V. Raghunadba Rao v. State Of A.P And Others

1. The omnipotence of Article 14 of the Constitution found its projec-tion into contractual relations assailing on its anvil preliminary specifications 11, 29, 59. 62 (b) and 73 of the Andhra Pradesh Standard Specifications (for short, the specifications) and certain supplementary specifications, which are integral parts of the contract dated December 23, 1977, as being arbi-trary, illegal and unenforceable; appointment of respondents 2 to 4 (arbitra-tors) as being void; resultant direction to the first respondent to appoint independent arbitrator or arbitrators in their place to adjudicate the dispute that arose under the contract.

2. Eschewing the disputant facts aside, the admitted facts revolving round the adjudication are thus: By a notice dated September 29, 1977, the first respondent invited tenders to construct “Ogee Spillway” from Chain 91, 45 to Chain 110 of “Taliperu Project” at Pedamidisileru village, Khammam district. The petitioner's tender, after negotiation, was accepted. By lumpsum agreement No. 28/77 dated December, 23, 1977, the petitioner, Class I contractor, undertook to execute the work of the value of Rs. 80,20,884-05 within 18 months from the date of handing over the site. On January 19, 1978, the site was handed over and the work is to be completed on or before July 18, 1978. The petitioner claims that he was always ready to execute the work but due to the offending printed conditions in the specifications he has been impeded in the performance of his part of the contract. On account thereof, the first respondent and its subordinates, who are relieved themselves of, or limited its liability, have put spokes in his way resulting in, unavoidable delay and escalation of the cost of execution. There-by the petitioner was not only impeded in completing the work but also was made to incur huge, additional expenses and loss constraining him to lay his claim on October 30, 1982 before respondents 2 to 4 under the arbitration clause 73. The first respondent submitted its counter on May 12, 1983 and a reply thereto was filed by the petitioner on July 28, 1983. Obviously apprehending that the impugned clauses would stand an impediment to his claim, the petitioner assails their constitutional validity as being “arbitrary” “oppressive”, “unjust” and “unconsicionable”, bereft of equal bargaining power.

3. The substance of the petitioner's grievance is that the tender schedule was issued on November 2, 1977, and the last day to submit tenders was November 8, 1977. As per the tender conditions the petitioner had to make inspection and to be satisfied of the source of 70 items and the places at which the quality and quantity of the materials; and to submit the tender within six days thereafter. It is not merely illusory but to make geological survey is only a pittance of inspection with no tangible result. The Clause 11 therefore is arbitrary. As per the agreement the 1st respondent has to fix pipes and the petitioner has to drill grout holes and drainage holes and in them the 1st respondent had to grout with cement with slurry and seal them as required, and till then they are to be kept exposed. The first respondent had not done its part necessitating the petitioner to write a letter on May 17, 1978 that the Department had not brought even the grout pumps till that date resulting in the petitioner's keeping the labour and machinery idle and inability to drill the holes and get them exposed, etc. In view of Clause 59 of the Specifications and the supplementary specifications relieving the liability of the State fork no action. The clause reads thus:

“In case there is delay by the department in completing these items of work, reasonable extension of time as decided by the Executive Engineer will be granted and no claim for any compensation will be entertained on this account. The unit rate quoted shall hold good even if the design is altered during execution. De-watering, bailing out water, centering, scaffoldings, benching, structing, all leads and lifts are included in the rates and no extra payment is admis-sible”.

4. According to the petitioner, apart from being arbitrary, it is an unjust and unconscionable claim.

5. It is further pleaded that Clause 62(b) of the Specifications provides making final measurements and payment cf lumpsum amount would be varied by adding thereto or deducting therefrom the difference, if any, of the grounds mentioned therein in the schedule by calculating at contract rates based on revised quantities. But in actual factuality the petitioner pleads that the State and its subordinates had misused its contractual covenants with a view to coerce the petitioner to resort to illegal methods and the details in support thereof have been mentioned in the affidavit. It is further pleaded that the Clause 29 of the Specifications provides the discretion and decision of the Executive Engineer on incidental matters like extension of time, etc., are final. He being party to the contract, his decision on the incidental matters in execution of the contract should not be made “conclusive and final” as he cannot be the judge of his own arbitrary exercise of power. It is further averred that when the dispute arose between the parties the appointment of the arbitrators, the employees of the State, cannot be the judges under Clause 73 of the Specifications. The appointment of independent arbitrators is sine qua non for a fair procedure. The appointment of the depertmental officials as arbitrators is obnoxious to fair play in action offending Articles 14 and 21 of the Constitution.

6. The State has resisted the above content ions, by filing an elaborate counter disputing the factual averments and the legal contentions made by the petitioner. Shot in the State's arm, the pleas of waiver and estoppel were put on forefront—by contending that as Class I contractor—petitioner bad, knowledge of the Specifications, had professional expertise in execution of contracts; having voluntarily agreed after satisfying the covenants and as of fact having executed the contract, the petitioner has waived his right or estopped to question the offending covenants. Right to an avocation or trade or business is a fundamental right under Article 19(1)(g) of the Constution. In Basheeshar Hath v. Incometax Commissioner AIR 1959 SC 149 S.R Das, C.J, speaking for himself and Kapur, J, held that Article 14 is founded on a sound public policy recognised and valued in all civilised States. It is an admonition addressed to the State when it disregards obligations imposed by the State. Therefore, a breach of an obligation imposed by the State, when attacked it cannot be a ground to defeat it by plea of waiver. The Constitu-tion is the supreme law of the land. The Court puts the question thus: “Is it open to the State to disobey the Constitutional mandate merely because a person tells the State that it may do so? If the Constitution asks the State as to why the State did not carry out its behest, will it be any answer for the State to make that “true, you directed me not to deny any person equality before the law, but this person said that I could do so, for he had no objec-tion to my doing it.” 1 do not think the State will be in any better position than the position in which Adam found himself when God asked him as to why he had eaten the forbidden fruit and the State's above answer will be as futile as was that of Adam who pleaded that the woman had tempted him and so he ate the forbidden fruit.” N.H Bhagwati, J., held in paragraph 32 that “it cannot therefore be urged that it is open to a citizen to waive his fundamental rights conferred by Part III of the Constitution.” Subba Rao, J, as he then was, considering the effect of the doctrine of waiver if countenanced to and applied, emphasised in paragraph 90 thus:

“A large majority of our people are economically poor, educatio-nally backward and politically not yet conscious of their rights. Individually or even collectively, they cannot be pitted against the State organizations and institutions, nor can they meet them on equal terms. In such circumstances, it is the duty of this Court to protect their rights against themselves. I have, therefore, no hesitation in holding that the fundamental rights created by the Constitution……………cannot be waived”

(Emphasis supplied)

7. This view received reiteration in Olga Tellis v. Bombay Municipal Corporation (1985) 3 SCC 545 , AIR 1986 SC 180 by another Constitution Bench speaking through Chandrachud, C.J In paragraph 28 it is held:

“It is not possible to accept the contention that the petitioners are estopped from setting up their fundamental rights as a defence to the demolition of the huts put up by them on pavements or parts of public roads. There can be no estoppel against the Constitution. The Constitution is not only the paramount law of the land, but, it is the source and sustenance of all laws. Its provisions are conceived in public interest and are intended to serve a public purpose. The doctrine of estoppel is based on the principle that consistency in word and action imparts certainty and honesty to human affairs…………… This principle can have no application to representations made regarding the asser-tion or enforcement of fundamental rights…. Therefore, notwith-standing the fact that the petitioners had conceded in the Bombay High Court that they have no fundamental right to construct hutments on pavements and that they will not object to their demolition after October 15, 1981, they are entitled to assert that any such action on the part of the public authorities will be in violation of their funda-mental rights.”

8. In this case the ratio in Basheshar Nath's case (1 supra) was approved.

9. Thus it is now settled law that the fundamental rights assured to the citizen in Part Hi of the Constitution are founded on public policy as means to establish an egalitarian social order set down in the Preamble and part IV in which the individual is assured of his dignity of the person with social and economic justice and right to equality of status and opportunity. Therefore, merely because the petitioner had executed the contract with the covenants engralted thereunder it they are found ultra vires the power of the executive, i.e, either arbitrary, unjust, unreasonable or unconscionable, it would offend Article 14 of the Constitution. Therefore, the doctrine of waiver or estoppel pleaded by the State is futile attempt and it does not lie in its mouth to contend that despite the admonition administered by Article 14 it is free to disobey the mandate of the Constitution pleading that the petitioner made no objection to its imposition of the covenants in the contract or that he had executed it voluntarily without any demur.

