercial activities  is not  at all  material because under  Articles 19(1)(g)  and 298  even the State is empowered to  carry on  any trade  or  business.  The  Court further held  that in  interpreting  the  expression  "other authority" the principle of ejusdem 327 generis should  not be applied, because, for the application of A  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 in  one single  category on  any  rational basis.      Praga Tools  Corporation v.  C.A. Imanual  and  others, [1969] 3  S.C.R. 773  was a  case heavily relied upon by the Appellants.  Praga   Tools   Corporation   was   a   company incorporated under the Companies Act, 1913, and therefore, a company within  the meaning  of the  Companies Act, 1956. At the material time 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, the 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 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 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 on  merits. In  appeal,  a  Division Bench of  that High  Court held  that the  company being one registered under  the  Companies  Act  and  not  having  any statutory duty  or function  to perform  was not one against which a  writ for  mandamus 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 declaration. In  appeal by the company, a two-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 328 mandamus. 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 was held to be           misconceived on  the ground  that it could not lie           against a  company which  was neither  a statutory           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

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         an impugned agreement between it and its employees           could  be   granted.  The   High  Court  in  these           circumstances ought  to have  left the  workmen to           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  by   the  Appellants.   The  subsequent  agreement enabling the  company to  retrench some  of its  workmen was challenged 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 determination was whether a writ of mandamus 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. 14 of 1947).      In State of Bihar v. Union of India and another, [1970] 2 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 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 131 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  even along  with a State or with the Government of India in the 329 category of  a party  to the  dispute under Article 131. The Court further  held that  the  enlarged  definition  of  the 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 "a  State" for the purpose of Article 131. We fail to see in 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. was  a State  to enable  a suit  to be filed against it under Article  131 and not whether either of these companies fell within  the scope  of the  definition of the expression "the State" in Article 12. C      Another 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  Irrelevant.   In  that  case  an  employee  of  the Hindustan Steel  Ltd., whose services were terminated, filed a petition  under Article 226 claiming that such termination was wrongful  as it  was really  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  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 Article 311(2). The contention which was raised on behalf of the appellant  was that as Hindustan Steel Ltd. was entirely financed by  the Government  and its management was directly

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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 Government nor were its employees servants holding posts  under the  Union. No  question arose  in that case whether  the company was "the State" within the meaning of Article  12 and  all that  was sought to be contended was that it was a department of the Government. 330      In Sabhajit 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 not be challenged as being discriminatory and violative  of Article  14. The contention raised in that case was  that the  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) :           "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 t)  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 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           industry in a trade, the utilisation of the result           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, Sukhdev  Singh and  others v. Bhagatram Sardar Singh Kaghuvanshi 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 statute  creating the corporation have the force of law. The majority 331 of a  Constitution Bench of this court answered both these A questions in  the  affirmative.  me  statutory  corporations before the  Court in  that case were the Oil and Natural Gas Commission  established   under  the  Oil  and  Natural  Gas Commission  Act,   1956,  the   Life  Insurance  Corporation established under  the Life Insurance Corporation Act, 1956, and the Industrial Finance Corporation established under the 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  commercial

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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 circumstance that 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 "the 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 private profit and by that fact  such an  authority is  not excluded from making a profit for the public benefit. Mathew, J., in his concurring judgment held that a finding of State financial support plus an  unusual  degree  of  control  over  the  management  and policies might  lead one  to characterize  an  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           government  agencies.  Activities  which  are  too           fundamental to  the society  are by definition too           important  not   to   be   considered   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.           The State  today has an affirmative duty of seeing           that all  essentials of life are made available to           all persons.  The task  of the  State today  is to           make possible  the achievement of a Good life both           by  removing   obstacles  in   the  path  of  such           achievements 332           and in assisting individual in realizing his ideal           of self-perfection.  Assuming  that  indispensable           functions are  government functions,  the  problem           remains of  defining the line between fundamentals           and non-fundamentals.  The analogy of the doctrine           of ’business  affected  with  a  public  interest’           immediately comes to mind." After referring to the relevant provisions of the Acts under which the  above statutory  bodies were established, Mathew, J., continued (at pages 654-5) :           "The fact that these corporations have independent           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. These  corporations are instrumentali-           ties or  agencies of  the state  for  carrying  on           businesses which  otherwise would have been run by           the state  departmentally. If the state had chosen           to carry on these businesses through the medium of           government 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?           The ultimate  question 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,  the question  is, for  whose benefit           was the corporation carrying on the business? When           it is seen from the provisions of that Act that on           liquidation of  the Corporation, its assets should

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         be divided  among the  shareholders,  namely,  the           Central and  State governments and others, if any,           the implication  is clear  that the benefit of the           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,                           MANOHAR 333           merely because a corporation has legal personality           of  its   own,  it   does  not   follow  that  the           corporation   1    cannot   be    an   agent    or           instrumentality of  the state,  l 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           exercised by  principal over agent and the control           exercised by  government over  public corporation.           That, I think is only a distinction in degree. The           crux of the matter is that public corporation is a           new type  of institution which has sprung from the           new social  and economic  functions of  government           and that it therefore does not neatly fit into old           legal categories. Instead of forcing it into them,           the later  should  be  adapted  to  the  needs  of           changing time and conditions."           (Emphasis supplied.)      Various aspects of the question which we have to decide were exhaustively considered by this Court in Ramana Dayaram Shetty v.  The International  Airport Authority of India and others, [1979]  3  S.C.R.  1014.  In  that  case  the  Court observed (at page 1032), "Today the Government, as a welfare State, is  the regulator  and dispenser  of special services and provider  of a large number of benefits, including jobs, contracts, licences, quotas, mineral rights, etc." The ques- 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   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 from the Board. Although  the authority  had no  share capital of its own, capital needed by it for 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 State", this Court said (at page 1036) :           "A corporation mar be created in one of two ways. 334           It may  be either established by statute or incor-           porated under a law such as the Companies Act 1956           or the  Societies Registration  Act 1860.  Where a           Corporation is wholly controlled by Government not           only in its policy making but also in carrying out           the  functions   entrusted  to   it  by   the  law           establishing  it   or  by   the  Charter   of  its           incorporation, there can be no doubt that it would           be an instrumentality or agency of Government. But           ordinarily where  a corporation  is established by           statute, it  is autonomous in its working, subject

