Madras High Court
M/S.Babu Filling Station vs The Divisional Retail Sales Manager on 15 February, 2010
Author: Chitra Venkataraman
Bench: Chitra Venkataraman
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED: 15.02.2010
CORAM:
THE HONOURABLE MRS.JUSTICE CHITRA VENKATARAMAN
O.P.No.585 of 2009
M/s.Babu Filling Station
represented by N.Babu
1268, Cuddalore Road
Vridhachalam
Cuddalore. .. Petitioner
versus
1. The Divisional Retail Sales Manager
Indian Oil Corporation Limited
Trichy Divisional Office
Women SIDCO Industrial Estate
Vazhavanthankottai
Trichy.
2. The Chief Divisional Retail Sales Manager
Indian Oil Corporation Limited
Chennai Divisional Office
500, Anna Salai, Teynampet
Chennai-18.
3. Mr.A.S.Raveendran
Arbitrator
Indian Oil Corporation Limited
Marketing Division, Southern Region
Indian Oil Bhavan
139, Mahatma Gandhi Road
Nungambakkam High Road
Chennai-34. .. Respondents
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Prayer: Petition under Section 34 of the Arbitration and Conciliation Act, 1996 to set aside the award passed by the second respondent in BFS/ARB dated 22.7.2009.
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For petitioner : Mr.V.Raghavachari
For respondents : Mr.Abdul Hameed
for M/s.Anand, Abdul & Vinodh Associates
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ORDER
The claimant before the learned Arbitrator is the petitioner in the present O.P. He has challenged the award rejecting his prayer to set aside the cancellation of the dealership licence and for consequential compensation. The petitioner contends that the learned Arbitrator failed to consider the terms of the contract, particularly when the test report which was the basis of the termination had not been disclosed as per Clause 8(6) of the order issued under Section 3 of the Essential Commodities Act. The petitioner submits that the test results were informed to the petitioner only along with the order of termination. Consequently, the termination being violative of the distribution agreement, the award rejecting the prayer of the petitioner is liable to be set aside.
2. It is further submitted that respondents-1 and 2 have not explained as to the non-furnishing of the laboratory report when the cancellation itself rested on the test report. There was no opportunity granted to the petitioner to know the contents of the test report and the test conducted. Consequently, the learned Arbitrator committed an error in rejecting the plea. In this connection, learned counsel placed reliance on the decision of the Andhra Pradesh High Court reported in 2008 (6) ALT 550 (Premodaya rep. by its Managing Director Vs. Bharat Petroleum Corporation Limited). He also placed reliance on the Article on "Octane Number and Aniline Point of Petroleum Fuels" by T.A.Albahri, M.R.Riazi and A.A.Alqattan of the Chemical Engineering Department, Kuwait University, on the importance of Research Octane Number (RON) of petroleum products. Learned counsel submits that in the absence of any material to substantiate the allegation of adulteration, the award has to be set aside under Motor Spirit and High Speed Diesel (Regulation of Supply, Distribution and Prevention of Malpractices) Order, 2005 issued by the Ministry under the Essential Commodities Act. He pointed out to the definition of "adulteration" as well as to "malpractice" only to submit that in the absence of any material to show that the petitioner had committed adulteration deliberately, the question of invoking the terms of termination clause under the agreement does not arise.
3. Per contra, learned counsel appearing for the respondents-1 and 2 pointed out that the petitioner was informed orally about the test results immediately on receipt of the same and hence, it is not open to the petitioner to submit that the petitioner had not been informed about the test results in accordance with the Rules. In the above circumstances, there is no violation of the terms of the contract. He also placed reliance on the following decisions:
(i) 2008 (3) R.A.J. 168 (Mad) (Bharat Petroleum Corporation Limited Vs. Rajrajeswari Agency);
(ii) Unreported decision of this Court dated 26.3.2007 in W.A.No.2868 of 2003 (Indian Oil Corporation Ltd. and another Vs. M/s.Kamala Filling Station and 2 others);
(iii) (2002) 1 M.L.J. 740 (M/s.Swamy Service Station Vs. Bharat Petroleum Corporation Limited);
(iv) 2000-1-L.W. 502 (Jenarthanan,B Vs. The Senior Regional Manager, Hindustan Petroleum Corpn.); and
(v) (1991) 1 SCC 533 (Indian Oil Corporation Ltd. Vs. Amritsar Gas Service).