10. It was contended that the covenants in the contract were made in the public interest. It was open to the petitioner to accept or decline to accept the terms. Specifications and Supplementary Specifications thereof have no statutory force. Alter acceptance it is not open to him to assail the correctness there of and the writ petition is not maintainable. It is well sett-led that the executive power of the State is co-extensive with its legislative power, it is not necessary that there should be law in the first instance. Article 19(6) permitted the State to engage itself in all activities necessary to promote the social and economic welfare of the community. In the absence of any law having been made by the legislature, the executive instructions would hold the Held (vide Ram Jawaya Kapur v. State of Punjab AIR 1935 SC 549. Article 13 injuncts that the law, i.e, existing statutory or customary or executive, having force of law as on January 26, 1950, or made thereafter, inconsistent with or contravenes the fundamental rights shall be void. The Specifica-tions or supplementary specifications would not stand on a higher footing. Ram Jawaya (1 supra) is also in an authority for this proposition. The doc-trine of public policy and maintainability of the writ petition will be dealt with a little later. Therefore, 1 find no merit in this contention too.

11. It is true that the contract in question is governed by the provi-sions of the Indian Contract Act 9 of 1872, for short ‘the Act’. The doc-trine of consensus ad idem binds the petitioner to the terms of the contract. The Agreement is voidable if it is caused by coercion, fraud or misrepresen-tation under Sec. 19 or undue influence under Sec. 19A. Under Sec. 21-A contract is not voidable if it is caused by mistake as to any law in fores in India, nor it becomes voidable if it is made under a mistake as to matter of fact. But if it is by mutual mistake as to a fact essential to the agreement it becomes void under Sec. 20. The consideration or object if, it is forbidden by law or defeats any provision of law or is fraudulent or involves or implies injury to the person or property of another or is immoral or opposed to public policy, the contract becomes void under Sec. 23. Sec. 27 declares that the agreement to restrain exercise of lawful profession, trade or business is void. An agreement to restrict absolutely to enforce the legal rights or limits its enforcement also is void under Sec. 28. If the terms of the agree-ment are uncertain the agreement becomes void under Sec. 29. The Speci-fic Relief Act, 1963 gives power to the affected party to avoid the contract or to enforce it, the details of which are redundant for the present purpose. In normal parallel (sic) parties to the contract are bound by the contractual relations and they have to work out the rights in terms of a contract as per law. Art. 14 cannot be a mask nor proceedings under Art. 226 be a means to avoid bilateral obligations voluntarily undertaken. March of law made in-roads into the traditional contract. The traditional freedom of contract has undergone a sea change. In paragraph 4 of Chitty on Contracts 25th edi-tion, Volume 1), it is stated thus:

“Freedom of contract 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 ecouomic interest of the community at large.”

12. The Preamble of the Constitution, the Fundamental Rights and Directive Principles, in short, “the trinity”, assures to every citizen Social, Economic and Political Justice, Equality of Status and of Opportunity with a right to Dignity of the’ person. The fundamental rights are means to the goals set down in the Directive Principles which enjoin the State to minimise the ineq-qualities in income and endeavour to eliminate inequalities in status and provide facilities and opportunities hot only amongst individuals but also amongst groups of people residing in different areas or engaged in different vocations. Constitution seeks to fuse together Gandbian Economy and state socialism through parliamentary democracy. The State has come in a big way and has undertaken diverse social welfare and economic measures to make State Socialism a reality. Article 19(1)(g) gives fundamental right to avocation or to carry on any trade. In Ramanna v. LA. Authority of India (1979) 3 SCC 489 , AIR 1979 Supreme Court 1628 at 1636 Bhagwati, J. (as he then was) held:

“Today the Government, in 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 Government pours forth wealth, contracts and licences. The valuables dispensed by Government take many forms, but they all share one characteristic. They are steadily taking the place of traditional forms of wealth. These valuables which derive from relationships to Government are of many kinds Many individuals and many more businesses enjoy largess in the form of Government con-tracts. These contracts often resemble subsidies,… All these mean growth in the Government largess and with the increasing magnitude and range of governmental functions as we move closer to a welfare State, more and more of our wealth consists of these new forms. Some of these forms of wealth may be in the nature of legal rights but the large majority of them are in the nature of privileges. The Government is still the Government when it acts in the matter of granting largess and it cannot act arbitrarily. It does not stand in the same position as a private individual.”

13. Charles A. Reich in his New Property (1964) 73 Yale Law Journal 733 at 743, in the context of the Government contracts, says that the Government contracts might seem the best possible example of a type of valuable which no one has any right to receive, and when represents only the government's managerial function. But even here, he quotes from Copper Plumbing and Heating Co. v. Campbell 290 F. 2d 368 370-1 (D.C Cir. 1961).

“…… While they (citizens) do not have a right on their own terms, appellants do have a right not to be invalidly denied equal opportunity under applicable law to seek contracts on government projects.”

14. At page 744, it is stated that while individual interests in largess have deve-loped along the lines of procedural protection and restraint upon arbitrary official action, substantive rights to possess and use largess have remained very limited. At page 744 the author further states that “in all of the cases concerning individual rights in largess the exact nature of the Government action which precipitates the controversy makes a great difference. A con-troversy over Government largess may arise from diverse situations as denial of the light to apply, ….attaching of conditions to a grant, modification of a grant already made, suspension or revocation of a grant, or some other sanction…. The theory seems to be that here some sort of rights have “ves-ted” which may not be taken away without proper procedure.”

15. It is, thus, settled law that the Government being a welfare State with ever expanding measures of economic activities to establish socialist secular democracy comes into contractual relations with citizens dispensing its largess and/or distributing its wealth on a vast scale like awarding con-tracts, etc. Many a people depend upon the State to come in relation with it. The Government contracts thereby serve as a source of wealth. We would deal with private contracts, the freedom of the parties in relation thereto and the development of law in that field at a later stage.

16. The State in exercise of its executive power executes the con-tracts in terms of Articles 298 and 299 of the Constitution by the President or the Governor or the authorised Officer “in such manner as he may direct or authorise”. The instrumentalities or other authorities that come under the canopy of Article 12 of the Constitution are of no exception to this Constitutional mandate. The acts of the Government are public and gene-ral in their application and the Government acts in its sovereign capacity. Though the Act makes no ditinction between ordinary contract and Govern-ment contracts, there stems applicability of public law principles under Rule of Law when it impinges the rights of the citizens enshrined in Part III. The State, therefore, is not free, like a private citizen, to impose arbitrary, uncanalised or unjust clauses or covenants in the public contract J It is true, as contended by Miss Lakshmi Devi, the learned Government Pleader, that the State in executing the contracts derives no profit like a private citizen and are executing the contracts for public well being. But could the Government impose unconstitutional conditions for the effective execution of the works undertaken by the State, is the problem posed. When the clauses in the public contracts are assailed oh the touchstone of Article 14 as being arbitrary, unfair, unconscionable, or unjust, public law element makes it incumbent to consider the validity thereof and their inevitable effect on the rights of the citizens either constitutional or statutory. When citizens enter into bilateral relations with the State in a vest scale, it is necessary that the actions of the State should conform to the rule of law in distributing socio economic justice. It is neither a police nor a laissez-faire State. It is a welfare state and it dispenses economic benefits in diverse forms which are means of livelihood and or wealth to several citizens. Public policy is imp-licit in Government contracts. Therefore, the authority of the State must be subject to limitations and conformable to rule of law. The broad dis-tinction between public law and private law element in Government con-tracts becomes thin. The question then is whether the State is free to impose unconstitutional conditions in the contracts. Miller in his “Govern-ment Contracts and Social Control: a Preliminary Inquiry” 41. Va. L. Rev, 27 (1965) has stated that:

“The rapid rise in the number of Government regulatory and wel-fare programmes, coupled with the multiplication of government con-tracts resulting from expanded budgets, has greatly increased the total benefits extended, thus affording the government countless new opportunities to bargain for the surrender of constitutional rights.”