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         only to  a provision,  often times  made, that  it           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           directors or committee of management in accordance           with the  provisions of the statute under which it           is incorporated.  When  does  such  a  corporation           become   an    instrumentality   or    agency   of           Government?"           (Emphasis supplied.) After considering  various factors  and the  case law on the subject, the Court thus summed up the position :           It will thus be seen that there are several factor           which may  have to  be considered  in  determining           whether    corporation    is    an    agency    or           instrumentality of Government. We have referred to           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 lt           is extraordinary,  whether there is any control of           the management  and policies of the corporation by           the 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   the           corporation are  public functions  closely related           to 335           governmental functions.  This particularisation of           relevant factors  is however not exhaustive and by           its  very   nature  it  cannot  be,  because  with           increasing  assumption   of  new   tasks,  growing           complexities of  management and administration and           the  necessity   of   continuing   adjustment   in           relations 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 and  in all  cases provide an unfailing           answer to  the question  whether a  corporation is           governmental instrumentality  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 S.L. Agarwal v.  General Manager,  Hindustan Steel  Ltd. in  very much the  same manner as we have done. So far as the case of Sabhajit Tewary  v. Union  of India and others is concerned, the Court said as follows :           "Lastly,  we   must  refer   to  the  decision  in           Sarabhajit Tewari  v. Union  of India & Ors. where           the question was whether the Council of Scientific           and Industrial  Research was an ’authority’ within           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

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         it was  not an ’authority’, but we do not find any           discussion  in  this  case  as  to  what  are  the           features  which   must   be   present   before   a           corporation can  be  regarded  as  an  ’authority’           within the  meaning of  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 336           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’."      In Managing Director, Uttar Pradesh Warehousing Corpora tion and another v. Vinay Narayan Vajpayee, [1980] 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 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 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           incorporated but  wholly owned  by the Government.           It is  self evident  and trite  to  say  that  the           function of  the State has long since ceased to be           confined to  the 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  worship’,   and  to   ensure           ’equality of status and of opportunity’.           (Emphasis supplied)      In Ajay  Hasia etc.  v.  Khalid  Mujib  Sehravardi  and others etc.,  [1981] 2  S.C.R. 79  the Regional  Engineering College 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 page 91):           "It is undoubtedly true that the corporation is a 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  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  of   management  and   administration           cannot be allowed to obliterate the true nature of           the reality behind which is the Government. Now it

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         is  obvious   that  if   a   corporation   is   an           instrumentality or  agency of  the Government,  it           must be  subject to  the same  limitations in  the           field of  constitutional  law  as  the  Government           itself, though in the eye of the law it would be a           distinct and  independent  legal  entity.  If  the           Government acting  through its officers 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."           (Emphasis supplied.) After referring to various authorities, the court summarized the relevant  tests which are to be gathered from the Inter- national Airport  Authority of  India’s case  as follows (at 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.’ 338           (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           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           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  (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,  Bharat  Petroleum.  In  Som Prakash Rekhi v. Union 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) from the judgment in that case is instructive and requires to be reproduced :           "For  purposes  of  the  Companies  Act,  1956,  a           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 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  has  functional  and  jural

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         individuality for  certain purposes and in certain           areas of  law, it does not necessarily follow that           for the 339           effective enforcement  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, constitutional  lawyers must  not blink  at           these  facts  and  frustrate  the  enforcement  of           fundamental   rights    despite   the    inclusive           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.Dhanoa  v.  Municipal  Corporation,  Delhi  and  others, [1981] 3  S.C.C. 431  runs counter  to the  trend set in the authorities 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  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 Act, the society was a body corporate by the  name under  which it  was registered, with perpetual succession and  a common  seal. The  Super Bazars  were  not owned by  the Central  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  advanced 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 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 summoned  to appear  that no  cognizance of  the alleged offence could  be taken  by him  for want  of sanction under section 197  of the Code of Criminal Procedure, 1973. On his contention 340 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  committed  by  him  while  acting  or purporting to  act in the discharge of his official duty, no court is  to take cognizance of such offence except with the previous sanction  in the  case of  a person who is employed or, as the case may be, was at the time of commission of the alleged offence  employed, in connection with the affairs of the Union  or of  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

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provisions of Clause Twelfth of section 21 are as follows:           "21. Public servant. -           The words ’public servant’ denote a person falling           under  any   of   the   descriptions   hereinafter           following, namely : -          x    x    x    x    x    x    x           Twelfth. - Every person -           (a) in  the service  or pay  of the  Government or           remunerated  by   fees  or   commission  for   the           Performance of any public duty by the Government;           (b) in  the service or pay of a local authority, a           corporation established  by or  under  a  General,           Provincial or State Act or a Government company as           defined in  section  617  of  the  Companies  Act,           1956." The Court  pointed out  that Clause  Twelfth did not use the words "body  corporate" and,  therefore,  the  question  was whether the expression "corporation" contained therein taken in collocation  of the  words "established  by  or  under  a Central or  Provincial or  State Act" would bring within its sweep a cooperative society. The Court said (at page 437) : 341           "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  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 artificial  being created  by law,  having a legal entity entirely separate  and distinct  from  the  individuals  who compose it,  with the  capacity of  continuous existence and 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 Societies Registration 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, 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  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 employed in connection with the affairs of  the Union  within the meaning of the section 197 of the  Code of  Criminal Procedure.  This  observation  was again made with reference to the argument that the appellant was employed in connection with the affairs of the Union. He undoubtedly was  not employed in connection with the affairs of 342 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.