Emphasizing on Clause 8(6) of the notification, contemplating "communication", with the oral information given as to the variation in RON and the notice also informing that the petitioner's products had not satisfied the RON, based on the termination clause under the dealership agreement, the termination was fully justified. In this connection, he placed reliance on the decision of this Court reported in 2008 (3) R.A.J. 168 (Mad) (Bharat Petroleum Corporation Limited Vs. Rajrajeswari Agency) that the termination had been done in accordance with the rules and regulations and hence, learned Arbitrator rightly came to the conclusion that the termination was justified; consequently, no interference is called for.
4. It is seen from the documents filed before the learned Arbitrator that the petitioner was appointed as a dealer for marketing the products of respondents-1 and 2 from 27.6.2003. On 24.12.2005, sample of spirit was collected from the retail outlet by the representatives of respondents-1 and 2 and was tested in the laboratory of the I.O.C.L., Korukupet. Admittedly, the samples were drawn in the presence of the petitioner's authorised agents. The samples taken from and out of the stocks made on 20.12.2005 were in three sets of two bottles each and two samples were left with the petitioner. The inspection was done on 24.12.2005. Two bottles containing the samples were despatched to the laboratory at Korukupet for conducting the RON test. It is further seen that one out of two samples collected from the delivery truck while delivering the petrol to the petitioner on 20.12.2005 was also sent to the lab for RON test; that test conducted on 26.12.2005 and 29.12.2005 on the samples drawn from the petitioner and the truck delivering the petrol to the petitioner, showed that while the truck samples satisfied the test, with petitioner's sample, however, failed to satisfy the RON test. Immediately thereon, on receipt of the report, respondents-1 and 2 issued show cause notice on 6.1.2006, wherein they alleged that the samples drawn from the petitioner's retail outlet were tested and as per the report dated 29.12.2005, the sample failed in the Research Octane Number Test. The notice alleged that the petitioner had committed irregularity of adulteration of Motor Spirit which falls under the Marketing Discipline Guidelines, 2005, thereby committed violation of Clause 56(i) of the Dealership Agreement, which reads as follows:
"Notwithstanding anything to the contrary herein contained the Corporation shall be at liberty to terminate this agreement forthwith upon at any time after the happening of any of the following events namely:
(a)
(b)
(i) if the dealer shall deliberately contaminate or tamper with the quality of any of the corporations products. "
In terms of the above, respondents-1 and 2 considered that the conduct of the petitioner constituted violation of the terms and conditions of the agreement dated 27.6.2003 and the Marketing Discipline Guidelines, 2005. The petitioner was also asked to reply to the show cause notice within seven days from the date of receipt of the notice as to why the petrol/HSD Pump agreement dated 27.6.2003 should not be terminated in exercise of the rights reserved to the Corporation under the agreement. The petitioner sent a reply dated 14.1.2006 stating that the petitioner was informed orally about the test result only when he enquired about the respondents-1 and 2 stopping sales from 4.1.2006. The petitioner pointed out that he had not heard about any such test nor understood the failure of the sample in the test. He reiterated that he had not indulged in adulteration. Consequently, he sought for dropping the proceedings. By order dated 1.2.2006, repeating the contents of the notice, the dealership agreement was put an end to, thereby the petitioenr was removed from the list of authorised dealers. Along with the said order passed on 1.3.2006, a copy of the test report was sent to the petitioner. Immediately thereafter, the petitioner moved this Court in W.P.No.8031 of 2006 seeking a writ of Certiorari to quash the proceedings of the respondent dated 1.3.2006. By order dated 29.7.2008 in W.P.No.8031 of 2006, this Court directed the parties herein to commence the process of arbitration. Thereafter, the petitioner herein moved this Court under Section 9 of the Arbitration and Conciliation Act, 1996 for interim injunction to restrain the respondent from interfering with the petitioner's possession of the petrol station. This Court disposed of the petition under order dated 30th September 2008 in O.A.No.922 of 2008 and Application No.3939 of 2008. As against this order granting relief to the petitioner by directing the respondent to supply diesel and allied products till the arbitration proceedings are over, an appeal was preferred. In the meantime, the petitioner preferred a claim petition wherein, he sought for the following relief:
(a) to declare that the cancellation of the dealership agreement dated 01.03.2006 is without jurisdiction, authority of law and illegal;
(b) to direct the respondents to compensate the claimant for the loss of business amounting to Rs.54,88,000/- together with interest at 18% per annum;
(c) to direct the respondents to pay Rs.1,00,000/- every month towards loss of business and Rs.32,000/- for the expenses incurred to maintain the work force on and from the date of the claim petition; and
(d) to award interst at 18% per annum from the date of the award till date of realization.
