Telangana High Court
Chevula Sandeep vs Punjab National Bank on 8 November, 2022
Author: K.Lakshman
Bench: K.Lakshman
KL,J
wpno.2648 of 2021 &batch
1
IN THE HIGH COURT FOR THE STATE OF TELANGANA
AT: HYDERABAD
CORAM:
* THE HON'BLE SRI JUSTICE K.LAKSHMAN
+ WRIT PETITION Nos.2648, 3755, 4235, 4248, 4256, 4257, 4855, 5107,
5577, 5666, 6194, 7420, 8722 of 2021, 23785, 24837, 25292, 25303, 25360
and 33025/2022
% Delivered on:08.11.2022
Between in W.P.No.2648 of 2021:
# Bheemrao Jaligma and others ..Petitioner
Vs.
$ Punjab National Bank .. Respondent
! For Petitioners : Ms. Pratusha Bopanna, Ld.counsel
representing Sri Vardhineni Krishna
Mohan, Sri B.Nalin Kumar,
Ld.counsel
^ For Respondents : Dr. K.Lakshmi Narasimha,
Smt. Kalpana Ekbote,
Ld.Standing Counsel
< Gist :
> Head Note :
? Cases Referred :
1. (1991) 1 SCC 212.
2. 2021 SCC OnLine SC 99
3. (1987) 2 SCC 160.
4. (2013) 8 SCC 345.
5. (2005) 6 SCC 1.
6. (2019) 2 SCC 282.
7. (2012) 9 SCC 512.
8. (1986) 3 SCC 156
9. [1983] 1 All ER 944
10. [1979] Ch. 84
11. [1975] Q.B. 326
12. (2018)4SCC1
13. (2011) 10 SCC 300
14. (1994) 4 SCC 104
15. (2012) 8 SCC 216
16. Order dated 18.08.2020 passed in OS-WP-LD-VC-No. 188 of 2020.
KL,J
wpno.2648 of 2021 &batch
2
HON'BLE SRI JUSTICE K.LAKSHMAN
WRIT PETITION Nos.2648, 3755, 4235, 4248, 4256, 4257, 4855,
5107, 5577, 5666, 6194, 7420, 8722 of 2021, 23785, 24837, 25292,
25303, 25360 and 33025/2022
COMMON ORDER:
The lis involved in the present batch of writ petitions is similar and therefore, the same were heard together and are decided vide the following common order.
2. Heard Ms. Pratusha Bopanna, learned counsel representing Sri Vardhineni Krishna Mohan, Sri B.Nalin Kumar, learned counsel for petitioners,Dr. K.Lakshmi Narasimha and Smt. Kalpana Ekbote, learned Standing Counsels appearing f3or respondent Banks. Perused the record.
3. The Petitioners in the writ petitions are registered valuers who challenge the clauses/correspondences which impose a mandatory condition for valuers seeking empanelment to execute a Letter of Indemnity in favour of the Respondent Bank(s) on the ground that the same is arbitrary, unconscionable, illegal and violative of Article 14 of the Constitution of India.
KL,J wpno.2648 of 2021 &batch 3
4. The impugned clauses/correspondences require registered valuers seeking empanelment with the Respondent Banks to execute the following letter of indemnity:
i. Letter of indemnity of Punjab National Bank.
LETTER OF INDEMNITY BY ENGINEERS/VALUERS To Name of the Bank, _______________ Dear Sirs In consideration of Name of the Bank (hereinaftrer called the 'Bank' which expression shall include its successors and assigns) empanelling me/us on that panel of approved Engineers and Valuers for the purpose of assessing the market value of the properties proposed to be taken as securities for the credit limits granted or to be granted by the Bank to its various borrowers, I/We jointly and severally, extend this letter of indemnity.
Whereas, by the letter of empanelment dated _______ the bank has empanelled me/us on their panel of approved Engineers & Valuers for the purpose of assessing the market value of the properties proposed to be taken as securities for the credit limits granted /to be granted by the Bank. I/We jointly and severally agree as follows:-
I/We declare that I/We have not been blacklisted/disqualified as per Section 34AB of Wealth Tax Act and would keep the Bank informed about disqualifications, if any, I have not suppressed any material facts from the Bank.
I/We shall duly and faithfully perform and discharge all the duties in the works entrusted by the Bank and in relation to the purposes of empanelment fairly without any favour and discrimination and I/We hereby undertake and agree to indemnify you, your successors and assigns at all times and from time to time and against all loss, damage and all actions. suits, proceedings, expenses, costs, charges and demands arising out of any act, lapses, defaults, negligence, errors, mistakes committed by me/us in performance of my/our professional obligations and I/We also hereby undertake and agree to pay to you on demand sums of money, costs, charges and expenses incurred in respect thereof and also to pay you interest on all such moneys at your ruling rate. We further agree that amount demanded by the Bank shall be conclusive against us.