17. In (1959-60) 73 Harvard Law Review in the Note under the Caption “Un-constitutional Condition”, at page 1595-1596 it is postulated that the power to withhold largess has been asserted by the State in (I) regulating the right to engage in certain activities: (2) Administration of Government welfare programmes; (3) Government employment; and (4) Procurement of con-tracts. It is further adumbrated at pages 1602-1603 thus:

“The sovereign's constitutional authority to choose those with whom it will contract for goods and services is in effect a power to withhold the benefits to be derived from economic dealings with the government…. As government activity in the economic sphere increa-ses, the contracting power enables the government to control many hitherto unregulated activities of contracting parties through the imposition of conditions. Thus, regarding the government as a private enterpreneur threatens to impair constitutional rights………. The government, unlike a private individual, is limited in its ability to con-tract by the Constitution. The federal contracting power is based upon the Constitution's authorisation of these acts “necessary and proper” to the carrying out of the functions which it allocates to the national government,—Unless the objectives sought by terms and conditions in government contracts requiring the surrender of rights are constitutionally authorised, the conditions must fall as ultra vires exercise of power,”

18. Again at page 1603, it is further emphasised thus:

“When conditions limit the economic benefits to be derived from dealings with the Government to those who forego the exercise of constitutional rights, the exclusion of those retaining their rights from participation in the enjoyment of these benefits may be a violation of the prohibition, implicit in the due process clause of fifth amendment and explicit in the equal protection clause of the fourteenth amend-ment, against unreasonable discrimination in the governmental besto-wal of advantages. Finally, disabling those exercising certain rights from participating in the advantages to be derived from contractual relations with the government may be a form of penalty lacking in due process. To avoid invalidation for any of the above reasons, it must be shown that the conditions imposed are necessary to secure the legitimate objectives of the contract, ensure its effective use, or protect society from the potential harm which may result from the contractual relationship between the government and the individual.”

(Emphasis supplied)

19. Professor Guido Calabresi of Yale University Law School in his “Retroactivity: Paramount power And Contractual Changes” (1961-62) 71 Yale Law Journal P. 1191 at 1196) stated that the Government can make contracts that are necessary and proper for carrying out any of the specific clauses of the Constitution or power to spend for general welfare. The Federal Government has no power, inherent or sovereign, other than those specifically or explicitly granted to it by the Constitution. At page 1197, it is further stated thus:

“The Government acts according to due process standards for the due process clause is quite up to that task without the rule. Altera-tions of Government contracts are not desirable in a free country even when they do not constitute a “taking” of property or impinge on questions of fundamental fairness of the type comprehended in due process. The Government may make changes, but only if war or commerce require them and not on the broader and more ephemeral grounds that the general welfare would be served by the change. Any other rule would allow the Government to welch almost at will”

(Emphasis supplied)

20. Therefore, the State has to justify its action and satisfy the conscience of the Court of the constitutional validity of clauses, in particular, when the contract involves overreaching consequences impinging the fundamental rights of the citizens. The result of the above discussion leads to the irresistible conclusion that the execution of the Government contracts has constitutional flavour emanating from Articles 298 and 299 of the Constitution. Public law element imposes limitation or imports an obligation upon the State's executive power to conform to rule of law. It cannot compel a citizen or person to for go the constitutional or statutory rights as a condition to grant contracts. The conditions/covenants must satisfy the rigour of Article 14 unless they are otherwise constitutionally authorised. Thereby the impostion of the unconstitutional conditions is ultra vires the executive power of the State.

21. In LIC of India v. Escorts Limited (1986) 1 SCC 264 , AIR 1986 SC 1370 in paragraphs 101 and 102, Chinnappa Reddi, J. speaking for their Lordships, did not consider the field of public law element in relation to the contracts. The case concerns with purchase of shares by the LIC as a shareholder in the field of private law. Therefore, the ratio does not concern itself with the public law element nor the obligation of the State to satisfy the validity of its action on the touchstone of Article 14. The ratio, therefore, is of little assistance to the State

22. Specifications are pre-constitution executive instructions consisting of Parts 1 “to HI. Part I relates to preliminary specification's; Part IT relates to execution of the work: Part III relates to Appendices, viz., tender notices and articles of agreement. Part I preliminary Specifications, in turn; consists of (A) Preface. (B) Statement of approximate Quantities in Schedule-A; (C) Drawings and Specifications, (D) Materials and Workman-ship; (E) Contract rates; (F) Responsibilities and Liabilities of the Contractor; (G) Miscellaneous;(H) Commencement, Completion: Delays, Extensions, Suspension of work and Forfeitures and (I) and (J) particulars of payment. It is already seen that the Specifications are Standard Forms. Admittedly, the contract is nothing but the incorporation of the standard forms contained in the Preliminary Section to of the Specifications. The State undertakes diverse works. The specifications were hitherto celled the Madras Detailed Standard Specifications. They have been in vogue for over several decades. The tender conditions are as per the Appendices in Section IV. Sri Raghuram, learned counsel for the petitioner assails that the State being the dispenser of largess in vast scale and the conditions offered are the standard forms, the petitioner has been left with little choice except either to abide by the terms of the specifications or forego his privilege to enter into favourable relations with the Government Thereby there is no equal bargaining position between the petitioner and the State. The mutuality or consensus ad idem is absent. The terms are non-negotiable. Therefore, the scope of bargain is unmeaning-ful. There is an element of economic coercion either “to accept the dotted lines of the specifications offered by the State or leave the contract.” Not only the clauses in the contract, are inherently suspect but also lack mutuality apart from absence of meaningful bargain between dominant State and the recipient citizen. The offending contractual clauses require strict scrutiny. The impugned Clause 11 is illusory; Clause 29 confers arbitrary power either to permit or to negate at the arbitrary discretion of the Executive Engineer; Clause 59 exculpates the contractual liability or limit the liability of the State imposing either exempting the State without recompeasating the citizen for the damage caused or loss suffered on account of the inaction, non-performance or under-performance on the part of its officers unless petitioner guccumbs to extra constitutional terms. It thereby cripples the petitutioner's right to an avocation under Article 19(I)(g). The contractual clauses are not only arbitrary but are unfair, unjust and unconscionable violating Article 14 of the Constitution, but received strenuous resistence from the learned Government Pleader.

23. Before angulating into the contentions raised, it is profitable to portray the march of law made in the U.S.A, U.K, and continental countries in the annals of bilateral relations between persons inter se. In the U.S.A, the standard form contracts are called “Contracts of Adhesion”. Assistant Professor of Law Todd D. Rakoff of Harvard University under the caption “Contracts of Adhesion: An essay in Reconstruction” published in (1982-83) 95 Hav. BR p. 1174 has surveyed the development of law. It is unique in modern commercial life. He expounded and criticised the existing thought on the subject. He attempted to develop a synthesis bet-ween the social phenomena and the legal doctrinaire on the standard form contracts. The traditional approach to the standard form contracts was first laid down in Lewiv v. Great Western Railway 157 Eng. Rep. 1427—Ex. 1860 decided by the Court of Exchequer is a leading authority. In an action to recover damages for loss of parcel in transit by the western Railway, the defence by the railway was the singrature on consignment form supplied by the Railway Board. But the plaintiff resisted pleading that he did not read the paper and he merely signed it and, therefore, he is not bound by the conditions. That was repelled by the Barnos unanimously. Baron Bramwell laid down that-II do not say that there may not be cases where a person may sign a paper and yet be at liberty to say, I did not mean to be bound by this,’ as if the party signing were blind, and he was not informed of its contents-he should never be allowed to set up such a defence.” Chief Baron pollock's statement is more terse. He states thus:

“The plaintiff ought not to be allowed and to say that he signed it but he did not mean to be bound by it.”

24. This principle was extended and applied rigorously in laissez faire economy. But Prof. Rakoff says at page 1189 that the rigorous application of the traditional doctrine to contracts of adhesion generates in modern circum-stances “so many unjust results that it can no longer be justified as the tolerable cost, of applying a general system of rules.”

25. Section 2-302 of the Uniform Commercial Code was commented upon by Senior Law Lecturer N.F Ellinghaus of University of Melbourne dealing with unconscionable clauses of the contract. Prior to amendment in 1979 introducing Section 211 of Restatement (second) of Contracts entitled “Standardized agreements” which reads thus:

“(1) Except as stated in sub-section (3), where a party to an agreement signs or otherwise manifests assent to a writing…. he adopts the writing as an integrated agreement with respect to the terms included in the writing.

(2) Such a writing is interpreted wherever reasonable as treating alike all those similarly situated, without regard to their knowledge or understanding of the standard terms of the writing.