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General Manager,  Hindustan Steel Ltd. In S.S. Dhanoa’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 State for the purposes of Parts III and IV of the Constitution and thus, "the State" within the meaning of that 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 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. Minhas  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 and hence a writ petition under  Article   32  filed  against  it  was  competent  and maintainable. In  Manmohan  Singh  Jaitla  v.  Commissioner, Union Territory  of  Chandigarh  and  others,  [1984]  Supp. S.C.C. 540 this Court once again following Ajay Hasia’s case held that  an aided school which received a Government grant of ninety-five  per  cent  was  an  "authority"  within  the meaning of  Article 12  and, therefore, amenable to the writ jurisdiction both of this Court and the High Court.      In Workmen  of Hindustan  Steel  Ltd.  and  another  v. Hindustan Steel  Ltd. and  others, [1984]  Supp. S.C.C. 554, 560 the  Court held  that the  hindustan Steel  Ltd.  was  a public  sector   undertaking  and,   therefore,  was  "other authority" within  the meaning of that expression in Article 12.      In P.K.  Ramachandra Iyer  and others v. Union of India and others,  [1984] 2  S.C.R. 141  once again following Ajay Hasia’s case,  the Court  held that  the Indian  Council  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 343 control of the Government of India permeated through all its activities. Since  its inception, it was set up to carry out the recommendations of the Royal Commission on Agriculture. According to this Court, these facts were sufficient to make the said Council an instrumentality of the State.      In A.L.  Kalra v.  Project and Equipment Corporation of India Ltd., [1984] 3 S.C.R. 316,319,325 the said corporation was held  to be an instrumentality of the Central Government 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   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 Banahu  Ghosh and  others, [1985] 3 S.C.C. 116 the West Bengal  State   Electricity  Board   was  held   to  be   an instrumentality of the State.      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, 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

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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  Central Government  operates   through  the   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.14.73 crores for the  next two  years includes  development of  Rajabagan Dockyard and operation of the Central Inland Water Transport Corporation and  operation of  river 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  commodities 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 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  been made  for IWT. The most important programme relates to  the investment  proposal of Central Inland Water Transport Corporation  (CIWTC)". The  Annual Plan 1984-85 of the  Government  of  India  Planning  Commission  states  as follows in paragraph 10.33 :           "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 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 follows :           "The Inland  Water  Transport  Directorate  is  an           attached office of this Ministry headed by a Chief           Engineer-cum-Administrator. It has a complement of           technical  officers   who  are  charged  with  the           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           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           Corporation which  is the  only major  company  in           inland water transport in the country."                                         (Emphasis supplied.) 345 As shown  by the  Statement of  Objects and  Reasons to  the Legislative 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 Gazette  of India  Extraordinary, Part  II,  Section  2, dated May  6, 1982,  at page  15, the Central Government had set up  various committees  in view of the advantages in the mode of  inland water  transport such  as its  low  cost  of

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transport, energy efficiency, generation of employment among weaker sections  of the  community and less pollution. These committees  had  recommended  that  the  Central  Government should declare  certain waterways  as national waterways and assume responsibility  for their development. A beginning in respect of this matter was 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 navigation. In the Demands for Grant of  the Ministry  of Shipping  and  Transport  1985-86 additional provision  was made  for an  overall increase  in Budget    Estimates     1985-86    mainly     for     equity participation/investment in  the Corporation. The activities carried on  by the  Corporation were  thus described  in the said Demands for Grant :           "Central  Inland  Water  Transport  Corporation  -           CIWTC 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     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. 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 346 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 Chairman, a Vice-Chairman 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  suspend him pending inquiry against him.  Under the  said act,  the Authority is, in the discharge of  its functions  and 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.      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 itself has  considered that  it is  a  Government  of  India undertaking. The  complete heading  of  the  said  Rules  is "Central  Inland  Water  Transport  Corporation  Limited  (A Government  of  India  Undertaking)  -  Service,  Discipline Appeal Rules - 1979".      In the  face of  so much  evidence it  is ridiculous to describe  the  Corporation  as  a  trading  company  as  the Appellants have attempted to do. What has been set out above is more  than sufficient  to show that the activities of the

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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.      It was,  however, submitted on behalf of the Appellants 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 of  A. L. Kalra v. Project and Equipment Corporation of India 347 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.      It is  true that  the decision in A.L. Kalra v. Project and Equipment  Corporation of  India Ltd.  was based  upon a concession made  by the  respondent corporation but the case of Workmen  of Hindustan Steel Ltd. and another v. Hindustan Steel Ltd.  and others  was that of a Government company for Hindustan Steel  Limited is  a Government company as defined by section  617 of  the Companies  Act  as  pointed  out  in Gurugobinda Basu v. Sankari Prasad Ghosal and 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 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 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 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 the 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 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           S.O. 32  the order  made by the General Manager is           unsustainable."      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 sector  undertaking. In  the entire  judgment, there is  no other  discussion on  this point except what is

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stated in the passage 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 submission is correct.      Does this,  therefore, make  any difference? There is a basic fallacy  vitiating the  above submission. That fallacy lies in  the assumption  which that  submission  makes  that merely because  a point  has not  fallen for decision by the Court, it  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 circumstances. 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. For instance, had Rylands v. Fletcher, [1868] L.R.  3 H.L. 330 not 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  it escaped  and would  have himself escaped all liability for the damage caused by such escape if he had not been negligent.  Similarly, but  for Donoghue v. Stevention, [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 that a Government Company is "the State" under Article 12? 349 That is  the position  in fact  but not  in substance. As we have seen,  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  this  Court.  The  observations  in several of these decisions, which have been emphasised by us in the passages extracted from the judgments in those cases, are general  in their  nature and  take in  their sweep  all instrumentalities and agencies of the State, whatever be the form which  such instrumentality or agency may have assumed. Particularly   relevant   in   this   connection   are   the observations of  Mathew, J.,  in Sukhdev Singh and others v. Bhagatram Sardar Singh Raghuvanshi and another, of Bhagwati, J., in  the International  Airport Authority’s case and Ajay Hasia’s case  and of  Chinnappa Reddy,  J., in Uttar Pradesh Warehousing   Corporations    case.   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 the purposes of  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  the various tests which have been laid down. Merely because  it has  so far  not the  monopoly of  inland water 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

