Employment contract clause void for arbitrary termination, Corporation must reinstate employees and pay arrears

The Court concluded that the Central Inland Water Transport Corporation Limited is considered "the State" under article 12 of the Constitution. The Court held that a clause in the Corporation's employment contract allowing arbitrary termination without reason was void under section 23 of the Indian Contract Act and violated article 14 of the Constitution. The Court upheld the High Court's decision to reinstate terminated employees, declaring the clause void and directing the Corporation to reinstate employees and pay arrears.

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Issues Involved:

1. Whether a Government company as defined in section 617 of the Companies Act, 1956, is "the State" within the meaning of article 12 of the ConstitutionRs.
2. Whether an unconscionable term in a contract of employment is void under section 23 of the Indian Contract Act, 1872, as being opposed to public policy and, when such a term is contained in a contract of employment entered into with a Government company, is also void as infringing article 14 of the Constitution in case a Government company is "the State" under article 12 of the ConstitutionRs.

Issue-wise Detailed Analysis:

1. Whether a Government company as defined in section 617 of the Companies Act, 1956, is "the State" within the meaning of article 12 of the ConstitutionRs.

The Court examined the definition of a Government company under section 617 of the Companies Act, 1956, which includes any company with not less than fifty-one percent of its paid-up share capital held by the Central Government, State Government(s), or both. The Central Inland Water Transport Corporation Limited (the Corporation) was found to be wholly owned by the Central Government and two State Governments, thus qualifying as a Government company.

The Court reviewed various precedents to determine whether such a company could be considered "the State" under article 12. It noted that the definition of "the State" in article 12 is extensive and includes the Government and Parliament of India, the Government and Legislature of each State, and all local or other authorities within the territory of India or under the control of the Government of India.

The Court emphasized that the definition of "the State" in article 12 is not restrictive but inclusive, covering entities that perform governmental functions or are under significant government control. The Corporation, being under complete control and management of the Central Government and engaged in activities of public importance, was deemed an instrumentality or agency of the State.

Thus, the Court concluded that the Corporation is "the State" within the meaning of article 12 of the Constitution.

2. Whether an unconscionable term in a contract of employment is void under section 23 of the Indian Contract Act, 1872, as being opposed to public policy and, when such a term is contained in a contract of employment entered into with a Government company, is also void as infringing article 14 of the Constitution in case a Government company is "the State" under article 12 of the ConstitutionRs.

The Court examined rule 9(i) of the Central Inland Water Transport Corporation Ltd. Service, Discipline and Appeal Rules, 1979, which allowed the Corporation to terminate the employment of a permanent employee with three months' notice or pay in lieu thereof without assigning any reason.

The Court considered whether this rule was unconscionable and thus void under section 23 of the Indian Contract Act, 1872. It noted that an unconscionable bargain is one that is irreconcilable with what is right or reasonable and that such a term, if found to be against public policy, would be void.

The Court found that rule 9(i) conferred absolute and arbitrary power on the Corporation, allowing it to terminate employment without any guidelines, reasons, or opportunity for the employee to be heard. This was deemed to violate the principles of natural justice and was considered discriminatory, as it allowed the Corporation to apply different rules to different employees under similar circumstances.

The Court held that such a clause was against public policy and void under section 23 of the Indian Contract Act. Furthermore, as the Corporation is "the State" under article 12, the rule also violated article 14 of the Constitution, which guarantees equality before the law and equal protection of the laws.

Therefore, the Court declared clause (i) of rule 9 void to the extent that it conferred upon the Corporation the right to terminate the employment of a permanent employee by giving three months' notice in writing or by paying three months' basic pay and dearness allowance in lieu of such notice.

Conclusion:

The Court dismissed the appeals, confirming the High Court's decision to quash the termination orders and direct the reinstatement of the employees. The declaration by the High Court was modified to specify that clause (i) of rule 9 is void under section 23 of the Indian Contract Act and ultra vires article 14 of the Constitution to the extent that it allows for termination of employment without assigning any reason. The Corporation was directed to reinstate the employees and pay all arrears of salary and allowances.

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