5. The petitioner contended that due to the termination, he had suffered huge loss from January 2006. Hence, he was liable to be compensated at Rs.34 lakhs. Apart from that, he also sought for a sum of Rs.10,88,000/- which is pending for payment of salary to the staff at Rs.32,000/- per month. The petitioner contended that the respondent was also liable to pay Rs.32,000/- every month till they resumed dealership business. He therefore sought for a sum of Rs.10 lakhs as a reasonable compensation for the injuries suffered by them.
6. This was countered by the respondent stating that the petitioner's petrol bunk was inspected and the products were taken for checking. On receipt of the report on 29.12.2005, the sale was suspended with effect from 4.1.2006 and on 6.1.2006, the Indian Oil Corporation Limited issued a show cause notice informing the petitioner about the falling short of the standards, particularly with reference to the RON test. On 14.1.2006, the petitioner gave counter to the show cause notice denying the adulteration. Thereafter, by order dated 1.3.2006, the dealership was cancelled.
7. The respondent submittted that having regard to the proved malpractice as far as the products are concerned, going by the terms of the agreement, rightly, the termination was ordered before the learned Arbitrator. The following issues were raised:
(i) Whether cancellation of dealership agreement is justified?
(ii) Whether the respondents have complied with the statutory provisions before issuing termination notice?
(iii) Whether claimant or respondent is entitled for any compensation?
As regards the first issue as to the whether the cancellation of the dealership agreement was justified, learned Arbitrator pointed out the RO sample failed to meet the minimum requirement of RON and therefore was not conforming to IS 2796-2000 Motor Gasoline specifications. The truck sample had passed the requirements. Hence, it was concluded that the quality of the product had deteriorated only at the retail outlet. In the circumstances, the penal action taken by the respondents as per the provisions of the dealership agreement could not be viewed as a wrong one. Learned Arbitrator further pointed out that the Korukupet Laboratory of the respondents is one of the enumerated centres and the test resolution stated that the sample failed the Research Octane Number Test; hence the said report had to be taken as conclusive.
8. On the second issue as to whether the respondents had complied with the statutory provisions before issuing the termination notice, learned Aritrator pointed out that under Clause 8(6) of the Motor Spirit and High Speed Diesel (Regulation of Supply, Distribution and Prevention of Malpractices) Order, 2005, all that was required was that the Authorised Officer shall communicate the test result to the dealer or transporter or concerned person and the oil company, as the case may be, within five days of receipt of the test results from the laboratory for appropriate action. Under Chapter 2.5c of the said Rules, if the sample fails, explanation of the dealer/transporters shall be called for in writing, giving details of the failure and enclosing the copy of the test report. Learned Arbitrator viewed that since the show cause notice itself contained the details of the test report, there being no demand made by the petitioner, the failure to enclose the copy of the test report will not vitiate the test results of the samples. Learned Arbitrator pointed out that the need for testing the RON at the supply level would arise only when the truck tank sample and the retail outlet sample matched but failed the test; but as for as the present case, while the retail outlet sample failed the test and the truck sample satisfied the test, there was no room for presuming that the adulteration had taken place at the tank truck requiring a test to be taken by drawing a sample from the supply point and that the petitioner could not be faulted with. As regards the claim for compensation, having regard to the rejection of the claim on the cancellation of the licence, the consequential claim was rejected.