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veil, carrying  out a governmental activity and governmental functions of  vital public  importance. mere  can thus be no doubt that the Corporation is "the State" within the meaning of Article 12 of the Constitution.      We now  turn to  the second  question which  falls  for determination  in   these  Appeals,   namely,   whether   an unconscionable term in a contract of employment entered into with the  Corporation,  which  is  "the  State"  within  the 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 Court. H 350      The first  point which  falls for consideration on this part of  the case is whether Rule 9(i) is unconscionable. In order to  ascertain this,  we must  first examine  the facts leading to the making of the said Rules and then the setting in which  Rule 9(i) occurs. To recapitulate briefly, each of the contesting  Respondents was in the service of the Rivers Steam Navigation  Company Limited. Their services were taken over by  the Corporation after the Scheme of Arrangement was sanctioned by the Calcutta High Court. Under 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 legally  admissible, by  the said company, and the Government of  India was  to provide to the said company the amount  of   such  compensation.   Under  the   letters   of appointment  issued   to  these   Respondents,  the  age  of superannuation was  fifty-five.  Thereafter,  Service  Rules were framed  by the  Corporation in 1970 which were replaced in 1979  by new rules namely, the said Rules. The said Rules did  not  apply  to  employees  covered  by  the  Industrial Employment (Standing Orders) Act, 1946, that is, to workmen, or to  those in  respect of  whom the Board of Directors had issued  separate   orders.  At  all  relevant  times,  these Respondents were  employed mainly  in a managerial capacity. No separate  orders were issued by the Board of Directors in their case.  These Respondents  were, therefore,  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-Managing Director and the Board of Directors  of the  Corporation. me  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(i), Rule  9(ii), sub-clause  (iv) of clause (b) of Rule 36 read with  Rule 38  and Rule  37. Of  these four  modes, the first two  apply to  permanent employees  and the  other two apply to  all employees.  Rule  6  classifies  employees  as either Permanent  or Probationary  or Temporary or Casual or Trainee.  Clause  (i)  of  Rule  6  defines  the  expression "Permanent employee"  as meaning "an employee whose services have been confirmed in 351 writing according to the Recruitment and Promotion Rules". 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,

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it may  pay to  the employee the equivalent of three months’ basic pay and 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 Rule 9, that is, a three months’ notice in writing.  Under rule  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  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 hereinafter provided"  in  the  said  Rules,  on  an  employee  for  his misconduct. Clause  (a)  of  Rule  36  sets  out  the  minor 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  dismissal  is  to  be imposed except  after holding  an inquiry in accordance with the provisions  of Rule  38 and  until after  the  inquiring authority,  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 authority 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  in Rules  38, 39 or 40, the disciplinary authority may  dispense 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 352 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 terminating an employee’s service under rule 37.      Each of the contesting Respondents in these Appeals was 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 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,  the  services  of  each  of  them  were terminated by the said letter dated February 26, 1983, under Rule 9(i).  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.      It was submitted on behalf of the Appellants that there

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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  Contract Act,  1872 (Act  No. IX  of 1872), that unconscionability was  not mentioned  in the Indian Contract Act ,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  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 S footing  and did not enjoy the same bargaining power, that the 353 contract contained in the service rules was one imposed upon A these  Respondents, that  the power conferred by rule 9(i) was arbitrary  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.       As the question before us is of the validity of clause (i) of  Rule 9,  we will refrain from expressing any opinion with respect  to the  validity of  clause (ii)  of Rule 9 or Rule 37 or 40 but will confine ourselves only to Rule 9(i).      The said  Rule constitute  a part  of the  contract  of employment between the Corporation and its employees to whom the said  Rules apply,  and they  thus form  a part  of  the 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.      Under section  19 of  the  Indian  Contract  Act,  when consent to  an agreement  is caused  by coercion,  fraud  or misrepresentation, the  agreement is  a contract voidable at the option  of the  party whose consent was so caused. It is not the  case of  either of  the contesting Respondents that there was  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 of  the party  whose consent  was so  caused and  the court may  set aside  any such contract either absolutely or if the  party who  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.           (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           over the other." 354 The material provisions of sub-section (2) of section 16 are as follows :           "(2) In  particular and  without prejudice  to the           generality of the foregoing principle, a person is

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         deemed to be in a position to dominate the will of           another -           (a) where  he holds  a real  or apparent authority           over the other . . . " We need not trouble ourselves with the other sections of the Indian Contract  Act except  sections 23  and 24. Section 23 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 agreement of  which the  object or consideration is unlawful is  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 several  considerations  for  a  single object is unlawful, the agreement is void. The agreement is, however, not  always void  in its  entirety for  it is  well settled that  if several  distinct promises 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  being enforceable.  The general rule was stated  by Willes,  J., in  Pickering v.  Ilfracombe Ry. Co., [1868] 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, the           contract is  altogether void;  but where  you  can           sever them,  whether the  illegality be created by           statute or  by the  common law, you may reject the           bad part and retain the good".      Under which  head would an unconscionable bargain fall? If it  falls under  the head of undue influence, it would be 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  a court  in any  other country been pointed out to us. The  word "unconscionable"  is defined  in  the  Shorter Oxford English  Dictionary, Third  Edition, Volume  II, page 2288, when used 355 with reference  to actions  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  or void, as the case may be, at Common 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  was considered immaterial that one party was economically  in a stronger bargaining position than the other; and  if such  a party  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,  interfered  in  many  cases  of  harsh  or unconscionable bargains,  such as,  in the  law relating  to penalties, forfeitures  and mortgages. 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, gave  ready cash to the heir in return for the property which  he expects  to inherit  and thus to get such

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property at  a gross  undervalue. It  also  interfered  with harsh or unconscionable 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      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 discharge from service, and control orders directing  a party  to sell  a  particular  essential commodity to another.      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 Chitty on  Contracts, Twenty-fifth  Edition,  Volume  I,  in paragraph 4, and are as follows : 356           "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           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 a  set of terms proposed by the other or           doing without  the goods or services offered. Many           contracts   entered   into   by   public   utility           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           frequently   contract,    not   on    individually           negotiated terms,  but on  those  contained  in  a           standard form  of  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           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 procedures for consultation, and by           legislation. Many  statutes introduce  terms  into           contracts  which  the  parties  are  forbidden  to           exclude, or  declare 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   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           recently, certain  of the  judges appear  to  have           recognised  the   possibility   of   relief   from           contractual   obligations   on   the   ground   of           ’inequality of bargaining power." 358 What the  French call  "contracts d’adhesion’,  the American