KL,J wpno.2648 of 2021 &batch 4 Yours Faithfully, Signature (Name and Official Seal of the Approved Valuer):
ii. Letter of indemnity of Central bank of India. To Central Bank of India __________________ Dear Sirs, In consideration of Name of the Bank (hereinaftrer called the 'Bank' which expression shall include its successors and assigns) empanelling me/us on that panel of approved Engineers and Valuers for the purpose of assessing the market value of the properties proposed to be taken as securities for the credit limits granted or to be granted by the Bank to its various borrowers, I/We jointly and severally, extend this letter of indemnity.
Whereas, by the letter of empanelment dated _______ the bank has empanelled me/us on their panel of approved Engineers & Valuers for the purpose of assessing the market value of the properties proposed to be taken as securities for the credit limits granted /to be granted by the Bank. I/We jointly and severally agree as follows:-
I/We shall duly and faithfully perform and discharge all the duties in the works entrusted by the Bank and in relation to the purposes of empanelment, fairly without any favour or discrimination and I/We hereby undertake and agree you, your successors and assigns at all times and from time to time from and against all loss, damage and all actions. suits, proceedings, expenses, costs, charges and demands arising out of any act, lapses, defaults, negligence, errors, mistakes committed by me/us in performance of my/our professional obligations and I/We also hereby undertake and agree to pay to you on demand sums of money, costs, charges and expenses incurred in respect thereof and also to pay you interest on all such moneys at your ruling rate.
I/We further specifically agree that this indemnity shall continue to remain in force and 1/We shall continue to be liable thereunder for all losses, damages, costs, charges and expenses arising out of any act, lapses, defaults, negligence, errors, mistakes committed by me/us in performance of my /our provisional obligations and shall be binding on me/us and our legal and personal representatives, successors and assigns.
Yours Faithfully, Signature KL,J wpno.2648 of 2021 &batch 5 (Name and Official Seal of the Approved Valuer):
iii. e-mail sent by the Canara Bank insisting to furnish a letter of indemnity forwarded to the petitioner:-
"With reference to your application for empanelment, kindly submit the affidavit on Non-Judicial Stamp Paper of Rs.50/- duly notarized and indemnity letter on Non-Judicial Stamp paper of Rs.200/- duly signed by affixing stamp."
5. Contentions of the Petitioners:-
i. The impugned clauses/correspondences requiring the valuers seeking empanelment to submit a letter of indemnity is one-
sided, unconscionable, dictatorial and offends Article 14 of the Constitution of India.
ii. The Courts can interfere in contractual matters where State or its instrumentalities act unfairly or arbitrarily. Reliance was placed on Kumari Shrilekha Vidyarthi v. State of U.P.1, Unitech Limited v. Telangana State Industrial Infrastructure Corporation (TSIIC)2, State of Karnataka v. Shree Rameshwara Rice Mills3 and Balmer Lawrie and Co. v. ParthaSarathi Sen4.
iii. Imposition of the indemnity clause on valuers is in furtherance of superior bargaining power enjoyed by the Respondent bank 1 (1991) 1 SCC 212.2
2021 SCC OnLine SC 99 3 (1987) 2 SCC 160.
4(2013) 8 SCC 345.
KL,J wpno.2648 of 2021 &batch 6 and leaves the valuers with no option but to accept the said condition of indemnity or leave it.
iv. Valuation undertaken by valuers is in the nature of professional opinion taking into account all the relevant factors at a particular point of time. The factors may change from time to time. There is possibility of long lapse of time between the date of valuation and the application of the report. Therefore, the opinion of the valuers may be misused.
v. No professional can be made liable for his/her opinion, more so, when the valuation report is not binding on the Respondent Banks. Imposition of an indemnity clause is arbitrary as no other professional (lawyer, doctor, chartered accountant) is mandatorily required to indemnify for their opinions. Reliance is placed on Jacob Mathew v. State of Punjab5, S.K. Jhunjhunwala v. Dhanwanti Kaur6and CBI v. K. Narayana Rao7.
5 (2005) 6 SCC 1.
6(2019) 2 SCC 282.
7(2012) 9 SCC 512.