(3) Where the other party has reason to believe that the party manifesting such assent would not do so if he knew that the writing contained a particular term, the term is not part of the agreement”

26. Commenting on the amendment, Prof. Rakoff stated that “If the presumption of enforceability is retained, it threatens to continue generate undesirable results.” He states at page 1191 that:

“This expansion is made manifest by the ‘explanatory comment, which states that reason to believe that the adherent would not knowingly have signed may be inferred from the fact that the term is bizarre or oppressive, from the fact that it eviscerates the non-standard terms explicitly agreed to, or from the fact that it eliminates the dominant purpose of the transaction.”

27. At page 1193 he states that:

“In the last decade or two, courts analyzing contracts of adhesion have applied the categories of “public interest” and “superior bargaining power” to a substantially broader set of situa-tions than would fit within the analogous doctrines of ordinary contract law concerning businesses affected with a public interest” and transactions tainted by “economic duress.”

28. He traced out in the article the Private Law Solution propounded by Prof. Karl Llewellyn and later on Public Law approach propounded by Professor Aurther Leff and Slawson in the context of applicability of the contracts of adhesion to the changing social conditions. At page 1215 he states that:

“The problems in Leff's and Slawson's analyses are fundamental, and indeed would seem to inhere in any attempt to justify from a public law perspective the proposition that form terms have some initial, yet often defeasible, validity. The public law model foeuses on the aggregate ordering of standardized transactions; but once the existence of a “public” issue can be found in the mere presence of a mass transaction, there appears to be no reason to let a private party stipulate any form term. Efforts to overcome this problem by some notion of delegated authority are forced. The supposed delegation is not based on any actual event, and considering would run counter to basic public law notions: legitimate governmental bodies should be disinterested in fact and should also be subject to role-defining rules and rituals that encourage consideration of the public interest.”

(Emphasis supplied)

29. In Chapter IV, “Toward the Development of New Doctrine”, at page 1249 he states that there exists:

“Gross Inequality of bargaining power” or the like (in the usual sense of a wide disparity of economic resources) ought not to be a prerequisite to finding a contract of adhesion Put simply, the prac-tice of standard form contracting is not based on the exercise of pre-existing market power.”

30. All that is necessary is whether the presence of the correlative social role of the drafting party and adherent is available in equal terms is the test. The doctrine of unequal bargaining power, the doctrine of unconscionability, “unlust in some sense”, etc., were considered and formulated doctrines for applying the amended 211 Restatement (second) of contracts.

31. In his “The Bargain Principle And Its Limits” published in (1982) 95 Har. L.R page 741, Prof. M.A Eisenberg quotes Prof. Arthur Leff from the latter's article “Unconscionability of the Code” published in (1967) 115 U. Pen. Law Review 485 at 494 stating that:

“The purpose of contract law is not simply to create conditions of liability, but also to respond to the social process of promising;.”

32. He states that since the law does not enforce a promise as such, a legal analysis of bargain of promises must start with a question whether such promise is enforceable at all. He further quotes Arthur Leff analysing the distinction between procedural and substantive unconscionability. Procedural upconsclonability is fault or unfairness in the bargining process and substan-tive unconscionability is fault or unfairness in the bargaing outcome—that is, unfairness of terms. Quoting S. 208 of the Restatement (Second) of Contracts, he states at page 752 that:

“Over the last fifteen years, however, there have been strong indications that the principle of unconscionability authorises a review, of elements well beyond unfair surprise, including, in appropriate cases, fairness of terms.”

33. He further states that:

“Theoretically it is possible for a contract to be oppressive taken as a whole, even though there is no weakness in the bargaining process.”

34. Professor Eisenberg propounds the basic test thus:

“Whether the clauses involved are so one-sided as to be uncons-cionable under the circumstances existing at the time of making of the contract—The principle is one of the prevention of oppression and unfair surprise—and not of disturbance of allocation of the risks because of superior bargaining power.”

35. He further states at page 799 that:

“Over the past thirty years a new paradigmatic pnnciple-uncons-cionability—has emerged. This principle explains and justifies the limits that should be placed upon the bargain principle on the basis of the quality of a bargain.”

36. At page 800, he states that:

“The paradigm (unconscionability) must be articulated and extended through the development of more specific norms to guide the resolution of specific cases, provide affirmative relief to exploited parties, and channel the discretion of administrators and legislators. In accomplishing this task, it now appears that the distinction between procedural and substantive unronscinnability,’ which may have served a useful purpose at an earlier stoge, does not provide much help once the relatively obvious norms of unconscionbilty, such as unfair surprise, have been articulated. Development of more specific norms must instead proceed by the identification of classes of cases in which neither fairness nor efficiency supports the application of the bargain principle—an effort that can be guided in part by the reconstruction and extension of existing contract doctrines.”

(Emphasis supplied)

37. He concludes that:

“Increase in the complexity of some areas of law may be desirable, if it accurately mirrors the increased complexity of social and economic life. Placing limits on the bargain principle involves costs of administration. Failure to place such limits, however, involves still greater costs to the system of justice.”

38. M.P Ellinghaus, Senior Law Lecturer of University of Melbourne in his “In defense of Unconscionability” (1968-1969) 78 Yale Law Journal page 757 at 766 states that—

“The relevance of the respective bargaining positions of the parties to the issue of unconscionability is beyond dispute, although to ask the draftsman for a comprehensive statement of precise nature and scope of this relevance.”

39. He states further at page 767 that bargains

“struck between seeming equals which, on closer investigation, turn out lopsided because of particular circumstances of the case.”

40. He further expressed the view that the test of a reasonable or average man is to be applied in preventing exploitation of the under-privileged (vide pages 768 to 774). He ends up his discussion at page 814 that the doctrine of “unconscionability is a residual category of shifting content and expansible nature,”

41. Section 138(2) of the German Civil Code provides that “a transaction is void when the person exploiting the distressed situation, inex-perienced, lack of judgmental ability, or grave weakness of another to obtain grant or promise or pecuniary advantage—which are obviously dispropor-tionate to the performance given in return.” The same is the law in Article 1974 of the Civil French Code.

42. As regards the development of law in the U.K common law has long been familiar with the attempt of one party to the contract to insert terms excluding or limiting his liability which would otherwise be his. Issues arising by such exclusion or limiting liability received stimulation by the use of standard form contracts. To put a nail on the attempts of avoidance or limiting the liability by the dominant party due to lack of mutulity or equal bargaining power, Courts have developed the doctrines of “The fundamental breach of a contract” that goes to the root of the contract; “Reasonableness of the terms”; “unfair terms”; “implied terms”; “just and reasonable doctrine”. The need to traverse the ratio behind these principles became redundant due to legislative interposition and incorporation of them in Unfair contract terms Act, 1977. Cheshire. Fifoot and Furmston in their “Law of Contract”, 11th Edition (1987), in Chapter VI under the heading “Excluding and limiting terms” also dealt at length at pages 149 to 188. At page 187, it is stated that the Unfair Contract Terms Act does not stand alone—indeed it forms part of a worldwide pattern. In the past 15 years, many countries have sought to tackle the problems of standard form contracts, inequality of bargaining power and exemption clauses by legisla-tion The Unfair Contract Terms Act is clearly a major work and more comprehensive in scope. At page 178, it is stated that it is for the person alleging that a term or notice is reasonable to show that it is (vide S. 11(5) of the Unfair Contract Terms Act). With regard to the question whether the terms are reasonable in relation to Sections 6 and 7 under the Unfair Contract Terms Act, Sec. 11(2) states that Schedule IT thereof should be looked into which provides five guidelines. They are as follows:

“(a) the strength of the bargaining positions of the parties relative to each other, taking into account (among other things) alternative means by which the customer's requirements could have been met;

(b) whether the customer received an inducement to agree to the term, or in accepting it had an opportunity of entering into a similar contract with other persons, but without having to accept a similar term;

(c) whether the customer knew or ought reasonably to have known of the existence and extent of the term (having regard, among other things, to any custom of the trade and any previous course of dealing between the parties);

(d) where the term excludes or restricts any relevant liability if some condition is not complied with, whether it was reasonable at the time of the contract to except that compliance with that condition would be practicable;

(e) whether the goods were manufactured, ceased or adapted to the special order of the customer.”