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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           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 contract is unconscionable."      The position  under  the  American  Law  is  stated  in "Reinstatement  of   the  Law   -  Second"  as  adopted  and promulgated by  the American  Law Institute,  Volume  II  xx which deals  with the  law of  contracts, in  section 208 at page 107, as follows : D           "$ 208. Unconscionable Contract or Tern           If a contract or term thereof is unconscionable at           the time  the contract  is made a court may refuse           to  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." In the  Comments given  under that  section it  is stated at page 107 :           "Like  the  obligation  of  good  faith  and  fair           dealing (S 205), the policy against unconscionable           contracts or  terms applies  to a  wide variety of           types  of   conduct.  The   determination  that  a           contract or  term is  or is  not unconscionable is           made in  the light  of its  setting,  purpose  and           effect. Relevant factors include weaknesses in the           contracting process  like those  involved in  more           specific rules  as to  contractual capacity, fraud           and other  invalidating causes;  the  policy  also           overlaps  with   rules  which   render  particular           bargains or  terms  unenforceable  on  grounds  of           public policy. Policing 358           against  unconscionable  contracts  or  terms  has           sometimes    been    accomplished    by    adverse           construction of  language, by  manipulation of the           rules of offer and acceptance or by determinations           that the clause is contrary to public policy or to           the dominant  purpose of  the  contract’.  Uniform           Commercial Code $ 2-302 Comment 1. . . . A bargain           is not  unconscionable merely  because the parties           to it are unequal in bargaining position, nor even           because the inequality results in an allocation of           risks to the weaker party. But gross inequality of           bargaining power, together with terms unreasonably           favourable to  the  stronger  party,  may  confirm           indications that the transaction involved elements           of deception  or compulsion,  or may show that the           weaker party  had no  meaningful choice,  no  real           alternative, or  did not  in fact assent or appear           to assent to the unfair terms."      (Emphasis supplied.) 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

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influential in,  what are  called in  the United  States,  L "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 :           "It  is  to  be  emphasized  that  a  contract  of           adhesion is  not unconscionable  per se,  and that           all unconscionable  contracts are not contracts of           adhesion. Nonetheless,  the more  standardized the           agreement  and   the  less  a  party  may  bargain           meaningfully, the more susceptible the contract or           a term will be to a claim of unconscionability."           (Emphasis supplied.) The position  has been  thus summed  up by  John R. Pedan in "The Law  of Unjust  Contracts" published by Butterworths in 1982, at pages 28-29 : 359           ". . . Unconscionability represents the end of a A           cycle commencing  with the Aristotelian concept of           justice and the Roman law iaesio enormis, which in           turn formed  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           Chancery court’s  discretionary powers under which           it upset all kinds of unfair transactions.   Subse           quently    the     movement    towards    economic           individualism 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           dominance, the  consensual theory still recognized           exceptions where  one party  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.           It is  suggested that the judicial and legislative           trend during  the last  30 years in both civil and           common 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  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 modern           doctrine of  unconscionability. American decisions           on article 2.302 of the UCC have already gone some           distance 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 the  extent of  more than  one-half of  the value  of the subject-matter, as  for  example,  when  a  vendor  had  not received half  the value  of property sold, or the purchaser had paid  more then  double value.  The  maxim  "pacta  sunt servanda" referred  to in the above passage means "contracts are to be kept" 360      It would  appear from certain recent English cases that the courts  in that country have also begun to recognize the possibility of  an unconscionable  bargain  which  could  be brought about  by economic  duress even  between parties who

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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 Shipping Co. Ltd.  v. Hyundai Construction Co. Ltd., [1979] Q.B. 705, Pao On  v.  Lau  Yin  Long  [1980]  A.C.  614  and  Universe Tankships of  Monrovia v.  International  Transport  Workers Federation, [1981]  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 origin which has affected the law of contracts is the theory of  "distributive  justice".  According  to  this  doctrine, 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  liberty. In  Lingappa  Pochanna  Appelvar  v. State of Maharashtra & Anr., [1985] 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           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 termed  ’distributive justice’.  The concept of           distributive justice  in the  sphere of law-making           connotes, inter  alia,  the  removal  of  economic           inequalities   and    rectifying   the   injustice           resulting from  dealings or  transactions  between           unequals in  society. Law  should be  used  as  an           instrument of  distributive justice  to achieve  a           fair division  of  wealth  among  the  members  of           society based  upon the  principle  :  ’From  each           according to  his capacity,  to each  according to           his needs’.  Distributive justice comprehends more           than  achieving   lessening  of   inequalities  by           differential  taxation,   giving  debt  relief  or           distribution of property owned by 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  means 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 redistribution  of wealth  as  a  means  of           achieving a  fair division  of material  resources           among the  members of  society  or  there  may  be           legislative control of unfair agreements."                                         (Emphasis supplied.)      When our  Constitution states  that it is being enacted in order  to give  to all  the citizens  of India  "JUSTICE, social, 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  national  life,  when  clause  (2)  of Article 38 directs the State, in particular, to minimize the inequalities in  income, not  only amongst  individuals  but

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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 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  is the doctrine of distributive justice  which is  speaking 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., appears  to have  been the propounder, and perhaps the originator -  at  least  in  England,  of  this  theory.  In Gillespie Brothers  & Co. Ltd. v. Roy 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 362 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 permit           the party to enforce his unreasonable clause, even           when  it   is  so   unreasonable,  or  applied  so           unreasonably, as  to be  unconscionable?  When  it           gets to  this point,  I would  say, as I said many           years ago :           ’there is  the vigilance  of the common law which,           while allowing freedom of contract, watches to see           that it is not abused’ : John Lee & Son (Grantham)           Ltd. v.  Railway Executive [1949] 2 All. E.R. 581,           584. It  will not  allow a party to exempt himself           from his  liability at common law when it would be           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 indemnity clause did not cover the negligence  of the  indemnified. It  was in  Lloyds Bank Ltd. v. 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           property, when  the parties  have not met on equal           terms, when  the one  is so  strong in  bargaining           power and  the other  so weak that, as a matter of           common fairness,  it is  not right that the strong           should be  allowed to  push the  weak to the wall.           Hitherto those exceptional cases have been treated           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           those  where   there  has   been   inequality   of           bargaining 363