9. Elaborate arguments were let in by the learned counsel for the petitioner on the RON test conducted and the failure on the part of the respondents in giving the details of the test report. The contention of the petitioners and the respondents rest purely on the contract terms. Clause 8 of the Motor Spirit and High Speed Diesel (Regulation of Supply, Distribution and Prevention of Malpractices) Order, 2005 gives the procedure for taking of the samples as well as the procedure for testing the sample. The relevant clauses thereon are as follows:
8(4) The authorised officer shall forward the sample of the product taken within ten days to any of the laboratories mentioned in Schedule III or to any other such laboratory when it may be notified by the Government in the Official Gazette for this purpose, for analysing with a view to checking whether the density and other parameters of theproduct conform to the requirements of Bureau of Indian Standard Specifications number IS 2796 and IS 1460 for motor spirit and high speed diesel respectively.
8(5) The laboratory mentioned in sub-clause (4) shall furnish the test report to the authorised officer within twenty days of receipt of sample at the laboratory.
8(6) The authorised officer shall communicate the test result to the dealer or transporter or concerned person and the oil company, as the case may be, within five days of receipt of test results from the laboratory for apropriate action. "
10. A conjoint reading of Clause 8 sub clauses (4), (5) and (6), as extracted earlier, show that as soon as the sample is taken, in the presence of the dealer, it has to be sent to any one of the laboratories of the respondents specified within ten days and after the test is conducted, the authorised officer of the laboratory has to send the test results wthin 20 days of receipt of the sample from the laboratory. Sub clause (6) says that the authorised officer has to communicate the test results to the dealer/transporter and the oil company within five days of the receipt of the test results from the laboratory for appropriate action. The effect of the said provision is that there needs to be communication of the test result not only to the dealer or transporter but also to the oil company, so that depending on the results, appropriate action could be taken. Learned counsel for respondents-1 and 2 pointed out that the above-said Regulation does not contemplate a written communication and it would be suffice if an oral communication is made to the parties concerned.
11. I do not agree with the said submission. A reading of the Motor Spirit and High Speed Diesel (Regulation of Supply, Distribution and Prevention of Malpractices) Order, 2005 shows that the same was issued in exercise of the powers conferred by Section 3 of the Essential Commodities Act. The Regulation defines "adulteration" to mean as follows:
" "adulteration" means the introduction of any foreign substance into motor spirit or high speed diesel illegally or unauthorisedly with the result that the product does not conform to the requirements of the Bureau of Indian Standards specifications number IS 2796 and IS 1460 for motor spirit and high speed diesel respectively or any other requirement notified by the Central Government from time to time;"
Malpractices are defined under Sub Clause (f), the relevant portion of which we have already extracted in paragraph 4. The Regulations define an Authorised officer under Section 2(b) as follows:
"(b) "authorized officer" means an officer authorized under the provisions of clause 7;
12. Clause 7 of the Regulations deals with power of search and seizure. It says that any Gazetted Officer of the Central Government or State Government or any police officer not below the rank of Deputy Superintendent of Police duly authorised by the general or special order by the Central Government or State Government or any officer of the oil company not bellow the rank of Sales Officer may conduct the search and take samples of the product. The authorised officer spoken to is not the oil company herein and hence, when sub clause (6) of Clause 8 speaks about communication by an authorised officer, going by the ambit of the authority of the authorised officer and the purpose of a search and seizure, the test result has to be communicated in writing only. The contention that the provision does not rule out an oral communication; hence cannot be accepted at all. It is not denied by the respondent that an aggrieved party can seek re-testing of the sample, should there be any doubt about the results which may be prejudicial to him. Going by the purport of the test and read in the context of the right of respondents-1 and 2 to terminate the agreement, when sub clause (6) contemplates a communication of the test result to the dealer or transporter or concerned person and the oil company, the communication has to be read in the context of what is to fall for consideration of the test results for an appropriate action to be taken. In the above circumstances, when the law contemplated that a drastic action could be taken by the oil company as against a dealer leading to cancellation of dealership, then the procedure prescribed has to be strictly adhered to. In the light of the provisions contained in Clause 8, the facts need to be seen.