KL,J wpno.2648 of 2021 &batch 7 vi. The impugned letters of indemnity do not set or notify any parameters to decide what will be considered a lapse or error or mistake on part of the valuers.
vii. The imposition of indemnity clause unjustly enriches the Respondent Banks and, in all likelihood, will lead to exploitation of innocent valuers.
viii. Reliance has been placed on interim orders passed by High Court of Judicature at Patna in Civil Writ Jurisdiction Case No. 2092 of 2020, High Court of Madhya Pradesh in W.P. No. 5850 of 2020, High Court of Judicature for Rajasthan Benchat Jaipur bench in S.B. Civil Writ Petition No. 3169 of 2020, High Court of Kerala in W.P.(C) No. 12679 of 2020. In the said cases, the Courts have held that, pending decision in the writ petitions, the Banks shall not insist on submitting an indemnity letter/certificate.
6. Contentions of the Respondents/Banks:-
i. The said indemnity letters are part of the contractual stipulations and constitute as an invitation to offer to all the valuers seeking empanelment with the Respondents. The valuers KL,J wpno.2648 of 2021 &batch 8 seeking empanelment can reject the invitation if they do not agree with the terms and conditions (including the condition of indemnity). The Petitioners cannot challenge the condition requiring them to submit a letter of indemnity as the same goes against the principle of party consent and autonomy.
ii. The present writ petition is in the realm of contract law and not under public law. Therefore, under Article 226 of the Constitution of India, this court cannot interfere in contractual matters.
iii. The Respondents are involved in the activity of money lending in lieu of security deposited by the borrowers. The valuation of security based on which money is lent is important and the same is done by the valuer empanelled with the Respondents.
Valuation of securities requires specialized skills as improper valuation will severely impair the prospects of recovery.
iv. The activity of lending involves an element of risk and the banks have to take all adequate precautions to ensure that the money lent is recovered.
v. Large number of banks including the Respondents were not able to recover the funds lent by them due to improper and highly KL,J wpno.2648 of 2021 &batch 9 inflated valuation done in collusion with the borrowers.
Therefore, the impugned letter of indemnity was incorporated with an objective to keep a check on improper valuations and ensure that the valuation conducted is honest, faithful and keeps the interest of the bank in mind.
vi. The empaneled valuers will only be liable to indemnify if he/she commits any act, lapse, default, negligence, error or mistake while discharging their duties. Therefore, the said stipulation of indemnity is valid.
Findings of the Court:-
7. From the facts of the case and the contentions raised by the parties, the question before this Court is whether the inclusion of a stipulation mandating submission of a letter of indemnity to seek empanelment as a valuer with the Respondent offends Article 14 of the Constitution of India.
8. According to the Petitioners, the said requirement of indemnity is unfair, oppressive, draconian and arbitrary as the same is imposed by abusing the unequal bargaining power which leaves no choice to the Petitioners. On the other hand, the Respondent contends that the object KL,J wpno.2648 of 2021 &batch 10 behind incorporating an indemnity clause is to secure the amounts lent by the Respondent against improper valuations.
9. It is relevant to note that none of the parties dispute that the Respondent is an instrumentality of the State under Article 12 of the Constitution of India. Further, it is trite law that in contractual matters involving the State or its instrumentality, there is a duty on the State or such instrumentality to act reasonably and fairly. The State even in cases falling in the realm of contractual law cannot act arbitrarily and shall satisfy the test of reasonableness. To the said extent, this Court agrees with the case laws relied upon by the Petitioners. The burden is on the party claiming that the action of the State or its instrumentality violates Article 14 of Constitution of India.
10. It was contended by the Petitioners that the inclusion of a clause mandating submission of a letter of indemnity is so unconscionable and draconian that it warrants interference of this Court.
11. It is relevant to note that the Supreme Court in Central Inland Water Transport Corpn. v. Brojo Nath Ganguly8 has held that an unconscionable contractual stipulation is a one which results due to unequal bargaining power between the parties. If the Court finds that the 8 (1986) 3 SCC 156 KL,J wpno.2648 of 2021 &batch 11 stipulation is unconscionable then it can strike down the stipulation as violative of Article 14 of Constitution of India. The relevant paragraphs are extracted below:
76. Under which head would an unconscionable bargain fall? If it falls under the head of undue influence, it would be voidable but if it falls under the head of being opposed to public policy, it would be void. No case of the type before us appears to have fallen for decision under the law of contracts before any court in India nor has any case on all fours of a court in any other country been pointed out to us. The word "unconscionable" is defined in the Shorter Oxford English Dictionary, 3rd Edn., Vol. II, p. 2288, when used with reference to actions etc. as "showing no regard for conscience; irreconcilable with what is right or reasonable". An unconscionable bargain would, therefore, be one which is irreconcilable with what is right or reasonable.