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         power such  as to  merit and  intervention of  the           court."                                         (Emphasis supplied.) He  then   referred  to  various  categories  of  cases  and ultimately deduced  therefrom a  general principle  in these words (at page 765 ) :           "Gathering all  together,  I  would  suggest  that           through all  these 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 consideration           which is  grossly inadequate,  when his bargaining           power is  grievously impaired by reason of his own           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 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, unconsciou6  of           the distre66  he is  bringing to the other. I have           also avoided  any reference to the will of the one           being ’dominated’  or ’overcome’ by the other. One           who is  in extreme need may knowingly consent to a           most improvident  bargain, solely  to relieve  the           straits in which he finds hlmself. 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  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 Diplock  in  A.  Schroeder  Nusic  Publishing  Co.  Ltd.  v. Macaulay (Formerely  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 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  total royalties  during the term of  the agreement  exceeded Rs. 5,000 the agreement was to stand  automatically extended by a further period of five years.  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, 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  action  claiming,  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  said agreement was  void as it was in restraint of trade and thus contrary to  public  policy.  In  his  speech  Lord  Diplock

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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) :           "My 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  in restraint of trade the restrictions           that the  respondent accepted  fell within  one of           those limited  categories of  contractual promises           in respect  of which  the courts  still retain the           power to relieve the promisor of his legal duty to           fulfil them.  In order  to determine  whether this           case is  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  exact from the song writer promises that           were 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           permitted to run its full course.           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 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           of laissez-faire  the courts  in the  19th century           abandoned the  practice  of  applying  the  public           policy   against    unconscionable   bargains   to           contracts generally, as they had formerely done to           any contract  considered to  be usurious;  but the           policy survived  in  its  application  to  penalty           clauses and  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  upheld it if they thought that           it was not.           So I  would hold  that the question to be answered           as respects  a contract  in restraint  of trade of           the kind  with which this appeal is concerned is :           "Was the  bargain fair?"  The test of fairness is,           no  doubt,   whether  the  restrictions  are  both

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         reasonably necessary  for the  protection  of  the           legitimate 366           interests of  the promisee  and commensurate  with           the benefits  secured to  the promisor  under  the           contract. For  the purpose  of this  test all  the           provisions of  the contract  must  be  taken  into           consideration."                                         (Emphasis supplied.) 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 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 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           is of  comparatively  modern  origin.  It  is  the           result of the concentration of particular kinds of           business in relatively few hands. The ticket cases           in the  19th century provide what are probably the           first examples. The terms of this kind of standard           form of  contract have  not been  the  subject  of           negotiation between the parties to it, or approved           by any  organisation representing the interests of           the weaker  party. They have 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           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."                                         (Emphasis supplied.) 367      The observations  of Lord Denning, M.R., in Levison and 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 in 1975  recommended that  a term which exempts the stronger party from  his ordinary  common law liability should not be given effect  except when  it is  reasonable:  see  The  Law Commission 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 reasonableness. This is a gratifying piece of law reform: but I 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. In Gillespie Bros. & Co. Ltd. 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 s apply it in the circumstances of the case.

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I see no reason why this should not be applied today, at any rate  in   contracts  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, 1977. This  statute does not apply to all contracts but only to certain  classes of  them. It  also  does  not  apply  to 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  torts and introduces 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. 368      In photo  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 did not possess unequal bargaining power. The House of Lords did not  in that  case reject  the test of reasonableness or 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  test. Lord  Wilberforce in  his  speech,  after referring to  the Unfair  Contract Terms Act, 1977, said (at page 843) :           "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           and reasonable.  It is significant that Parliament           refrained from legislating over the whole field of           contract. After  this Act,  in commercial  matters           generally, when  the parties  are not  of  unequal           bargaining power,  and  when  risks  are  normally           borne by  insurance, not  only  is  the  case  for           judicial 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.) Lord Diplock said (at page 850-51) :           "Since  the   obligations  implied  by  law  in  a           commercial contract  are those  which, by judicial           consensus over  the  years  or  by  Parliament  in           passing  a   statute,  have   been   regarded   as           obligations which  a reasonable  business an would           realise that he was accepting when he entered into           a contract  of a particular kind, the court’s view           of the  reasonableness of  any departure  from the           implied obligations  which would  be  involved  in           construing  the  express  words  of  an  exclusion           clause in  one sense  that  they  are  capable  of           bearing rather than 369           another, is  a relevant  consideration in deciding           what  meaning  the  words  were  intended  by  the           parties to bear."

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                                       (Emphasis supplied.) Lord  Scarman,   while  agreeing   with  Lord   Wilberforce, described (at  page 853)  the action out of which the appeal before the  I House  had arisen  as  "a  commercial  dispute between parties well able to look after themselves" 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  States  and  the  United  Kingdom  have  statutorily recognized, at  1 least  in certain  areas  of  the  law  of contracts, that  there can i 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  arising   out   of circumstances not  within their  control or  as a  result of situations not  of their  creation. Other legal systems also permit judicial  review of a contractual transaction entered into in similar circumstances. For example, i section 138(2) of the  German Civil  Code provides  that a , transaction is void "when  a person"  exploits "the distressed q 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 disproportionate to  the performance  given in  return." The position according to the French law is very much the same.      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  push the  weak to  the wall?  Should  they  be allowed to  ride 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 370 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 part  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  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 unfair and unreasonable contract,  or   an  unfair  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 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 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

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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 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 principle,  however, will  not apply where 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 infra-structural organizations and with the State through  its instrumentalities  and agencies  entering into almost every branch of industry and commerce, there can be myriad situations which result in unfair and unreasonable bargains between  parties possessing wholly disproportionate and unequal  bargaining power.  These cases  can neither  be enumerated nor  fully illustrated. The court must judge each case on its own facts and circumstances.      It is  not as  if our  civil courts have no power under the existing law. Under section 31(1) of the Specific Relief Act, 371 1963 (Act  No. 47  of 1963),  any  person  against  whom  an instrument 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 Indian Contract Act, even though at times they  are between  parties one of whom holds a real or apparent authority  over the  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 within the four corners of the definition 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 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 that 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 would also not be  in the  public interest.  Such a  contract or such a clause in  a contract ought, therefore, to be adjudged void. While the  law of contracts in England is mostly judge-made, the law  of contracts  in India  is enacted  in  a  statute, namely, 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