43. Section 1(4) of that Act provides no immunity of liability for breach of a duty or obligation which may arise directly or vicariously, whether intentional or inadvertent. Section 9 provides that the contract term has to satisfy the the requirement of reasonableness despite the termination of the contract either by breach or by a party electing to treat it as repudiated. Further amplifies that despise affirmation by a party entitled to treat the contract as repudiated, still the requirement of reasonableness in relation to that contract has to be satisfied. (Other sections are not relevant. Hence omitted).

44. Lord Denning in his “The Discipline of Law” at pages 45 to 48, under the Chapter “Exemption Clauses and Presumed Intent” traces the doctrine of presuned Intent. He states that the tendency is to apply the above doctrine rather than that of fundamental breach. He poses the question for arri-ving at the presumed intent of the parties thus; “You must ask this question: It the parties had envisaged the situation which has happened, would they, as reasonable persons, have supposed that the exemption or limitation clause would apply to protect the wrongdoer?……………Although the clause in its natural and ordinary meaning would seem to give exemption from or limitation of liability for a breach, nevertheless the Court will not give the party that exemption or limitation if the Court can say: “The parties as reasonable men cannot have intended that there should be exemption or limita-tion in the case of such a breach as this” In so stating the principle, there arises in these cases “the figure of the fair and reasonable man”; and spokes-man of this fair and reasonable man”; as Lord Radcliff once said, “must be the Court itself.”

(Emphasis supplied).

45. In Suisse Atlantique Societe D ‘Agreement Maritime S.A v. Rotter-damsche Kolen Centrale 1967 (1) AC 361, Viscount Dilhorne at p. 393, held that in relation to a fundamental breach one has to have regard to the character of the breach and determine whether in consequence of it the performance of the contract becomes something totally different from which the contract contemplates. The House of Lords considered the effect of the fundamental breach from the perspective of one of interpretation of terms of contract but not as rule of law. This theory was first propounded by Pearson, L.J in U.G.S Finance Limited v. National Mortgage Bank of Greece and National Bank of Greece, S.A This ratio was upheld in Suisse Atlantique Societie's case (8 supra) and the exclusion or limitation clauses in a contract was so construed as not to relieve the party from obligations of the contract. In Central Inland Water Transport Corporation Ltd. v. Brojo Nath (1986) 3 SCC 156 , AIR 1986 SC 1571 for short, “the Water Transport case”, the Court traced the development of the doctrine of reasonableness or fairness of the terms of the contract in particular of Lord Denning; Lord Diplock's latest view in Photo Production Ltd. v. Securlcot Transport Ltd. 1980 A.C 827 and received approval. It needs no reiteration. I would deal the effect of the ratio of Water Transport Case at the later stage.

46. In George Mitchell (Chesterhall) Ltd. v. Finney Lock Seeds Ltd. (1983 (2) AC 803 (HL)) the facts are that the plaintiff ordered supply of Fenney's Late Dutch Special Cabbage seeds from the defendants but was supplied with different seeds with the invoice from containing exclusion of liability. After plantation it germi-nated and grew uncommercial one which was ploughed out. On filing suit for damages, the defence was of the clause excluding the liability except the value of the seeds. 1 he suit was decreed. On appeal, considering the exemp-tion orlimitation clauses in the context of Sale of Goods Act, 1979, and Unfair Contract Terms Act, 1977, Lord Bridge of Harvich, speaking for the Board, held at page 816 that the nature of the breach and the circumstances under which it occurred cannot possibly be excluded from and that regard must be had to all the circumstances of the case. In that context of applying the doclrine of “fair and reasonableness or relative bargaining strength” under Sec. 55(4) of the Sale of Goods Act, 1979 and under sub-section (4) of Sec. 11 of Unfair Contract Terms Act, 1977, it was held that the decisive factor however, appears from the evidence “clearly recognises that the limitation of the liability imposed by the relevant conditions would not be fair or reason-able, etc.” Similar development of law was made by Israeli Standard Con-tracts Law, 1964, Similar law was made by Sweden in 1971, Denmark in 1974, Federal Germany in 1976; France and Finland in 1978, etc. (Vide footnote 19 on page 187 of Chshire, Fifoot and Furmston's “Law of Contract”, Eleventh Edition). It could thus be seen that in the U.S.A, U.K and the continental jurisprudence, the attempt of the contracting parties to impose unfair or unreasonable terms, excluding or limiting the liability resulted in injustice; the legislature has stepped in and relieved the parties from the unjust contractual obligations. The Courts have equally responded to evolve new principles to meet the demand for justice.

47. Dias in his Jurisprudence, 4th edition, 1976, at page 281, in Chapter IX, ‘Values’, stated that:

“The axiom upon which its rules traditionally developed is that there should be equality in the bargaining positions of the parties, and when that is lost the courts attempt to restore it. Thus, the public are at disadvantage as against commercial concerns when con-tracts for services are in “standard form”. There is no freedom to bargain; one has either to accept the terms set out or do without the service. Such a situation lends itself to abuse and, although the courts can do little once of the customer has appended his signature to the document, they have striven to give such relief as they can.”

48. In India to, the legislature has stepped in some areas and passed Usurious Loans Acts, Debt Relief Acts, Tenancy Laws and relieved the debtors, the tenants or the weaker parties from oppressive contractual terms either wipe out the debts altogether or limited the bargaining power or exclusionary clauses, etc. In the Water Transport Case (10 supra), the Court introduced the doctrine of ‘Distributive Justice’ into the the contratual arena in paragraph 83, holding that the doctrine of Distributive Justice is speeaking through the words couched in Part IV of the Constitution. It is trite to traverse once over the ground covered in the Water Transport Case. Realising the slowness with which the legislature steps in, emphasised the need of the Court to interpose and intrepret the laws in paragraph 90 at page 1610 with questions addressed thus:

“Should then our Court not advance with the times? Should they still coutinue to cling to outmoded concepts and outworn idealo-gies? 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 nineteeth Century theories? Should the strong be permitted to push the weak to the wail? Should they be allowed to ride rough-shod over the week? Should the courts sit back and watch supinely while the strong stample 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”, etc.

49. Thus, it could be seen that the principles of private law emerged in the American, Angle-Saxon and Continental Jurisprudence was applied and extended to the cases hedged with contractual relations arising under the Constitution to advance Justice or to undo injustice as a step to usher in an egalitarian social order. Fair conducted is expected from parties and exception clauses are not an open “sesame” and exclusion of contractual liability should not be free pass to deviation without limitation from legal norms in particular when State deals with its citizens.

50. The question then is whether unequal bargaining power, unfairness in exclusion or limiting the liability of the State or incorporating arbitrary or unconscionable conditions in the contract are not liable to assailment of their validity under Article 14 of the Constitution? Undoubtedly, the Courts were reluctant to adjudicate in the proceedings under Articles 226 and 32 contractual obligations relegating the parties to the remedy of suit (vide Hari Shanker v. Deputy E & T Commissioner (1975) 1 SCC 737 , AIR 1975 SC 1121—But even in relation thereto, when the actions of the Slate offend fan play in action, namely, the principles of aud alteram partem, the Courts did intervene since the denial thereof offends equality of opportunity. Action of blacklisting a citizen without opportunity is an instrument of coercion to give up Constitutional right to enter contractual relations with the State, (vide E.E & C. Ltd. v. State of West Bengal (1975) 1 SCC 70 , AIR 1975 SC 266

51. The action was quashed.

52. In Sukhdiv Singh v. Bhagat Ram ((1975) 1 SCC 421 , AIR 1975 SC 1331) Mathew, J, in separate but concurrent judgment extended the limitations of contract of adhesion to the Indian Jurisprudence. In paragraph 93, it was held that the governing power wherever located must be subjected to the fundamental constitutional limitations. The need to subject the power centres to the control of the Constituion and the Constitution requires an extention of the concept of the State action it was further held that “the concept of private action where public functions are being performed”. It was also held at page 1358 that it is the growing tendency to protect individuals from contract of adhesion from overreaching terms often found in standard from contracts used by large commercial establishments. Judicial disfavour of contracts of adhesion has been said to reflects the measured need to protect the weaker contracting party against the harshness of the common law and the abuse of freedom of contract. Ray, C.J, speaking for majority, held in parugragh 33 that the statutory authorities cannot deviate from the conditions of service. Any deviation will be enforced by legal sanction of declaration by Courts to invali-date actions in violations of rules and regulations. The existence of the rules and regulations under statute is to ensure regular conduct with a distinctive attitude to that conduct as a standard. In that case the dismissal of an employee by a statutory authority under contract of employment was held to be violative of the principles of natural justice.