89. Should then our courts not advance with the times? Should they still continue to cling to outmoded concepts and outworn ideologies? Should we not adjust our thinking caps to match the fashion of the day? Should all jurisprudential development pass us by, leaving us floundering in the sloughs of 19th century theories? Should the strong be permitted to push the weak to the wall? Should they be allowed to ride roughshod over the weak? Should the courts sit back and watch supinely while the strong trample underfoot the rights of the weak? We have a Constitution for our country. Our judges are bound by their oath to "uphold the Constitution and the laws". The Constitution was enacted to secure to all the citizens of this country social and economic justice. Article 14 of the Constitution guarantees to all persons equality before the law and the equal protection of the laws. The principle deducible from the above discussions on this part of the case is in consonance with right and reason, intended to secure KL,J wpno.2648 of 2021 &batch 12 social and economic justice and conforms to the mandate of the great equality clause in Article 14. This principle is that the courts will not enforce and will, when called upon to do so, strike down an unfair and unreasonable contract, or an unfair and unreasonable clause in a contract, entered into between parties who are not equal in bargaining power. It is difficult to give an exhaustive list of all bargains of this type. No court can visualize the different situations which can arise in the affairs of men. One can only attempt to give some illustrations. For instance, the above principle will apply where the inequality of bargaining power is the result of the great disparity in the economic strength of the contracting parties. It will apply where the inequality is the result of circumstances, whether of the creation of the parties or not. It will apply to situations in which the weaker party is in a position in which he can obtain goods or services or means of livelihood only upon the terms imposed by the stronger party or go without them. It will also apply where a man has no choice, or rather no meaningful choice, but to give his assent to a contract or to sign on the dotted line in a prescribed or standard form or to accept a set of rules as part of the contract, however unfair, unreasonable and unconscionable a clause in that contract or form or rules may be. This principle, however, will not apply where the bargaining power of the contracting parties is equal or almost equal. This principle may not apply where both parties are businessmen and the contract is a commercial transaction. In today's complex world of giant corporations with their vast infrastructural organizations and with the State through its instrumentalities and agencies entering into almost every branch of industry and commerce, there can be myriad situations which result in unfair and unreasonable bargains between parties possessing wholly disproportionate and unequal bargaining power. These cases can neither be enumerated nor fully illustrated. The court must judge each case on its own facts and circumstances.
KL,J wpno.2648 of 2021 &batch 13 From the decision in Brojo Nath Ganguly (Supra), it can be said that a contract can only be interfered on the ground of unconscionability, if the term(s) of the contract are substantially unfair, monstrous, tainted with illegality and which shock the conscience of the Court.
12. Black's Law Dictionary (10th Edition, Thomson Reuters) defines unconscionability as follows:
Unconscionability. 1. Extreme unfairness. Unconscionability is normally assessed by an objective standard: (1) one party's lack of meaningful choice, and (2) contractual terms that unreasonably favor the other party.
2. The principle that a court may refuse to enforce a contract that is unfair or oppressive because of procedural abuses during contract formation or because of overreaching contractual terms, esp. terms that are unreasonably favorable to one party while precluding meaningful choice for the other party.
An examination of English decisions at this juncture is apt to determine what constitutes an unconscionable bargain which may require courts to step in and strike down such unfair terms. In Alec Lobb (Garages) Ltd v Total Oil GB Ltd.9, it was held:-
It is probably not possible to reconcile all the authorities, some of which are of great antiquity, on this head of equitable relief, which came into greater prominence with the repeal of the usury laws in the nineteenth century. But if the cases are examined, it will be seen that three elements have almost invariably been present before the court has interfered.9
[1983] 1 All ER 944 KL,J wpno.2648 of 2021 &batch 14 First, one party has been at a serious disadvantage to the other, whether through poverty, or ignorance, or lack of advice, or otherwise, so that circumstances existed of which unfair advantage could be taken: see, for example, Blomley v Ryan (1954) 99 CLR 362, where, to the knowledge of one party, the other was by reason of his intoxication in no condition to negotiate intelligently. Second, this weakness of the one party has been exploited by the other in some morally culpable manner: see, for example, Clark v Malpas (1862) 4 De GF & J 401, 45 ER 1238, where a poor and illiterate man was induced to enter into a transaction of an unusual nature, without proper independent advice, and in great haste. And third, the resulting transaction has been, not merely hard or improvident, but overreaching and oppressive. Where there has been a sale at an undervalue, the undervalue has almost always been substantial, so that it calls for an explanation, and is in itself indicative of the presence of some fraud, undue influence, or other such feature. In short, there must, in my judgment, be some impropriety, both in the conduct of the stronger party and in the terms of the transaction itself (though the former may often be inferred from the latter in the absence of an innocent explanation) which in the traditional phrase 'shocks the conscience of the court', and makes it against equity and good conscience of the stronger party to retain the benefit of a transaction he has unfairly obtained.
