Blurred Line Between Public Law and Private Law

It is no longer res integra that even in contractual disputes between the State and a Private party, the State has to stand the test of Article 14 of the Constitution which enjoins the state to act in a manner which is fair, just, equitable and devoid of the vice of arbitrariness. The law on this issue lends its existence to a chequered history stemming from the ratio laid down in Radhakrishna Agarwal and Ors. vs State of Bihar¹ wherein the Supreme Court emphatically held that a dispute which is purely contractual in nature, between the State and private party, then no Writ can be issued under Article 226 of the Constitution, and the parties must avail remedy in private law. However, the position of law, thereafter, underwent a radical change when in Kumari Shrilekha Vidyarthi and Ors. vs State of UP and Ors. ², the Supreme Court held that even in contractual sphere between the State and private citizen, the State must stand the test of Article 14 and its actions arising out of a contract, could be challenged by invoking the Writ jurisdiction of High Court if it is acting arbitrarily. This position of law has been affirmed by a catena of judgments³, more recently by a three-judge bench of the Supreme Court in Subodh Kumar Sing Rathour vs The Chief Executive Officer and Ors⁴

A Writ Court, i.e. High Court, has been Constitutionally vested with powers under Article 226 to hold the State accountable for its actions by issuing various Writs, more specifically Mandamus. A Writ is a remedy in Public Law which is issued against Public Authorities viz. the Government or its instrumentality when their actions are challenged on account of violation Article 14 or fundamental rights. While there is no quarrel to the proposition that an arbitrary action of the State can be examined by the High Court in its Writ Jurisdiction, however, can an arbitrary action of State, which is a subject of arbitration proceedings, can be examined by the Arbitrator by invoking public law principles? Can an Arbitrator, who is a creature of contract and bound by the terms of the contract in stricto sensu, invoke powers which are in the realm of public law, and vested exclusively in a Writ Court i.e. High Court? Can a Arbitrator say that the certain clause in a contract is bad in law or a certain action taken by the State who is one of the parties to the contract is arbitrary?

Blurred line between Public law and Private Law

The Supreme Court and various High Courts are unanimous in their opinion that the distinction between public law and private law is getting blurred. Whether a matter belongs to the field of public law or private law has to be discerned from analyzing the factual matrix of each case and no straight jacket formula can be applied⁵. The remedy under public law is invoked, essentially, to enforce a public duty. For example, a Writ of Mandamus can be issued against a government or its instrumentality to hold it accountable for its actions, which makes it extremely crucial that the authority against which the Writ Jurisdiction is invoked is a “State” within the meaning of Article 12 of the Constitution i.e. it is a public body, government or its instrumentality, which has to be discerned from the facts and circumstances of each case. Therefore, it is imperative to first overcome the threshold embodied in Article 12 of the Constitution before invoking the public law remedy of Writ Jurisdiction. The test for determining whether a particular entity falls within the meaning of ‘State’ embodied in Article 12 of the Constitution, was enunciated in a Constitution Bench judgment, in the matter of Ajay Hasia and Ors vs Khalid Mujib Sehravardi 6. The Constitution Bench of Supreme Court laid down the following determining factors-

If the entire share capital of the corporation is held by the Government, then it would indicate that the corporation is an instrumentality or agency of Government.
Where the financial assistance of the State is so much as to meet almost entire expenditure of the corporation, this would indicate that the corporation is impregnated with a governmental character.
If the corporation enjoys a monopoly status which is the state conferred or state protected.
Existence of a deep pervasive State control would also indicate that eh corporation is a state agency or its instrumentality.
If the functions of the corporation are of public importance and closely related to governmental functions, it would be relevant factor in classifying corporation as an instrumentality of agency of Government.
If a department of government is transferred to a corporation.

The Supreme Court, however, did not clarify whether satisfaction of even one of the six tests would suffice or that satisfaction of how many of the above tests would help in concluding an entity as ‘State’. It is left to be determined in each case, having regard to the totality of the circumstances⁷.

However, the Courts are also of the opinion that it is not necessary that the authority must be a ‘State’ within the meaning of Article 12 and a Writ can also be issued against a Private Body. In S. Shobha vs Muthoot Finance Ltd⁸ the Supreme Court held that in adjudicating whether a Writ lies against a particular body, the test that must be applied is ‘function test’. Court observed that if the authority is discharging a public function or a public duty then a Writ would be maintainable against it and it is immaterial whether the authority is a public body or a private body. Court clarified ‘public functions’ as those functions which are governmental or closely associated by being of public importance or being fundamental to the life of the people. Therefore, the Supreme Court answered that public law remedy can be enforced against a Private Body also provided it is discharging a ‘public function’ as follows-

“If a private body is discharging a public function and the denial of any rights is in connection with the public duty imposed on such body, the public law remedy can be enforced. The duty cast on the public body may be either statutory or otherwise and the source of such power is immaterial but, nevertheless, there must be the public law element in such action.”

