Case BriefsSupreme Court

Supreme Court: In the case where the Jharkhand Government had failed to give effect to the Industrial Policy and subsequent Notification that promised 50% rebate to Industrial Units on electricity duty, the Dr. DY Chandrachud* and Indu Malhotra, JJ took the opportunity to explain the evolution and application of the doctrines of Promissory Estoppel and Legitimate Expectations over the years.

Here is a summary of the discussion by the Court:

Origin and evolution of Doctrine of Promissory Estoppel

Under English Law, judicial decisions have in the past postulated that the doctrine of promissory estoppel cannot be used as a ‘sword’, to give rise to a cause of action for the enforcement of a promise lacking any consideration. Its use in those decisions has been limited as a ‘shield’, where the promisor is estopped from claiming enforcement of its strict legal rights, when a representation by words or conduct has been made to suspend such rights.

However, in the absence of a definitive pronouncement by the House of Lords holding that promissory estoppel can be a cause of action, a difficulty was expressed in stating with certainty that English Law has evolved from the traditional approach of treating promissory estoppel as a ‘shield’ instead of a ‘sword’. By contrast, the law in the United States and Australia is less restrictive in this regard.

India adopted a more expansive statement of the doctrine in order to remedy the injustice being done to a party who has relied on a promise.

In Motilal Padampat Sagar Mills Co. Ltd. v State of UP, (1979) 2 SCC 409, the Supreme Court viewed promissory estoppel as a principle in equity, which was not hampered by the doctrine of consideration as was the case under English Law. The judgment that was penned by Justice P N Bhagwati stated:

“… having regard to the general opprobrium to which the doctrine of consideration has been subjected by eminent jurists, we need not be unduly anxious to project this doctrine against assault or erosion nor allow it to dwarf or stultify the full development of the equity of promissory estoppel or inhibit or curtail its operational efficacy as a justice device for preventing injustice…We do not see any valid reason why promissory estoppel should not be allowed to found a cause of action where, in order to satisfy the equity, it is necessary to do so.”

Doctrine of Legitimate Expectations vis-à-vis Promissory Estoppel

Under English Law, the doctrine of promissory estoppel has developed parallel to the doctrine of legitimate expectations. The doctrine of legitimate expectation initially developed in the context of public law as an analogy to the doctrine of promissory estoppel found in private law. However, since then, English Law has distinguished between the doctrines of promissory estoppel and legitimate expectation as distinct remedies under private law and public law, respectively.

The doctrine of legitimate expectations is founded on the principles of fairness in government dealings. It comes into play if a public body leads an individual to believe that they will be a recipient of a substantive benefit.”

Another difference between the doctrines of promissory estoppel and legitimate expectation under English Law is that the latter can constitute a cause of action. The scope of the doctrine of legitimate expectation is wider than promissory estoppel because it not only takes into consideration a promise made by a public body but also official practice, as well.

Under the doctrine of promissory estoppel, there may be a requirement to show a detriment suffered by a party due to the reliance placed on the promise. Although typically it is sufficient to show that the promisee has altered its position by placing reliance on the promise, the fact that no prejudice has been caused to the promisee may be relevant to hold that it would not be “inequitable” for the promisor to go back on their promise. However, no such requirement is present under the doctrine of legitimate expectation.

Further, while the basis of the doctrine of promissory estoppel in private law is a promise made between two parties, the basis of the doctrine of legitimate expectation in public law is premised on the principles of fairness and non-arbitrariness surrounding the conduct of public authorities.

“This is not to suggest that the doctrine of promissory estoppel has no application in circumstances when a State entity has entered into a private contract with another private party. Rather, in English law, it is inapplicable in circumstances when the State has made representation to a private party, in furtherance of its public functions.”

Indian Law and the doctrine of legitimate expectations

Under Indian Law, there is often a conflation between the doctrines of promissory estoppel and legitimate expectations. While this doctrinal confusion has the unfortunate consequence of making the law unclear, citizens have been the victims. Representations by public authorities need to be held to scrupulous standards, since citizens continue to live their lives based on the trust they repose in the State. In the commercial world also, certainty and consistency are essential to planning the affairs of business.

