Contract Law

Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly

AIR 1986 SC 1571; (1986) 3 SCC 156

Facts

Central Inland Water Transport Corporation was a government-controlled company.
Its service rules contained a clause permitting termination of a permanent employee’s service by:
giving three months’ notice; or
paying three months’ salary in lieu of notice.
The clause did not require:
misconduct;
a disciplinary inquiry;
reasons;
an opportunity to be heard.
Brojo Nath Ganguly and another permanent employee were terminated under this rule.
They challenged the provision as arbitrary, unfair and opposed to public policy.
The Corporation argued that the employees had accepted the service rules and were bound by their contracts.

Whether an extremely one-sided termination clause imposed by a powerful employer is void under Section 23.
Whether inequality of bargaining power may make a contractual term unconscionable and opposed to public policy.

Courts ordinarily uphold freedom of contract where parties bargain on relatively equal terms.
However, an unfair and unreasonable clause may be void under Section 23 where:
there is gross inequality of bargaining power;
the weaker party has no meaningful choice;
the term is imposed by the stronger party;
the term is unconscionable or contrary to public policy.
This principle is particularly relevant to standard-form contracts governing necessities such as employment.
A State-controlled body is also subject to constitutional standards of non-arbitrariness.

The employees did not genuinely negotiate the termination rule.
Their practical choice was to accept the standard service conditions or remain unemployed.
The Corporation possessed overwhelming economic and institutional power.
The rule allowed it to terminate a permanent employee for any reason or no stated reason.
It created no corresponding right for the employee and supplied no procedural safeguard.
The Court described the clause as arbitrary and capable of being used as a “Henry VIII” power.
The concept of freedom of contract could not justify a term accepted under economic compulsion rather than real bargaining.
The Court did not hold that every unequal contract is invalid.
The doctrine applies where inequality is combined with a term so unfair that enforcement would offend conscience and public policy.
Because the Corporation was an instrumentality of the State, the rule also violated Article 14 by authorising arbitrary treatment.
The clause was therefore invalid both as:
an unconscionable term opposed to public policy under Section 23; and
an arbitrary state action.

The Supreme Court struck down the termination clause and set aside the dismissals.
Use this case for: a grossly unfair standard-form term imposed through serious inequality of bargaining power may be void as opposed to public policy.