13. In Multiservice Bookbinding Ltd. v. Marden10, Browne- Wilkinson J held as follows:
I therefore approach the second point on the basis that, in order to be freed from the necessity to comply with all the terms of the mortgage, the plaintiffs must show that the bargain, or some of its terms, was unfair and unconscionable: it is not enough to show that, 10 [1979] Ch. 84 KL,J wpno.2648 of 2021 &batch 15 in the eyes of the court, it was unreasonable. In my judgment a bargain cannot be unfair and unconscionable unless one of the parties to it has imposed the objectionable terms in a morally reprehensible manner, that is to say, in a way which affects his conscience.
The classic example of an unconscionable bargain is where advantage has been taken of a young, inexperienced or ignorant person to introduce a term which no sensible well-advised person or party would have accepted. But I do not think the categories of unconscionable bargains are limited: the court can and should intervene where a bargain has been procured by unfair means.
14. Lord Denning M.R., in Lloyds Bank Ltd. v.
Bundy11discussing what constitutes unconscionability and unfair contractual terms warranting interference of the courts held as follows:
Gathering all together, I would suggest that through all these instances there runs a single thread. They rest on "inequality of bargaining power." By virtue of it, the English law gives relief to one who, without independent advice, enters into a contract upon terms which are very unfair or transfers property for a consideration which is grossly inadequate, when his bargaining power is grievously impaired by reason of his own needs or desires, or by his own ignorance or infirmity, coupled with undue influences or pressures brought to bear on him by or for the benefit of the other. When I use the word "undue" I do not mean to suggest that the principle depends on proof of any wrongdoing. The one who stipulates for an unfair advantage may be moved solely by his own self-interest, unconscious of the distress he is bringing to the other. I have also avoided any reference to the will 11 [1975] Q.B. 326 KL,J wpno.2648 of 2021 &batch 16 of the one being "dominated" or "overcome" by the other. One who is in extreme need may knowingly consent to a most improvident bargain, solely to relieve the straits in which he finds himself. Again, I do not mean to suggest that every transaction is saved by independent advice. But the absence of it may be fatal. With these explanations, I hope this principle will be found to reconcile the cases.
Unconscionability of a transaction shall be decided based on the circumstances of the parties which may include the weakness of one party and the dominant position enjoyed by another party, the financial needs of the parties, the alternatives or the choice available to the weaker party, etc. In other words, as held by the Supreme Court in State of Karnataka v. State of Tamil Nadu12, unconscionability of a contract depends on unconscientious use of superior power over another party who may be ignorant or be in a weak bargaining position.
15. The Supreme Court in Phulchand Exports Ltd. v. O.O.O. Patriot13 held that where business men are involved who are aware of the nature of bargain and are equally situated, the transaction cannot be termed as unconscionable. The relevant paragraphs are extracted below:
37. The transactions covered by Section 23 are the transactions where the consideration or object of such transaction is forbidden by law or the transaction is of such a nature that, if permitted, would defeat the provisions of any law or the transaction is fraudulent or the transaction 12 (2018)4SCC1 13 (2011) 10 SCC 300 KL,J wpno.2648 of 2021 &batch 17 involves or implies injury to the person or property of another or where the court regards it immoral or opposed to public policy. Whether a particular transaction is contrary to a public policy would ordinarily depend upon the nature of transaction. Where experienced businessmen are involved in a commercial contract and the parties are not of unequal bargaining power, the agreed terms must ordinarily be respected as the parties may be taken to have had regard to the matters known to them.
38. The sellers and the buyers in the present case are business persons having no unequal bargaining powers. They agreed on all terms of the contract being in conformity with the international trade and commerce. Having regard to the subject-matter of the contract, the clause for reimbursement or repayment in the circumstances provided therein is neither unreasonable nor unjust;
far from being extravagant or unconscionable. It is the precise sum which the sellers are required to reimburse to the buyers, which they had received for the goods, in case of the non-arrival of the goods within the prescribed time. More so, the fact of the matter is that the goods never arrived at the port of discharge. The Arbitral Tribunal has only awarded reimbursement of half the price paid by the buyers to the sellers and, therefore, the award cannot be held to be unjust, unreasonable or unconscionable or contrary to the public policy of India.