“When public authorities fail to adhere to their representations without providing an adequate reason to the citizens for this failure, it violates the trust reposed by citizens in the State. The generation of a business-friendly climate for investment and trade is conditioned by the faith which can be reposed in government to fulfil the expectations which it generates.”

In National Buildings Construction Corporation vs S. Raghunathan, (1998) 7 SCC 66, a three Judge bench, speaking through Justice S. Saghir Ahmad, held that:

“The doctrine of “legitimate expectation” has its genesis in the field of administrative law. The Government and its departments, in administering the affairs of the country, are expected to honour their statements of policy or intention and treat the citizens with full personal consideration without any iota of abuse of discretion. The policy statements cannot be disregarded unfairly or applied selectively. Unfairness in the form of unreasonableness is akin to violation of natural justice. It was in this context that the doctrine of “legitimate expectation” was evolved which has today become a source of substantive as well as procedural rights. But claims based on “legitimate expectation” have been held to require reliance on representations and resulting detriment to the claimant in the same way as claims based on promissory estoppel.”

However, it is important to note that this observation was made by this Court while discussing the ambit of the doctrine of legitimate expectation under English Law, as it stood then. Since then and since the judgment in National Buildings Construction Corporation, the English Law in relation to the doctrine of legitimate expectation has evolved. More specifically, it has actively tried to separate the two doctrines and to situate the doctrine of legitimate expectations on a broader footing.

In a concurring opinion in Monnet Ispat and Energy Ltd. vs Union of India, (2012) 11 SCC 1, Justice H L Gokhale highlighted the different considerations that underlie the doctrines of promissory estoppel and legitimate expectation. He said:

“… for the application of the doctrine of promissory estoppel, there has to be a promise, based on which the promise has acted to its prejudice. In contrast, while applying the doctrine of legitimate expectation, the primary considerations are reasonableness and fairness of the State action.”

In Union of India vs Lt. Col. P.K. Choudhary, (2016) 4 SCC 236, speaking through Chief Justice T S Thakur, the Court discussed the decision in Monnet Ispat and held:

“… the doctrine of legitimate expectation cannot be claimed as a right in itself, but can be used only when the denial of a legitimate expectation leads to the violation of Article 14 of the Constitution.”

Conclusion

Hence, in an attempt to provide a cogent basis for the doctrine of legitimate expectation, which is not merely grounded on analogy with the doctrine of promissory estoppel, the Court, in the present case, concluded:

“… the doctrine of legitimate expectation cannot be claimed as a right in itself, but can be used only when the denial of a legitimate expectation leads to the violation of Article 14 of the Constitution. the doctrine of substantive legitimate expectation is one of the ways in which the guarantee of non-arbitrariness enshrined under Article 14 finds concrete expression.”

[State of Jharkhand v. Brahmputra Metallics Ltd.,  2020 SCC OnLine SC 968, decided on 01.12.2020]


*Justice Dr. DY Chandrachud has penned this judgment. Read more about him here

Counsels heard:

For the State of Jharkhand: Additional Advocate General Tapesh Kumar Singh, appearing for the State of Jharkhand

For Respondent: Advocate Devashish Bharuka

Also read: ‘Administrative lethargy of State will discourage entrepreneurship’; SC calls out Jharkhand Govt for not giving 50% electricity rebate to Industrial Units as promised

Case BriefsSupreme Court

Supreme Court: In a case where an Industrial Unit was seeking a rebate or deduction of 50 per cent of the amount assessed towards electricity duty from Financial Years 2011 to 2014 on the basis of Industrial Policy 2012 notified by the State of Jharkhand and a statutory notification dated 8 January 2015 issued under Section 9 of the Bihar Electricity Duty Act 1948, the bench of Dr. DY Chandrachud* and Indu Malhotra, JJ directed came down heavily upon Jharkhand Government’s administrative lethargy and held that the company (respondent)  was entitled to an exemption from electricity duty for FY 2012-13 and 2013-14.