53. In Ramanna v. Airports Authority of India Ltd. ((1979) 3 SCC 489 , AIR 1979 SC 1628), a case under contractual relations of inviting tenders and acceptance thereof, Bhagwathi, J. (as he then was) while unsettling the contract given to a person who did not fulfil the conditions prescribed for offering the tender at page 1635 in paragraph 10 held that:

“It is indeed unthinkable that in a democracy governed by rule of law, the executive government or any of its officer should possess arbitrary power over the interests of the individaul. Every action of the executive government must be informed with reason and should be free from arbitrariness. That is the very essence of the rule of law and its bear minimum requirement. And to the application of this principle it makes no difference whether the exercise of the power involves affectation of some right or denial of some privilege.”

54. This principle was further extended in Kasturi Lal Lakshmi Reddy v. State Of J&K ((1980) 4 SCC 1 , AIR 1980 SC 1992), holding that the Government while dealing with public, whether by entering into contracts or granting other forms of larges, etc., cannot act arbitrarily at its sweet will. There are two limitations imposed by law which structure and control the discretion of the Government in this behalf, namely, the State has no absolute or unfettered discretion. ‘“Every activity of the State has a public element in it and must therefore be informed with reason and guided by public interests.” The award of contracts of granting of largess and their validity must be tested on the touchstone of reasonableness, and public interest. If the action fails to satisfy either test, it would be unconstitutional and invalid, in that case, the contract was unsettled on the touchstone of unreasonableness under Article 14.

55. In Air India v. Nargesh Meerza ((1981) 4 SCC 335 , AIR 1981 SC 1829) contratual conditions of service to terminate the service of airhostess on grounds of (1) marriage within the specified periods of service; or (2) first pregnancy; or (3) superannuation of 35 years of age was considered. While approving the first ground, Fazal Ali, J. declared that the second and third ground are subversive of dignity of the womanhood and, therefore, unreasonable and arbitrary. It contains quality of unfairness and exhibits naked despotism violating Article 14.

56. In Sudhir Chandra v. Tata Iron Steel & Co. (1984) 3 SCC 369 , AIR 1984 SC 1064 the contract of employment provided unfettered discretion to the employer to deny terminal benefits. Desai, J. held that absolute discretion is liable to be tested on reason, justice and fair-play. Unreasonableness, arbitrary actions and denial of right on that basis are characterised as “whim, fancy or sweet will” of the employer and it is a “hangover of the laissez faire days” and utterly inconsistent with the modern notions of fair industrial relations. It was also furrther held that absolute discretion uncontrolled by guidelines is antithesis of rule of law.

57. K.L Tripathi v. State Bank of India (1984) 1 SCC 43 , AIR 1984 SC 273 concerns with dismissal and held that even if a party bound himself by a contract, the contract which is violative of the principles of natural justice, is liable to be questioned under Article 14. Accordingly, enquiry, though conducted in terms of the rule but in violation of the principles of natural justice was held to be obnoxious to Article 14.

58. In Workmen v. Hindustan Steel Ltd. 1984 Supp SCC 551 dismissal of an employee without enquiry in terms of the Standing Order affects the livelihood. There-fore, it was held that the dismissal was arbitrary violative of the basic require-ment of natural justice.

59. In State of West Bengal v. Dinesh Bandhu Ghosh (1985) 2 SCC 358 , AIR 1985 SC 772 termination of the services of a permanent employee giving three months' notice or salary in lieu thereof in terms of the Regulations was held by Chinnappa Reddi, J. to be “vicious discrimination” and “a naked hire and fire rule” and the time is propitious to banish it altogether from employer-employee relation-ship. The writ was issued.

60. In his “The Constitutional Protection of Individual Rights: Limits on Government Authority” (Foundation Press), Professor. Laurence H. Tribe, in Chapter 16-6 at page 1000 states that when the action of the State “burdening fundamental rights, or suggesting prejudice against racial or other minorities— must be subjected to close analysis in order to preserve substantive value of equality and liberty.” At page 1002 in paragraph 16-7 it was further stated that the distribution of benefits or burdens in a manner inconsistent with fundamental rights must be subjected to strict scrutiny. Inequalities are particularly injurious when they interfere with either political or legal legitimacy.

61. The last of the landmark is the Water Transport Case. In this the concept of contractual relations under the Act vis-a-vis the instrumental-ity of the State has come up when Rule 9(i) was assailed as being violative of public policy under Sec. 23 of the Act. Contractual concept of “unrea-sonableness”, or unfairness in contractual terms, lack of bargaining power between employer and employee, the distributive justice, arbitrary exercise of power were gone into in meticulous analysis and declared that Rule 9(i) as violative of the public policy under Sec. 23 of the Act and thereby it is void.

62. A Division Bench of this Court, in A.P.S.E.B v. K.K Sugar Indusries AIR 1984 A.P 360 , 1984 (1) ALT speaking through my learned brother Kodandaramayya, J. held that when the authority exercised power unreasonably, the Courts can relieve the party from the effect thereof.

63. In Radhakrishnan Agarwal v. State of Bihar (1977) 3 SCC 457 , AIR 1977 SC 1496 also it was held that Article 14 imposes an obligation on the State's executive power under Article 298 and they carry corresponding obligation with the State. Article 14 regulates the organs of the State functioning tinder the Constitu-tion but a distinction was nude that it would be operative before entry into the contract. After the contract is entered into, it is no longer governed by the Constitutional provisions and the legality thereof is to be decided under the contract. In fact, the questions under consideration did not arise nor were factually decided (Vide paragraph 21 at page 1503). In fact, the decision was rendered during the time when the operation of Article 14 was suspended by exercise of the power under Article 359. Therefore, the ratio cannot be extended, in particular, after the march of law made with the latest Water Transport Case (10 supra). In Han Shankar's case (13 supra) also, this question did not arise. Equally, State of Naryana v. Joge Ram (1980) 3 SCC 599 , AIR 1980 SC 2018 relied on by the State, is also of little assistance to the State. In that case, the ques-tion was whether the auction held on March 27, 1967 for retail vending and cancellation thereof in terms of the auction notice and the rules are valid. It was held that since the cancellation was done in terms of the rules, the State was authorised to cancel the auction. H.M.K Ansari and Co. v. Union of India (1983) 4 SCC 417 , AIR 1984 SC 29 is also a case concerning the interpretation simplicitor of Clause 18 of the contract. The reasonableness thereof was not the subject matter of the issue. Accordingly, it extends little assistance to the State. Equally, Lakshmichand and Balchand v. State of A.P (1987) 1 SCC 19 , AIR 1987 S.C 20, also does not concern itself with regard to the point in issue. There also the construction on Clause 71 of the contract was in issue.

64. Accordingly, it must be held that the exercise of the power by the State or a statutory authority or an instrumentality must be conformable to justness, fairness, reasonableness and the terms of the contract must be fair and conscionable. It has no power to impose unconstitutional conditions. In bilateral relations between the State and the citizen, the parity is inher-ently unequal. His entering into a contract with standard form and massive clauses excites suspiction. Mutuality of the bargaining power between a dominant State and recipient citizen is a casualty. The procedure of negotia-tion is an unalterable formality, in particular, at the behest of the subordi-nate officers. The procedure of negotiation and bargaining, therefore, are neither efficacious nor meaningful. Unless the citizen/person agrees to the dotted lines printed contractual terms put forth by the State, he has no alternative except either ‘to take or leave the contract’. Absence of consensus ad idem, in strict sense, is a factor to be kept at the back of the mind of the Court. When the citizen complains of their constitutional invalidity, it is the duty of the Court to adopt strict construction of the terms of the contract to adjudge whether the insignia envisaged under Article 14 has been adhered to It is the duty of the State to abide by the rule of law under the Constitu-tion or to prevent violation thereof. The arms of Article 14 are long enough to unravel the State actions, not only legislative or executive but even contractual relations and relieve a party when the bargain is unconscionable cither due to weakness on one side, usury on the other or extortion or advan-tage taken of that weakness, when the relative position of the parties is such as prima facie to raise the presumption that unconscientious use of power has arisen and declare them to be arbitrary, unjust, unfair and unconscionable. Courts will not enforce the contract but strike down such contract or Clause or Clauses of the contract. In a complex web of disputed questions of fact, the Court in its proceedings under Article 226, would relegate the parties to have it adjudicated in the appropriate forum.