16. At this juncture, it is relevant to note that the concept of reasonableness cannot be invoked by one party to force the State to enter into a contract. The State or its instrumentality is free to decide the terms on which it will enter into a contract. Doctrine of reasonableness cannot be invoked to amend/alter/modify terms of contract to favour one KL,J wpno.2648 of 2021 &batch 18 party. In Excise Commr. v. Issac Peter14, the Supreme Court held as follows:
26. Learned counsel for respondents then submitted that doctrine of fairness and reasonableness must be read into contracts to which State is a party. It is submitted that the State cannot act unreasonably or unfairly even while acting under a contract involving State power. Now, let us see, what is the purpose for which this argument is addressed and what is the implication? The purpose, as we can see, is that though the contract says that supply of additional quota is discretionary, it must be read as obligatory -- at least to the extent of previous year's supplies -- by applying the said doctrine. It is submitted that if this is not done, the licensees would suffer monetarily. The other purpose is to say that if the State is not able to so supply, it would be unreasonable on its part to demand the full amount due to it under the contract. In short, the duty to act fairly is sought to be imported into the contract to modify and alter its terms and to create an obligation upon the State which is not there in the contract. We must confess, we are not aware of any such doctrine of fairness or reasonableness. Nor could the learned counsel bring to our notice any decision laying down such a proposition. Doctrine of fairness or the duty to act fairly and reasonably is a doctrine developed in the administrative law field to ensure the rule of law and to prevent failure of justice where the action is administrative in nature. Just as principles of natural justice ensure fair decision where the function is quasi-judicial, the doctrine of fairness is evolved to ensure fair action where the function is administrative. But it can certainly not be invoked to amend, alter or vary the express terms of the contract between the parties. This is so, even if the contract is governed by statutory provisions, i.e., where it is a statutory contract -- or rather more so.14
(1994) 4 SCC 104 KL,J wpno.2648 of 2021 &batch 19 It is one thing to say that a contract -- every contract -- must be construed reasonably having regard to its language. But this is not what the licensees say. They seek to create an obligation on the other party to the contract, just because it happens to be the State. They are not prepared to apply the very same rule in converse case, i.e., where the State has abundant supplies and wants the licensees to lift all the stocks. The licensees will undertake no obligation to lift all those stocks even if the State suffers loss. This one-sided obligation, in modification of express terms of the contract, in the name of duty to act fairly, is what we are unable to appreciate. The decisions cited by the learned counsel for the licensees do not support their proposition. In Dwarkadas Marfatia v. Board of Trustees of the Port of Bombay [(1989) 3 SCC 293] it was held that where a public authority is exempted from the operation of a statute like Rent Control Act, it must be presumed that such exemption from the statute is coupled with the duty to act fairly and reasonably. The decision does not say that the terms and conditions of contract can be varied, added or altered by importing the said doctrine. It may be noted that though the said principle was affirmed, no relief was given to the appellant in that case. Shrilekha Vidyarthi v. State of U.P. [(1991) 1 SCC 212 : 1991 SCC (L&S) 742] was a case of mass termination of District Government Counsel in the State of U.P. It was a case of termination from a post involving public element. It was a case of non-government servant holding a public office, on account of which it was held to be a matter within the public law field. This decision too does not affirm the principle now canvassed by the learned counsel. We are, therefore, of the opinion that in case of contracts freely entered into with the State, like the present ones, there is no room for invoking the doctrine of fairness and reasonableness against one party to the contract (State), for the purpose of altering or adding to the terms and conditions of the contract, merely because it happens to be the State. In such cases, the KL,J wpno.2648 of 2021 &batch 20 mutual rights and liabilities of the parties are governed by the terms of the contracts (which may be statutory in some cases) and the laws relating to contracts. It must be remembered that these contracts are entered into pursuant to public auction, floating of tenders or by negotiation. There is no compulsion on anyone to enter into these contracts. It is voluntary on both sides. There can be no question of the State power being involved in such contracts. It bears repetition to say that the State does not guarantee profit to the licensees in such contracts. There is no warranty against incurring losses. It is a business for the licensees. Whether they make profit or incur loss is no concern of the State. In law, it is entitled to its money under the contract. It is not as if the licensees are going to pay more to the State in case they make substantial profits. We reiterate that what we have said hereinabove is in the context of contracts entered into between the State and its citizens pursuant to public auction, floating of tenders or by negotiation. It is not necessary to say more than this for the purpose of these cases. What would be the position in the case of contracts entered into otherwise than by public auction, floating of tenders or negotiation, we need not express any opinion herein.