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relevant provision  in the  Indian Contract  Act  which  can apply is section 23 when it states that 372 "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", "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 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 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 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 whereas the latter countenances judicial law-making  in this  area. The  adherents  of  "the narrow view"  school would  not invalidate a contract on the ground of  public policy  unless that  particular ground had been well-established  by authorities.  Hardly ever  has the voice of the timorous spoken more clearly and loudly than in these  words   of  Lord   Davey  in  Janson  v.  Uriefontein Consolidated Mines  Limited [1902]  A.C.  484,  500  "Public policy is  always an unsafe and treacherous ground for legal decision." That  was in  the year  1902. Seventy-eight years earlier, &  Burros, 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 you." The Master of the Rolls, Lord Denning,  however,   was  not   a-man  to   shy  away   from unmanageable horses and in words which conjure up before our eyes the  picture of  the young  Alexander the  Great taming Bucephalus, he  said in  Enderyby Town Football Club Ltd. v. Football Association Ltd., [1971] Ch. 591, 606. "With a good man in the saddle, the unruly horse can be kept in control.  It can  jump over  obstacles." Had the timorous always held  the field,  not only  the  doctrine  of  public policy 373 but even  the Common  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 common law, which           has grown  up gradually  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. It is thus clear that the principles governing public policy must 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

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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 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 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 Nath Motani and others v. Prahlad Rai and others, [1960] 1 S.C.R. 861 reversing the High Court and restoring the decree passed by the  trial 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):           "The correct position in law, in our opinion, is 374           that what one has to see is whether the illegality           goes so  much 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           required to  rest his  case upon  that illegality,           then public  policy  demands  that  the  defendant           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           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  conscience of  the Court, the plea of           the defendant should not prevail."      The  types   of  contracts   to  which   the  principle formulated by  us above  applies are not contracts which are tainted with  illegality but  are  contracts  which  contain terms which  are so  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(i) by applying to it the principle formulated above. Each of the contesting Respondents  was   in  the   service  of  the  Rivers  Steam Navigation  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 wag  "all  legitimate  and  legal compensation payable  to them  either under  the  Industrial Disputes  Act   or  otherwise   legally  admissible".  These Respondents were  not covered by the Industrial Disputes Act

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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 get  unless their contract  of employment  with their previous employers contained any provision in that behalf. So far as 375 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 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.  The above terms are followed by asset of terms under the heading "Other 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.  They had, however, no real choice before them. Had they  not accepted  the appointments, they would have at the highest received some compensation which would have been probably meagre  and would certainly have exposed themselves to the hazard of finding another job.      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 regulations other  than those  providing for  termination of service and,  therefore, Rule 9(i) 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(i).      The said  Rules as  also the earlier rules of 1970 were accepted by  the contesting  Respondents without demur. Here again they  had no  real choice  before them. They had risen higher in  the hierarchy  of the  Corporation. If  they  had refused to  accept the said Rules, it would have resulted in termination of  their service  and the  consequent  anxiety, harassment   and    uncertainty   of   finding   alternative employment.      Rule 9(i) confers upon the Corporation the power to 376 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 West Bengal State  Electricity Board  and others  v. Desh  Bandhu Ghosh 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           parallel is  to be  found in the Henry VIII clause           so familiar to administrative lawyers." As all  lawyers may not be familiar with administrative law, we may  as well  explain that  "the Henry  VIII clause" is a provision  occasionally   found  in  legislation  conferring

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delegated legislative  power, giving  the delegate the power to amend  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 Committee 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  "that King  is regarded  popularly  as  the impersonation  of  executive  autocracy".  m  e  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 Parliament  in  the  United  Kingdom after 1932  does not  show that  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 who on  behalf of the Corporation is to exercise that power. It was  submitted on  behalf of the Appellants that it would be  the   Board  of   Directors.  me   impugned  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).  m  ere  are  no guidelines  whatever   laid  down   to  indicate   in   what circumstances the power given by Rule 377 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 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  modes in  which the  services of a permanent employee can  be 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 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  without any  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 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)  thus confers an absolute, arbitrary and  unguided power  upon    the  Corporation.  It violates one of the two great rules of natural justice - the audi alteram  partem 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. Tulsiram  Patel etc..  [1985] 3 S.C.C. 398 (at page 463),

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"The principles  of natural  justice are not the creation of Article 14.  Article 14  is not  their  begetter  but  their 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 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 administrative. Undoubtedly,  in certain  circumstances  the principles of  natural  justice  can  be  modified  and,  in exceptional cases,  can even  be excluded  as pointed out in Tulsiram Patel’s case. Rule 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 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 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 against them. Sengupta had been informed that a disciplinary inquiry 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 in various  parts of  West Bengal, Bihar and Assam, as shown by the  said Rules,  and possibly  in other  States also. me said Rules  form part  of the contract of employment between the Corporation and its employees who are not workmen. These employees had  no powerful  workmen’s Union to support them. They had  no voice in the framing of the said rules they had no choice  but to  accept the  said Rules  as part  of their contract of employment. m ere is gross disparity between the Corporation and  its employees,  whether they  be workmen or officers. m  e Corporation  can afford  to dispense with the services of  an officer.  It will find hundreds of others to take his  place but an officer cannot afford to lose his job because if  he does  so, there  are  not  hundreds  of  jobs waiting for  him. A  clause such  as clause (i) of Rule 9 is against 379 right and reason. It is wholly unconscionable. It has been A entered into  between parties  between whom  there is  gross inequality of  bargaining power.  Rule 9(i)  is term  of the contract between  the Corporation  and all  its officers. It affects a  large number  of persons  and it  squarely  falls within  the   principle  formulated  by  us  above.  Several statutory authorities  have a clause similar to Rule 9(i) in their contracts  of employment.  As appears 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