65. Imposition of unconstitutional conditions prevents exercise of lawful avocation or profession assured under Article 19(1)(g) of the Constitution. Section 27 of the Act declares such a contract to be void. Every citizen has right to dignity of person and economic and social justice assured in the preamble of the Contitution. Entering into contractual relations with the State would enable a citizen to secure economic justice. Deprivation thereof by imposition of unconstitutional conditions is opposed to public policy within the meaning of Section 23 of the Act. Thereby, the contract also becomes void. Let us, therefore, consider the clauses in seriatim.

66. Second paragraph of Clause 11 of Specifications provides thus: “Tenderers must satisfy themselves by personal examination of the site of the proposed work by examination of the plan and specifications and by other means as to the accuracy and sufficiency of the statement of competence and all conditions affecting the work and shall not at any time after the submission of the tender, dispute or complain of such statement of competence, nor assert that there was any misunder-standing in regard to the nature or the quantum of the work to be done nor in the consequence, apply for extension of time for comple-tion beyond the agreement date”.

67. The first paragraph is not relevant to the point in dispute. It is an enabling provision to the advantage of an intending contractor. A reading by itself does lead to the conclusion that it is fair one and per se is not arbitrary. But the clauses therein must be read in conjunction with the timelag between the date inviting the tenders and the last date to submit tenders. The examination is for fruiful purpose of self-satisfaction by the intending contractor of the details thereof including the site etc. - and not an empty formality exercise in vacue. Sufficient time-lag is implicit depending upon the nature of the contract, the quantum of the work to be executed and other relevant attending circumstances. Therefore unless sufficiently longtime is given between the date of unilateral calling the tenders and the last date to submit tender, the clause remains to be a mere paper statement affording no adequate opportunity to the intending contractor. Paragraph 2 by itself connot be declared to be per se arbitrary, but on a given facts and circumstances it has to be tested with reference to the time-lag as indicated above and given the relief to the parties.

68. Clause 59 is part of the Chapter titled “H. Date of Commence-ment, Completion, Delays, Extensions, Suspension of Work and Forfeiture”. It consists of three paragraphs. Paragraph I begins with the exclusionary clause thus;

“No claim for compensation on account of the delay or hindrance to the work from any cause whatever shall lie except hereinafter defined”.

69. Then “procedure was provided for extension of time, etc. We are not concerned with regard to the rest of the clauses. The relevant portion of the Supplementary Specifications was already extracted. It is true that power is given to the Executive Engineer to extend time for the reasons beyond the control of the contractor. Power also was given to the State to make altera-tions or additions to the contract already entered into and procedure also has been provided to claim compensation within 14 days for unreasonable acts on the part of the Executive Engineer. The scope of Clause 59 first para-graph, the Supplementary Specifications in Schedule A are to be read in the context of its effect, on the right of the contractor but not how the Executive Engineer exercises his discretionary power. The limiting or self relieving clauses are “inherently suspect” and “fertile source for extra-contractual behaviour of the parties or the officers”. The contractor could always be kept at the whim, caprice, or beck and call of the officer concerned, do hors the contractual relations. The Clauses have over reaehing or penal conse-quences hovering as a ghost on an honest contractor to strictly adhere to the terms, of the contract. Due to the self-relieving or limiting clause, the contractor will always have to look tothe favourable disposition of the officer/officers concerned, sprouting seeds of corruption, undermining the quality of the work which affects the public interest. Invariably, if not always, it is the public that suffers and the public exchequer would be exposed, to avoidable expenditure. In Shivaji Rao N, ratil v. Mahesh M. Gosavi (1987) 1 SCC 227 , AIR 1987 SC 294 at 311 in paragraph 51, Sabyasachi Mukharji, J. held that;

“This Court cannot be oblivious that there has been a steady decline of public standards or public morals and public morals. It is necessary to cleanse public life in this country along with or even before cleaning the physical atmospheres. The pollution in our values and standards is an equally grave menace as the pollution of the environment. Where such situations cry out the Courts should not and cannot remain mute and dumb”.

70. Clauses also act as a shield for inaction (lethargy) non-performance or under-perfcrmance on the part of the officer. Therefore, limiting or self-relieving obligations on the part of the State are self-exculpatory and breed-ing source to extra-constitutional behaviour, omission to recompense a contractor of the damages or loss suffered due to inaction, non-performance or under-performance or substantial unilateral variation of the terms of the contract are obnoxious to justness, fairness or reasonableness offending Article 14. Thus considered, I am constrained to conclude that the opening part of first sub-clause of Clause 59 and the supplementary specifications already extracted, are arbitrary, unreasonable, unjust, unfair and unconsctonable.

71. Clause 29 forms part of Chapter D of the Specifications under the caption “Materials and Workmanship”. Clause 20 provides that the contractor shall use best quality of the material, etc. Clause 21 deals with proportions of use of material for the execution of work. Clause 22 deals with measurements and mixing. Clause 23 deals with data. Clause 24 deals with the lay-out of material stacks. Clause 25 deals with the source of purchase of materials and stores and the liability to supply by the Govern-ment is governed by Clause 26. Clause 27 gives power for inspection and rejection of the defective material. Clause 28 provides power to give directions in writing by the Executive Engineer giving specified resonable time to remove the defect, shrinkage and other faults noticed. Clause 29 which is material, empowers the Executive Engineer to give his decision is those matters and it “shall be final and conclusive.” The contention in this regard is that such a finality has been excluded under Clause 73 from the purview of arbitration. Therefore, the Executive Engineer, being a party to the contract and responsible for the execution of the work, so making his decision final and conclusive and binding on the petitioner is an arbitrary clause given by the State unto itself preventing the petitioner-contractor to agitate the correctness of the decision so given, It., is resisted by the learned Government Pleader by raising twofold contentions. It is firstly contended that Part D relates to procedure for testing the material and refection there-of. For. expeditious execution of the works of importance taken up by the State and in the public interest those conditions have been imposed. The decision of the Executive Engineer is subject to an appeal to the Superintend ing Engineer. Under the latter part of Clause 29. the decision of the Superintending Engineer was made final and conclusive, Therefore provid-ing right of appeal against the orders of the Executive Engineer would cure the initial defect of conclusiveness of the findings of the Executive Engineer from the vice of being arbitrary. Alternatively it is contended - that the petitioner made no objections to any of the decisions given by-the Executive Engineer during the process of working out the contract. Therefore, he is now estopped to question the same.

72. ???ft is true that the petitioner did not raise any objection against the decisions given by the Executive Engineer during the course of working out the contract. Though the decision of the Executive Engineer, is final and conclusive and is binding on the contractor, the latter part of Clause 29 provides;

“In the case of any differences between the Executive Engineer and the Contractor on matters relating to materials, workmanship, removal of improper work, interpretation of contract, drawings and contract specifications, mode of procedure and the carrying out of the work, the contractor shall have a right of appeal to the next higher authority, viz., the Superintending Engineer of the circle, and the decision of the latter shall be final and conclusive”.

73. Thus, it is clear that the Executive Engineer is empowered to effectively supervise the work and is entitled to give on the spot, during the course of execution of the work, decisions to reject the substandard material, etc. If a contractor is aggrieved, right of appeal is provided to the Superintending Engineer. Thereby, it is seen that the decision of the Executive Engineer is not final. This clause is incorporated in the public interest and is not arbitrary. But the more important and serious infirmity in the covenants is excluding the decisions of the Executive Engineer or of the Superintending Engineer in respect of the disputes relating to the matters covered under Clauses 20, 22.27(c), 29, 36, 37 and 40 of the Preliminary Specifications from the purview of the arbitration. It is true that for the expeditious execution of the work and to prevent use of substandard or defective material; to prevent faulty work, power has been given to the Executive Engineer to exercise his discretion and I find no justification to find fault with it. The Executive Engineer and the Superintending Engineer are the subordinates to the State. Their decision shall not be made final and conclusive but must be left to a decision, though may be raised at a later stage by an independent authority, viz., the Court or an independent arbitrator or panel of arbitra-tors. It is well settled that no one shall be a Judge of his own cause. Giving finality to a decision of the Executive Engineer or on appeal by the Superintending Engineer is obnoxious to fairplay offending Article 14 and is an unfair procedure offending Article 21 of the Constitution. The mere omission to raise objection to the decisions of the Executive Engineer does not prevent the petitioner to raise the constitutional validity of the clauses in the contract or the procedure provided thereunder. Accordingly, I hold that Clause 29 of the Specifications is not arbitrary. But the exclusion of the decisions of the authorities mentioned there under from the purview of arbitration under Clause 73 is invalid offending Articles 14 and 21 and is in excess of the executive power of the State.