17. It is to be noted that the scope of interference in commercial/ contractual matters under Article 226 of the Constitution of India is extremely narrow. The State or its instrumentality in the matters involving commercial transactions is justified in acting like a prudent business man who is driven by his own commercial interest.
KL,J wpno.2648 of 2021 &batch 21
18. In the context of award of tenders, the Supreme Court in Michigan Rubber (India) Ltd. v. State of Karnataka15 has held that in contractual matters where State or its instrumentality is a party, the Courts can only interfere where public interest is involved and if the decision-making process is discriminatory, grossly unfair and arbitrary which no reasonable authority can come up with and is marred by mala fides. The relevant paragraphs are extracted below:
23. From the above decisions, the following principles emerge:
(a) The basic requirement of Article 14 is fairness in action by the State, and non-arbitrariness in essence and substance is the heartbeat of fair play. These actions are amenable to the judicial review only to the extent that the State must act validly for a discernible reason and not whimsically for any ulterior purpose. If the State acts within the bounds of reasonableness, it would be legitimate to take into consideration the national priorities;
(b) Fixation of a value of the tender is entirely within the purview of the executive and the courts hardly have any role to play in this process except for striking down such action of the executive as is proved to be arbitrary or unreasonable. If the Government acts in conformity with certain healthy standards and norms such as awarding of contracts by inviting tenders, in those circumstances, the interference by courts is very limited;
(c) In the matter of formulating conditions of a tender document and awarding a contract, greater latitude is required to be conceded to the State authorities unless the action of the tendering authority is found to 15 (2012) 8 SCC 216 KL,J wpno.2648 of 2021 &batch 22 be malicious and a misuse of its statutory powers, interference by courts is not warranted;
(d) Certain preconditions or qualifications for tenders have to be laid down to ensure that the contractor has the capacity and the resources to successfully execute the work; and
(e) If the State or its instrumentalities act reasonably, fairly and in public interest in awarding contract, here again, interference by court is very restrictive since no person can claim a fundamental right to carry on business with the Government.
24. Therefore, a court before interfering in tender or contractual matters, in exercise of power of judicial review, should pose to itself the following questions:
(i) Whether the process adopted or decision made by the authority is mala fide or intended to favour someone; or whether the process adopted or decision made is so arbitrary and irrational that the court can say: "the decision is such that no responsible authority acting reasonably and in accordance with relevant law could have reached"? and
(ii) Whether the public interest is affected?
If the answers to the above questions are in the negative, then there should be no interference under Article 226.
Therefore, a strict and higher threshold is contemplated by the Supreme Court to interfere in commercial/contractual matters under Article 226 of the Constitution of India.
19. Now coming to the facts of the case, this Court cannot accept the contention of the Petitioners that the clause requiring submission of a letter of indemnity for valuers seeking empanelment with the bank is KL,J wpno.2648 of 2021 &batch 23 unconscionable, irrational, unfair and violates Article 14 of the Constitution of India.
20. It is clear that the amount disbursed by banks as part of their lending activity depends on the valuation of the security that is deposited. This valuation is sine qua non for the bank to determine the amount which shall be disbursed and in case the borrower fails to return the loan amount, the bank is left with no other option but to enforce the security deposited. Therefore, it is justified on the part of the banks to ensure that the property deposited by the prospective borrower is properly valued.
21. To ensure such proper valuation, it is for the banks to determine the criteria that a valuer has to satisfy to seek empanelment with them. The banks may come up with a condition that the valuer shall act reasonably, fairly and take reasonable care while valuing a property. The bank is justified in imposing a condition that if any loss occurs to the bank on account of improper/illegal valuation, the valuer will be called upon to indemnify the bank.
22. This Court cannot accept the contention of the Petitioners that the valuers are professionals whose role is only to give opinion like doctors, lawyers or chartered accountants. As stated above, the amount KL,J wpno.2648 of 2021 &batch 24 of loan that is disbursed is based on the valuation determined by the valuer. A valuer is required to have the necessary qualifications as required under the Wealth Act, 1957 and rules thereunder. He has a duty to act fairly and value the property based on the prevailing market standards, failing which he shall be ready to face action. The Petitioners contention of the Petitioners appears to be that valuers shall be empaneled with the Respondent bank but shall have no liability in cases of wrongful valuation. The said contention is untenable.