Therefore, the distinction between public law remedy and private law remedy, centrally depends upon the kind of function being discharged by the authority against which legal action is being taken, which has to be discerned from the facts and circumstances of each case and no straight jacket formula can be applied. Once on the facts of a particular case it is found that nature of the activity or controversy involves public law element, then the matter can be examined by the High Court under Article 226 of the Constitution to see whether action of the State or its instrumentality or agency, is fair, just and equitable⁹. However, if it is found that the matter does not involve any ‘public duty’ or ‘public function’ then the court would relegate the parties to exhaust their remedy under private law by filing a Civil Suit, as the case may be.

Can an Arbitrator invoke Public Law Principles to adjudicate the dispute?

Arbitration is a private dispute resolution mechanism. It is not a “court” which is separately defined under the Arbitration and Conciliation Act, 1996 [“the Act”] under Section 2(e). It is settled law that the Arbitrator appointed by the parties is a creature of Contract and cannot travel beyond the terms of the Contract. The Delhi High Court has gone so far to say that an Arbitrator is a prisoner of contract¹⁰. Therefore, in a given case between the State and private party, when the private party accuses the State of acting discriminately and arbitrarily, in violation of Article 14 of the Constitution, does the Arbitrator have the authority to examine the arbitrary action of the State as alleged by the Private party?

In Kesar Enterprise vs Union of India and Ors.¹¹, a Division Bench of the Delhi High Court was concerned with a dispute between a private company and the Railway administration. The contract between the parties entitled the State to increase the license fee at any time subject to serving a one month’s notice. The Company accused the State of arbitrarily increasing the license fee and filed petition for appointment of arbitrator to adjudicate the dispute. The Delhi High Court observed that an arbitrary action of a State cannot be adjudicated under the private dispute mechanism of arbitration. The Arbitrator being a creature of contract cannot declare a clause or any part of it as void or invalid. In private law field there is no scope for applying the doctrine of arbitrariness. Excess of State can only be checked under Article 14 of the Constitution only by public law remedy which the Petitioner did not avail.

In Board of Control for Cricket in India vs Deccan Chronicles Holding Ltd.¹², the Bombay High Court was adjudicating a Petition filed under Section 34 of the Arbitration and Conciliation Act, 1996 challenging an Award rendered by the Arbitrator on various grounds, one of them being that the Arbitrator, despite holding that BCCI was not a ‘State’, invoked public law principles to adjudicate the dispute. The Bombay High Court emphatically held that the invocation of public law principles is impermissible in arbitration proceedings as follows-

“214. Do different considerations arise when one of the parties is ‘the State’ within the meaning of Article 12? Here, the learned Sole Arbitrator held that BCCI is not the State but held that it nonetheless performs ‘public functions’. Would that make a difference in arbitration, a dispute resolution constrained by private law? It would appear not. Certainly, the public law duty to act fairly cannot be imported into a contract by a private law arbitral tribunal to effectively alter its terms so as to create an obligation on the so-called public-duty party that the contract does not envisage..

There is no quarrel with the proposition that a court, especially a Constitutional court, is not constrained in the same way as an arbitrator. Public law actions demand public law remedies. The suggestion is not that a public authority can play Jekyll and Hyde or that it is required to demonstrate fairness only in a public law action. The question is what is it that the decision-making body is empowered in law to do. A writ court may well hold against a public body on a public law principle or by invoking Article 14; but an arbitrator, constrained as he or she is by the contract, has no such power.