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with paid-up  capital of Rs.16,414.9 crores as stated in the written arguments submitted on behalf of the Union of India. The  Government   and  its  agencies  and  instrumentalities constitute the  largest employer  in the  country. A  clause such as  Rule 9(i)  in a  contract of  employment  affecting large sections of the public is harmful and injurious to the public interest for it tends to create a sense of insecurity in the minds of those to whom it applies and consequently it is against public good. Such a clause, therefore, is opposed to public  policy and  being opposed to public policy, it-is void under section 23 of the Indian Contract act.      It was,  however, submitted on behalf of the Appellants that this  was a  contract entered  into by  the Corporation like any  other contract entered into by it in the course of its 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 equally  not  possible  for  us  to  equate  a  contract  of employment  with   a  mercantile   transaction  between  two businessmen and  much less  to do  so when  the contract  of employment  is  between  a  powerful  employer  and  a  weak employee.      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 employer could terminate the employee’s service by giving  him 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 380 equivalent amount from whatever may be payable to him. 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 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.      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 service  but the  civil  court  could  not  have  ordered reinstatement as it would have amounted to granting specific performance 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.      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 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, Sukhdev Singh and others v. Bbagatram Sardar Singh Raghuvanshi   and   another,   The   International   Airport Authority’s Case  and Ajay  Hasia’s Case). The actions of an instrumentality or  agency of  the State must, 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

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invalidating factor  for  any  discriminatory  or  arbitrary State action  has been  traced in  Tulsiram Patel’s Case (at pages 473-476).  The principles  of natural justice have now come to  be recognized as being a part of the Constitutional guarantee contained  in Article 14. In Tulsiram 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           contained in Article 14 because of the new and 381           dynamic interpretation  given by this Court to the           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  violation 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 principles  of natural justice.           What it 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  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 unreasonable and  it also  wholly ignores and sets aside the audi alteram  partem rule it, therefore, violates Article 14 of the Constitution.      On behalf  of the  Appellants reliance  was placed upon the case  of Radhakrishna  Agarwal and  others v.  State  of Bihar and  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 expiry of every three years in consultation with the lessee 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, 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 382 State or  its agents have entered into the field of ordinary contract  the  relations  are  no  longer  governed  by  the constitutional 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           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

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         and are  bound by  the terms  of the contract only           unless some  statute steps  in  and  confers  some           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 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   Radhakrishna  Agarwal’s  Case.  Further,  the contract or the lease between the parties in that case was a legally valid  contract. In  that case  what the  appellants were doing was to complain of a breach of contract committed 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 contract  of employment is void. They are not complaining that  the action of termination of their service is in  breach of  Rule 9(i).  Their complaint  is not merely with respect  to the  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 the ordinary law of contracts.      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.  Muley v. J.R.D. Tata and others, [1980] Lab. & Ind. Cases  11; s.c.  [1979] 2  Ser. L.R. 438 and Manohar P. Kharkhar and 383 another v.  Raghuraj and  another, [1981]  2 Lab.  L.J.  459 commonly known as the "Makalu" 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 Makalu’s Case was relied upon by the Appellants. Both the  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 indisputably  "The  State"  within  the meaning of  Article 12 of the Constitution. Under Clause (a) of the  said Regulation  48, the  services  of  a  permanent employee can be terminated "without assigning any reason" by giving him  thirty days’ notice in 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  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  the Constitution. In  West Bengal State Electricity Board’s Case this Court  stated (at  page 119), "The learned Judge struck down Regulation  48(a) and  we agree  with his reasoning 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  untrammelled power in the hands of  the authorities,  that it  was an  arbitrary power which was  conferred and it did not make any difference that

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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 corporation 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  Regulation 48  only  meant  a  disclosure  of  the reasons to  the employee  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 under Regulation 49 the employee was also permitted to resign 384 without assigning any reason by giving the notice prescribed 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  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 existence of  relevant  reasons  was  a  sine  qua  non  for exercising the  power under  Regulation 48.  It went  on  to state   that   because   of   the   complexity   of   modern 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  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 would have  to be  dictated for the purpose of the needs and exigencies of  its administration  and  if  that  power  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 September  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  earlier. We  find ourselves  wholly unable to agree with the  view taken  by the  Division Bench. Apart from the factual aspects  of the case, as to which we say nothing, we find every  single conclusion  reached by the Division Bench and the  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 any  reason"  was  wrong  and untenable. Starting  with this  wrong premise,  it has  gone from one  wrong premise  to another. In the light of what we have said earlier about the principles of 385 public policy  evolved, and tested by the principle which we have formulated,  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) :

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         "The learned counsel for the appellant relied upon           Manohar P.  Kharkhar v.  Raghuraj 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           administration and  the  unpredictable  exigencies           arising in 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." 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 has been  stated in  the above  passage. The Makalu Case was wrongly decided  and  requires  to  be  overruled.  We  are, however, 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.      We would like to observe here that as the definition of "the State"  in Article  12 is for 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 "securing  that the citizens, men and women, equally 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". An adequate means of livelihood cannot be secured to the citizens by taking away without any reason the means of livelihood. The 386 mode of  making "effective  provision for securing the right to work" cannot be by giving employment 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 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.      The  Calcutta  High  Court  was,  therefore,  right  in quashing  the  impugned  orders  dated  February  26,  1983, terminating the  services of  the contesting Respondents and directing the  Corporation to reinstate them and to pay them all arrears  of salary.  The High  Court was,  however,  not right in  declaring 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 was that Rule 9 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  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 order to be effective.  It can  be that  in certain  circumstances an employer would  be  justified  in  refusing  to  accept  the

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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 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 accepting 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  be  confirmed,  the  declaration  given  by  it requires to be suitably modified.      In  the   result,  both  these  Appeals  fail  and  are dismissed but the order passed by the Calcutta High Court is modified by 387 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 Corporation 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 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 months’ basic pay and dearness allowance in lieu of such notice.      By interim  orders passed  in the Petitions for Special Leave to  Appeal filed  by the  Corporation, we  had granted pending the  disposal of those Petitions a stay of the order of the  Calcutta High  Court in  so far  as it  directed the reinstatement of  the contesting  Respondents. At that stage the  Corporation   had  undertaken   to  pay   to  the  said Respondents all arrears of salary and had also undertaken to pay thereafter  their salary  from month to month before the tenth day of each succeeding month until the disposal of the said  Petitions.   We  hereby   vacate  the  stay  order  of reinstatement  passed  by  us  and  direct  the  Corporation forthwith to reinstate the First Respondent in each of these Appeals and  to pay  to him  within six weeks from today all arrears of  salary and  allowances payable  to him,  if  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 the Intervener will bear and pay their own costs of the Appeals. S.R.                                      Appeals dismissed. 388