However, considering the terms of Clause 35.7(b) of the Industrial Policy 2012 which provided that entitlement ensues from the financial year following the commencement of production, the Court held that since the respondent had commenced production on 17 August 2011, it was not entitled to a rebate/deduction for FY 2011-12.

“If the object of formulating the industrial policy is to encourage investment, employment and growth, the administrative lethargy of the State apparatus is clearly a factor which will discourage entrepreneurship.”

Terms of the impugned Industrial Policy

The policy document contemplated the grant of a rebate/deduction from the payment of electricity duty not only to new units but to existing units as well who had or would set up captive power plants. The State held out inter alia a solemn representation in terms of Clauses 32.10 and 35.7(b) of the entitlement of the exemption for a period of five years from the date of production. Besides this, it also contemplated in Clause 38(b) that a follow-up exemption notification would be issued within one month. That period of one month stretched on interminably with the result that the purpose and object of granting the exemption would virtually stand defeated. The net result was that when belatedly, the State government issued a notification under Section 9 of Bihar Act 1948 on 8 January 2015, it was prospective. As a consequence, by the time that the exemption notification was issued, a large part of the term for which the exemption was to operate in terms of the Industrial Policy 2012 had come to an end. The State government was evidently inclined to grant the exemption.

“This is not a case where due to an overarching requirement of public interest, the State government decided to override the representation which was contained in the Industrial Policy 2012. To the contrary, it sought to implement the representation albeit in fits and starts. Firstly, there was a delay of three years in the issuance of the notification. Secondly, by making the notification prospective, it deprived units such as the respondent of the full benefit of the exemption which was originally envisaged in terms of the Industrial Policy 2012.”

The Court, hence, noticed that not only did the State in the present case hold out a solemn representation, the representation was founded on its stated desire to encourage industrialization in the State.

The policy document spelt out:

(i) The nature of the incentives;

(ii) The period during which the incentives would be available; and

(iii) The time limit within which follow-up action would be taken by the State government through its departments for implementing the Industrial Policy 2012.

Legitimate Expectation

The State having held out a solemn representation in the above terms, it would be manifestly unfair and arbitrary to deprive industrial units within the State of their legitimate entitlement. The State government did as a matter of fact, issue a statutory notification under Section 9 but by doing so prospectively with effect from 8 January 2015 it negated the nature of the representation which was held out in the Industrial Policy 2012. Absolutely no justification bearing on reasons of policy or public interest has been offered before the High Court or before this Court for the delay in issuing a notification.

“It is one thing for the State to assert that the writ petitioner had no vested right but quite another for the State to assert that it is not duty bound to disclose its reasons for not giving effect to the exemption notification within the period that was envisaged in the Industrial Policy 2012.”

Noticing that both the accountability of the State and the solemn obligation which it undertook in terms of the policy document militate against accepting such a notion of state power, the Court said,

“The state must discard the colonial notion that it is a sovereign handing out doles at its will. Its policies give rise to legitimate expectations that the state will act according to what it puts forth in the public realm. In all its actions, the State is bound to act fairly, in a transparent manner. This is an elementary requirement of the guarantee against arbitrary state action which Article 14 of the Constitution adopts. A deprivation of the entitlement of private citizens and private business must be proportional to a requirement grounded in public interest.”

Conclusion

The Court, hence, held that the State had made a representation to the respondent and similarly situated industrial units under the Industrial Policy 2012 and this representation gave rise to a legitimate expectation on their behalf, that they would be offered a 50 per cent rebate/deduction in electricity duty for the next five years. However, due to the failure to issue a notification within the stipulated time and by the grant of the exemption only prospectively, the expectation and trust in the State stood violated.

“Since the State has offered no justification for the delay in issuance of the notification, or provided reasons for it being in public interest, we hold that such a course of action by the State is arbitrary and is violative of Article 14.”

[State of Jharkhand v. Brahmputra Metallics Ltd., 2020 SCC OnLine SC 968, decided on 01.12.2020]


*Justice Dr. DY Chandrachud has penned this judgment. Read more about him here

Counsels heard:

For the State of Jharkhand: Additional Advocate General Tapesh Kumar Singh, appearing for the State of Jharkhand

For Respondent: Advocate Devashish Bharuka