…This necessarily means that no arbitral tribunal can return a finding that something contravenes public policy unless the contract permits such a course of action. To venture into that is again to venture impermissibly into the realm of public law. An arbitrator cannot, for instance, return a finding that a particular rule or regulation is ‘bad in law’. That is exclusively the domain of a court. An arbitrator has to apply the law as it stands. The fact that it is misapplied is not a ground for challenge, but there is not the slightest possibility of an arbitrator sallying forth to hold that an action or a rule violates a public policy standard. Proportionality lies squarely within the public policy realm.The task of the arbitrator is to see if the impugned action is or is not valid having regard to terms of the contract, nothing more; i.e. to see if the termination conformed to the contract. Whether or not the termination was onerous, or had severe consequences, was entirely irrelevant and beyond the contract”. (emphasis supplied)

Correctness of the Ratio laid down in Kumari Shrilekha (supra)

In Kumari Shrilekha (supra) the Supreme Court took a stark departure from the earlier position of law viz. that a dispute between a State and a private citizen, arising out of a contract between them, cannot be entertained under a Writ Petition and no allegation of arbitrariness can be imputed to the State as the rights and obligations of the parties are purely governed by the Contract between the parties which is in the realm of private law. However, in Kumari Shrilekha (supra) the Supreme Court observed that even in Private contractual sphere, the State is required to stand the test of Article 14 and its arbitrary action can be challenged by invoking Writ Jurisdiction of the High Court.

The above ratio laid down in Kumari Shrilekha (supra) was later distinguished by a three-judge bench of the Supreme Court in Assitt. Excise Commissioner vs Issac Peter¹³ wherein the Supreme Court observed that the case in Shrilekha (supra) pertained to mass termination of employees of District Government Council, therefore the matter fell within the public law field and amenable to Writ Jurisdiction. The three Judge bench then went on to emphatically hold that in case of Contract freely entered into with the State, there is no room for invoking the Doctrine of fairness and reasonabless against one party to the Contract (State) for the purpose of altering, adding to terms and conditions of the Contract, merely because it happens to be the State. In such cases, the mutual rights and liabilities of the parties are governed by the terms of contracts and the laws relating to contracts. This, essentially, posits two conflicting decisions. While Shrilekha (supra) holds that even in private contract between private citizen and state, the State is required to act fairly and its arbitrary action can be examined by invoking Writ Jurisdiction, however, in Issac Peter (supra) the Supreme Court has distinguished the aforesaid ratio and restated the earlier position of law that in private contract, the doctrine of fairness and reasonabless cannot be imported and imputed to the State, to alter or modify the terms of the contract which is purely in the realm of Private Law.

While there is no quarrel that the decision in Issac Peter (supra) being of bigger strength (three judge bench) must prevail over the ratio laid down in Kumari Shrilekha (supra). However, the difficulty is, the ratio laid down in Shrilekha has been upheld and quoted with approval by various subsequent judgments of the Supreme Court, more recently by a three judge bench in Subodh Kumar vs Chief Executive Officer (supra). In none of the subsequent decisions the Supreme Court attempted to reconcile the ratio laid down in Shrilekaha and Issac Peter (supra). The ratio laid down in Issac Peter was not brought to the knowledge of the Court. Resultantly, the position of law today is conflicted which would be found from the discussion on various case laws below.

In Oil and Natural Gas Corporation Ltd. vs Streamline Shipping Co. Pvt. Ltd.¹⁴, a Division Bench of the Bombay High Court was adjudicating an appeal against an order passed under Section 9 of the Arbitration and Conciliation Act, 1996, restraining the Appellant ONGC from terminating the Contract. The Contract between the parties entitled the ONGC to terminate the contract after one year without assigning any reason, making the contract determinable in nature under Section 14(1)(c) of the Specific Relief Act. However, the Respondent opposed termination on the ground that the clause is unfair, unreasonable and constitutes an arbitrary action on the part of the State and violative of Article 14. Reliance was placed on ABL International and Shrilekha (supra) to accentuate that even in private law field the State must act fairly and reasonably. The Division Bench, however, relied upon Issac Peter (supra) and held that where the contracts are freely entered with the State there is no scope for invoking the doctrine of fairness and reasonableness for the purpose of altering or adding to the terms of the Contract. In such cases the question of public law based on Article 14 of the Constitution do not arise and the matter must be decided strictly in the realm of private law rights governed by the general law relating to contracts with reference to the provisions of Specific Relief Act.

In Mic Electronics & Anr. vs Municipali Corporation of Delhi & Anr.¹⁵, a Division Bench of Delhi High Court was adjudicating a Section 37 Appeal filed by the Appellant against dismissal of its Section 9 Application under the Arbitration and Conciliation Act, 1996. The dispute arose out of a commercial contract between the Appellant and an instrumentality of the State i.e. MCD. The State put forth the argument that the contract between the parties was determinable in nature in terms of Section 14(1)(c) of the Specific Relief Act and thus not specifically enforceable. The Appellant however, relied upon the ratio of Shrilekha (Supra) to emphasise that even in private contract, the State must act justly, fairly and equitably.