13. It is not denied by respondents 1 and 2 herein that the date of even the oral communication of the test report could not be stated. It is not denied by respondents-1 and 2 that the petitioner was not intimated about the test result as contemplated under Clause 8 (6). However, learned counsel appearing for respondents-1 and 2 maintains that with the oral communication made to the petitioner, he cannot contend that the respondent had violated the compliance of the Regulations. Pointing out to the difference in the languagre of Sub clause (5) and (6), he contended that under sub clause (5), the laboratory has to "furnish" the test report to the authorised officer. Sub clause (6) speaks about the "communication" of the test result by the "authorised officer". In the circumstances, he pointed out that one cannot contend that the non-communication of the test result in writing would be fatal to the case of the respondents. It must be noted herein that the Regulations contemplate communication only from the "authorised officer", the said person being one as defined under Clause 2(b) and Clause 7 to the dealer or transporter or concerned person and the oil company and not from the oil company to the dealer. In the circumstances, when the Section is very specific as to the communication to the dealer as well as to the oil company, it stands to reason that the communication contemplated has to be made in a manner that would advance the purpose of search and seizure. On the admitted facts that there was failure of the compliance of Clause 8(6) of the Regulations and that the petitioner was communicated of the results only along with the termination order, it is clear that there was non-compliance of the Regulations which touches on the validity of the termination of the contract.
14. It may be noted that the contract contemplated termination of the contract on any one of the clauses specified therein. As far as the present case is concerned, as per sub clause (1) of Clause 56, the contract could be terminated by respondents-1 and 2 if the dealer deliberately contaminates or tampers with the quality of any of the Corporation's products. In the light of the allegations contained in the notice as well as in the order based on the test result, the compliance of the Regulations as regards the communication as referred to under Sub Rule (6) under Rule 8, hence, assumes significance.
15. A reading of the notice sent by the respondents on 6.1.1996 shows that except for stating that the the sample had failed the RON test, there are no other details of any further action in this regard.
16. Learned counsel appearing for the petitioner pointed out to Section 20 of the Petroleum Act that the purpose of giving a copy of such report is only as regards an opportunity to be given so that the right of the party aggrieved is protected. A reading of the termination order shows that it is a mere repetition of the notice dated 6.1.2006. Even though the petitioner sought for the details of the test, yet, the termination order makes no reference to the letter of the petitioner on this aspect. In the background of the said facts, one has to see the Arbitral Tribunal's order. A reading of the award shows that except for a mere recording of the respondent's stand, there is hardly any consideration of Rule 8(6) in the sense of the test results communicated to the petitioner herein. Learned Arbitrator had extracted Chapter 2.5C of the Marketing Discipline Guidelines, 2005 as regards the general points to be observed, in all cases, which reads as follows:
" If the sample fails, explanation of the dealer/transporters as applicable shall be called for in writing, giving details of failure and enclosing copy of the test report. "
Having exracted the said requirement, it is rather surprising that the award fails to take note of this requirement which certainly cuts at the very root of the proceedings taken alleging adulteration. In the circumstances, the view of the learned Arbitrator that the respondent had complied with the terms of the contract before issuance of the termination notice is wholly unsustainable and contrary to the terms of the contract.