74. Clause 73 is known as arbitration clause. It empowers either party to give notice of the dispute or difference to a named arbitrator or a panel of arbitrators. Procedure has been prescribed to adjudicate and giving award within a specified time of four months from the date of enter-ing upon reference, etc. The contention of the petitioner is that the named panel of arbitrators, viz., respondents 2 to 4 are Government Officials. They are not free from bias or the possibility of bias cannot be ruled out. Objec-tivity is a casualty or it creates reasonable suspicion to the independence of such arbitrators. The Court would exercise its power by removing the officers and to give directions to appoint independent arbitrator or panel of arbitrators. It is violative of fair procedure. The State has resisted and the learned Government Pleader has contended that the works of certain valua-tion are now taken out from the purview of arbitration and the right to sue is provided. The arbitrators, though officials, would independently go into the evidence and consider the same and make the award. In case of any bias that itself is a ground to declare the award as invalid under Section 30 of the Arbitration Act or if bias is noticed during the proceedings, that itself is also a ground to ask the Civil Court by a petition, to remove him and appoint in his/their place another arbitrator/arbitrators. If the award itself is vitiated for any other reason it is subject of a decision of the Court under the Arbitration Act, 1970. Therefore, Clause 73 is not arbitrary or invalid.

75. Respondents 2 to 4—panel of three arbitrators are Government Officials. The petitioner has agreed them to be arbitrators.

76. Russel on Arbitration, 20th Edition (1932), in paragraph 24 of Appendix of Arbitration Act, 1950, at page 471 provides that despite the agreement, the party can seek leave of the Court to revoke the authority of the arbitrator or for appointment of an impartial arbitrator. At page 144, it is further provided that prior knowledge that the arbitrator might not be capable of impartiality is not a ground to refuse the application to relieve the party from the contract. In Amarchand v. Ambica Jute Mills AIR 1966 SC 1032, it was held that under Section 5 of the Arbitration Act,

“it is enough to show that there is reasonable ground for apprehension that the arbitrator will be biased” for removing him. In U.P Co-op. Federation v. Sunder Bros., Delhi AIR 1967 SC 249 it was further held that “it is obvious that a party may be released from the bargain if he can show that the selected arbitrator is likely to show bias or by sufficient reason to suspect that he will not act j fairly.” In Chief Engineer Panchayat Raj Dept. v. B. Balaiah . 1985 (1) APLJ 224, a Division Bench of’ this Court to which T am a member, has emphasised the imperativeness in respect of Government contracts to assign reasons in support of the award. Justice Deshpande in his article, “Why a non-speaking Award Bad” 1987 Indian Bar Review, Vol, 14, p. 44 also has emphasised the need for assigning reasons in support of the award. “Fairplay in action” insists on making aspeaking order on pain of voidity or invalidity, of an administrative action. It is a facet of fair procedure envisioned under Article 21 to subserve the right to life. Reasons are the route to unlock the mind of the maker and non-speaking order is ‘inherently suspect’ besides being arbitrary obnoxious to Article 14. Arbitrator is a quasi-judicial authority. Assigning reasons in support of a conclusion or a finding is a facet of fair and just procedure. The finding or the conclusion is the basis for a decision, award or a decree. Absence of reasons affects its validity and thereby becomes an unfair and un-just procedure, affecting the right to livelihood of a contractor offending Article 21. Thus, the legitimacy of immunity from reasons hitherto claimed by the arbitrator has been irretrivably eroded, in particular, with the march of administrative law. It is entirely different to a case of private arbitration agreeing to an Award with or without reasons In an Article “Arbitrating State Contracts” by D.C Singhania reported in Lex Et Juris, a law Magazine of October, 1987, it is stated that in the case of Govermnent contracts that the arbitrators shall normally record their adjudication with reisons. He further stated that the Government Official-arbitrator as he looks for the promotional chances, his bias in favour of the Government cannot be ruled out. He states that the matter has been referred to a Constitution Bench of the Supreme Court in a leave petition in Bhoj Raj Dalmia v. Delhi Electricity Supply Undertaking. Appointment of and impartiality of a Judge or Tribunal coupled with objectivity are sine quo non for fair procedure. Justice should not only be done but seemingly appears to have been done. He must be “able toact above suspicion of unfairness……………without any inclination of/or bias towards one side or the other in dispute”. (Vide A.P.S.R.T.C v. Satyarnarayam Transport AIR 1965 SC 1303. The apprehension that the official arbitrator may always be hunted with the idea of his career prospects of promotion or his objective and unbiased adjudication against the State would be an inhibi-tive factor cannot with reasonable certainty be removed from the mind of a suitor. In State of Karnataka v. Sri Rameshwar Rice Mills (1987) 2 SCC 160 , AIR 1987 SC 1359 it was held that the interest of justice and equity require that where a party to a contracts disputes the committing of any breach of the condition the adjudication should be by an independent person or body and not by the other party to the cotract. Undoubtedly, the procedure has been provided under the Arbit-ration Act, 1940, for removal of an arbitrator or setting aside the award on the ground of bias by an arbitrator. But when it could be avoided at its there shold mere invocation of remedial procedure at a later stage is not a ground to deny the remedy to a party.

77. From the above perspective, I am inclined to hold that in matters relating to Government contracts, fair procedure is that the disputes shall be referred to an independent arbitrator or panel of arbitrators of “their known integrity”. Accordingly, I hold that the procedure provided in Clause 73 to refer to an arbitrator or a body of official arbitrators, is an unfair pro-cedure offending Article 21 of the Constitution.

78. With regard to assailment or illegality of Clause 62(b), power has been given to deduct part amounts pending execution of the contract. It is an interim measure. Therefore it is not arbitrary.

79. As seen, the Specifications have been in existence for over several decades preceding the Constitution and nearly 37 years after the Constitution. The Government is under the belief that they are constitutionally valid. For the first time, now the point has been raised. Therefore, though I hold that the offending clauses are arbitrary violating Article 14 or 21 of the Constitution, in the public interest, I hold that the ratio now laid down would be made applicable prospectively to the contracts to be executed from hereafter. In Golak Nath v. State of Punjab AIR 1967 SC 1643 the Supreme Court has applied the doctrine of prospective overruling to validate the acts done preceding the date of judgment. The same ratio would apply in this category of cases as well. By application of doctrine of, prospective operation, the public mischief could be avoided and undue burden on the public exchequer could be minimised. I, therefore, hold that the decision only applies to the petitioner's contract and to the contracts to be executed hereinafter.

80. The disputed questions of facts of this case have been left out from consideration and I relegate the petitioner to the arbitration agreed under Clause 73 of the Specifications. But the result of the above discussion leads to the couclusion that the petitioner hardly was left with only six days' time to make inspection and to test the quality of the raw-material pointed out by the State; as a result, the procedure under Clause 11 is only illusory and a pretence of opportunity with no meaningful result. Thereby he has been denied of adequate opportunity to have tested the material and their quality before making an offer. Dispite the petitioner's omission to object to the rejection of the material by the Executive Engineer, the petitioner is not precluded to agitate his claim before the arbitrator. The official panel of arbitrators is invalid. Therefore, the petition is relieved of his right to lay his claim before the official panel of arbitrators. The respon-dent is directed to give an option to the petitioner either for a solitary arbi-trator or for a panel of arbitrators depending on his choice and the respond dents are directed to appoint a retired judicial officer or panel of officers to arbitrate the dispute under the contract. It is open to the petitioner to lay - his claim afresh before such arbitrator or panel of arbitrators who would consider and decide according to law.

81. Before parting with the case, I place on record the valuable assistance given by Sri Raghuram, the learned counsel for the petitioner, Miss Lakshmi Devi, the learned Government Pleader and, in particular, to Sri V. Venkataramanaiah, Sri N. Subba Reddy, the learned Government Pleader and Sri M.R.K Choudary who assisted this Court as amicus curiae, at request.

82. The writ petition is accordingly allowed, but in the circumstances, without costs. Advocate's fee: Rs. 500/-