The High Court, however, observed that the aforesaid decision is not an authority on proposition that the mutual rights and liabilities of the parties where the contracts are freely entered into with the State, are exclusively governed by public law principles and not by the terms and conditions of the Contracts and the laws relating to contract. The Division Bench then relied upon Isaac Peter (supra) to hold that in case of contracts freely entered into with the State, there is no room for invoking the doctrine of fairness and reasonableness against one party to the Contract (State). In such cases the mutual rights and liabilities of the parties are governed by the terms of the contracts and the law relating to contracts. Therefore, the court held that the Contract was determinable in nature in terms of Section 14(1)(c) of the Specific Relief Act and thus not specifically enforceable. The allegations of unreasonable and discriminatory treatment by the State cannot be countenanced in a case of private dispute involving private law principles.

In State of Manipur and Ors. vs Moirangthem Chaoba Singh¹⁶ , the Gauhati High Court was concerned with a Contract executed between the State of Manipur and a private citizen. The Contract also contained an arbitration clause, however, the private citizen filed Writ Petition alleging arbitrariness on the part of the State for non-payment of its dues despite completion of the work assigned by the State. The Single judge allowed the Writ by relying upon Shrilekha (supra) and held that the State, even in private contract, ought to act, fairly, justly and reasonably.

In Writ Appeal, the High Court relied upon the Issac Peter (supra) and held that the present case is purely a commercial contract between the State and the private citizen therefore, the doctrine of fairness or reasonableness cannot be invoked to alter the terms of an express contract to the detriment of the State. The Court further observed that since the Contract also included an arbitration clause, in such a case recourse to a public law remedy or any other remedy is not possible without invoking the remedy of arbitration.

As observed from the above case laws, as much as the private parties tried to place reliance on the ratio laid down in Shrilekha (supra) to submit that even in private contractual sphere the State is required to act fairly and reasonably, the decision ultimately turned on the ratio laid down in Issac Peter (supra) having the contrary ratio. Therefore, a clarification is required from the Supreme Court to reconcile the above two decisions.

Conclusion

The detailed discussion above can be summarized as follows-

The dichotomy between public law and private law rights and remedies would depend upon the factual matrix of each case and the distinction between the public law remedies and private law field cannot be demarcated with precision. Each case has to be examined on its facts whether the contractual relations between the parties bear insignia of public element¹⁷.
In order to discern whether in a given case public element or public duty is involved, the Courts must apply the ‘function test’ as laid down in S.Shobha vs Muthoot Finance Ltd (supra). If it is found that the entity is performing a public function, then its action can be examined by invoking the public law remedy of Writ Jurisdiction and it is immaterial that the entity is private body or public body. If public law element is not involved then the parties have to be relegated to exhaust their private law remedies by instituting civil suit, as the case may be.
In S.Shobha (supra) the Supreme Court clarified ‘public functions’ as those functions which are governmental or closely associated by being of public importance or being fundamental to the life of the people.
In Ajay Hasia (supra) the Supreme Court laid down various tests, as reproduced herein above, that can be applied for determining whether a particular authority falls within the meaning of ‘State’ embodied in Article 12 of the Constitution.
Although Writ Jurisdiction is a public law remedy, yet a relief would still lie under it if it is sought against an arbitrary action or inaction of the State, even if they arise from a non-statutory contract¹⁸.
An Arbitrator, who is a creature of Contract, cannot invoke public law principles to adjudicate the dispute¹⁹BCCI vs Deccan Chronicles (supra)–
1. An Arbitrator cannot return a finding that something contravenes public policy.
2. An Arbitrator cannot return a finding that a particular rule or regulation is ‘bad in law’. That is exclusively the domain of a court.
3. An Arbitrator has to apply the law as it stands.
4. The task of the Arbitrator is to see if the impugned action is or is not valid having regard to the terms of the contract, nothing more.
The ratio laid down in Kumari Shrilekha (supra) and Issac Peter (supra), posits a conflicting position of law. While the former holds that even in contractual sphere with a private party, the State has to act fairly, justly and reasonably, however, the latter holds the contrary view. Issac Peter (supra) being a decision rendered by a three-judge bench, naturally, prevails over the ratio laid down in Kumari Shrilekha (supra). However, the Supreme Court in various subsequent judgments has affirmed and quoted with approval, the position of law laid down in Shrilkeha (supra), more recently in a three-judge bench judgement in Subodh Kumar vs Chief Executive Officer (supra) completely overlooking the contrary ratio laid down in Issac Peter (supra). Therefore a clarification is required from the Apex Court on this issue.

By Daksh Pandit