17. In this regard, I have no hesitation in holding that the learned Arbitrator failed to consider the terms of the notification which protects the right of the parties herein, particularly when the allegation as regards the termination rests on the failure to maintain the standards, leading thereby to the charge on adulteration. In this regard, the reliance placed by the petitioner to the decision of the Andhra Pradesh High Court reported in 2008 (6) ALT 550 (Premodaya rep. by its Managing Director Vs. Bharat Petroleum Corporation Limited), needs to be noted. The learned Judges pointed out that Table I Schedule I of the Control Order gives requirements for petrol. There are 12 characteristics of petroleum products which are standard. If any foreign substance is introduced and is shown as responsible for adulteration, then it is open to the oil company to take such actions as are contemplated under the contract. Pointing out to the test report that there are deviations in the value of RON, the learned Judges held that the action of the oil company in suspending the supplies was illegal. The test report in that case pointed out to the variation in RON reading. The respondent company issued a notice enclosing the test report that the sample taken did not meet the specifications of RON and hence, the dealer was visited with penalty. In the context of the allegation that the sample did not match the RON specifications, learned Judges pointed out that there was no proven case of adulteration. Learned counsel made reference to the decision reported in 2008 (56) BJRJ 1114 (Chirag Keshaw Service Station Vs. the Bharat Petroleum Corpn. Ltd.), wherein the Patna High Court held that the mere variation in RON test, by itself, cannot be a conclusive proof for adulteration; consequently, the cancellation was held to be bad. In the background of the above-said decisions and the decision reported in ILR 2002 1 Delhi 56 (M/s.Pt.Munshi Ram & Associates (P) Ltd. Vs. Delhi Development Authority and another), one can draw an inference that in a case of allegation of malpractice, particularly based on the charge of adulteration flowing from the fact that the sample test did not satisfy the RON count, it is necessary that the respondent company has to act in all fairness to the rights of the parties and the same has to be done only by following the Regulations strictly, by going in for checking the samples from the outlets. But in so checking, drawing a sample and taking the test check, the Rules clearly prescribe the procedure to be followed in the presence of the dealer's representatives and thereafter, based on the test report communicated to the dealer as well as to the oil company depending on the results, further action could be taken. In the light of the above said facts, going through the decisions relied on by the learned counsel appearing for the petitioner, one can only draw a conclusion that if the test conducted has to have a meaning, particularly in the context of a deliberate act of adulteration leading to the termination of the licence, the respondent has to necessarily observe the Regulations strictly.
18. Learned counsel appearing for the petitioner also made reference to the extract about RON, apart from the decisions reported in 2004 72 DRJ 491 (Bhatia Service Station and another Vs. Indian Oil Corporation and another) as well as 2003 4 JCR 267 (Jrh) (Suneet Services Vs. Bharat Petroleum Corporation Ltd. and others), 2003 (1) JCR 315 (Jhr) (Hirak Point, Dealer and Bharat Petroleum Corporation Ltd. Vs. Bharat Petroleum Corp. Ltd. and others), 2003 III AD (Delhi) 694 (Bharat Filling Station and another Vs. Indian Oil Corporation Ltd.) and 130 (2006) DLT 102 (Dharam Chand Gupta Vs. Indian Oil Corporation Ltd. and others) on the effect of non-compliance of the Regulations and its effect on the termination of the licence based on the allegation of adulteration. Having regard to the established principle of law that violation of the observance of the Regulations or the procedure would be fatal to the invoking of a termination clause in an agreement, it is not necessary for me to go in detail with the above-said decisions. The sum and substance of the law declared in all these cases are that having regard to the nature of allegations on adulteration, the test report necessarily has to be enclosed and communicated to the dealer at the earliest point of time, so that the compliance of the Regulations is absolute and unexceptionable.
19. Learned counsel appearing for the respondents placed reliance on the decision reported in 2000-1-L.W. 502 (Jenarthanan,B Vs. The Senior Regional Manager, Hindustan Petroleum Corpn.) to the effect that when the claim of the respondents is that with the samples failing to meet the RON test, the test report is of an absolute, uncontroverted piece of evidence pointing out to adulteration. He pointed out that the termination is only on account of the adulteration practiced. In the circumstances, the learned Arbitrator's view cannot be taken as one indicative of legal misconduct.
20. A reading of the decisions relied on by the respondents, no doubt, show that the report substantiates the allegation as to adulteration to result in penal consequences including termination. However, when apart from Section 20 of the Petroleum Act, Marketing Discipline Guidelines of 2005 as well as the Motor Spirit and High Speed Diesel (Regulation of Supply, Distribution and Prevention of Malpractices) Order, 2005, contemplate communication of the test result to the dealer to seek a re-testing of the sample taken, and in this case, when admittedly the test report was given only along with the order of termination, the view of the learned Arbitrator goes against the Regulations which bind the respondent. Consequently, the award suffers a legal infirmity; hence, liable to be set aside by this Court. Consequently, I have no hesitation in setting aside the award, particularly with reference to the finding that the respondents had acted in terms of the contractual obligations.
21. In the circumstances, the arbitral award stands set aside and the Original Petition stands allowed. No costs.
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