23. Even lawyers, doctors and chartered accountants can be held liable before the consumer forums or their respective disciplinary bodies if they act negligently or against the interests of their clients. For example, Jacob Mathew (supra) relied upon by the Petitioner does not say that the doctors are not at all liable for their professional opinion. The said decision says that they have to take reasonable care and shall not act negligently. To prove that they are not liable, doctors have to show that they have followed the test in Bolam's case and have acted reasonably in light of the standard of care prescribed.
24. Similarly, there is no open-ended liability in the present case. The indemnity clause can be invoked by the Petitioners only if the bank is able to prove that the valuation was improper and loss was sustained KL,J wpno.2648 of 2021 &batch 25 by them owing to an act, lapse or error committed by the valuer. If the valuers feel that their valuation report is justified and was based on existing market standards, they can raise the same grounds before a court of law against invocation of the indemnity clause.
25. Further, the Petitioners have failed to establish that the condition mandating submission of letter of indemnity is unconscionable on account of unequal bargaining power. The Petitioners are not ignorant and are well aware of the duties that are to be performed by them and the importance of the valuation report given by them. Only when the duties are not performed and the same results in any loss to the Petitioner, can the indemnity clause be enforced. The said clause cannot be said to be unconscionable as it does not give any undue advantage to the Respondent. The said clause merely fixes liability on the valuers who fail to act as required and the said liability can only be decided by a court of law.
26. As per the decisions discussed above, the Petitioners have failed to show that the stipulation mandating submission of a letter of indemnity is extravagant, is grievously impaired by reason, is morally culpable & reprehensible and unreasonably favours only the Respondents.
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27. Dealing with a similar clause mandating an indemnity clause for empanelment as a valuer with the State Bank of India, a Division Bench of the Bombay High Court in Practicing Valuers Association (India) v. State Bank of India16 refused to interfere under Article 226 of Constitution of India and held that such a stipulation is valid and not violative of Article 14 of the Constitution of India. This Court agrees with a view expressed by the Bombay High Court. The relevant paragraphs of the said decision are extracted below:
38. Keeping these principles in mind, we have to consider the challenge to the Impugned Condition relating to the indemnity clause. SBI states that the rationale for seeking an indemnity is its experience of suffering because of incorrect and deliberately inflated valuation reports. SBI has given some examples in its Affidavit in Reply of instances where it claims to have suffered loss and prejudice because of certain valuations of property that ultimately proved to be grossly inaccurate. We are making it clear that we should not be understood as expressing any opinion on the specific grievance that SBI may have with the valuers named in the Affidavit in Reply.
These are stated as examples to justify the inclusion of the Impugned Condition relating to the indemnity clause.
39. In view of the importance of valuation qua the business of banking and lending, we are of the opinion that it cannot be said that the objective of including an indemnity clause in its terms of empanelment is arbitrary or unreasonable and without any purpose whatsoever. Looking to the nature and purpose of this contractual stipulation, it would be within 16 Order dated 18.08.2020 passed in OS-WP-LD-VC-No. 188 of 2020.
KL,J wpno.2648 of 2021 &batch 27 the discretion of SBI in matters of contract to insist on its inclusion as it wants to uniformly hold valuers to a higher and more exacting standard. SBI is entitled to seek inclusion of the indemnity clause in its terms of empanelment and terms of contract with valuers. We also find that SBI is entitled to add such terms to its Agreements with valuers in the larger public interest given the nature of decisions that SBI will make based on such valuations given by the valuers.
40. It is also important to note that SBI is not seeking a bond or bank guarantee which can immediately and unilaterally be encashed against its empaneled valuers. Even if SBI seeks to rely upon and invoke the indemnity against a valuer, it will have to initiate appropriate legal proceedings before a Court and SBI would have to establish breach of the indemnity and consequent loss by following due process of law. At the same time, the indemnity clause does hold the valuer to a higher standard of care and secure SBI's interest by way of express contract rather than SBI having to base any action only on a tortious or civil action of professional negligence or fraud. As we have observed above, this exercise of discretion in important commercial or contractual matters cannot at all be termed an arbitrary exercise of power by SBI.
41. Every valuer has a choice not to be empaneled with SBI if it does not agree to be bound by the indemnity clause in question. SBI does not have a monopoly in issuing valuation mandates even though it's business may account for a significant share of valuations carried out by valuation professionals.
28. Therefore, in light of the aforesaid discussion, the present batch of writ petitions are liable to be dismissed.
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29. In the result, the present batch of writ petitions are dismissed. Interim order stand vacated.
Miscellaneous applications, if any pending, shall also stand closed.
_______________________ JUSTICE K. LAKSHMAN Date: 08.11.2022 Note: L.R.copy to be marked.
b/o. vvr