The Supreme Court's decision in Indian Oil Corporation Ltd. v. Shree Niwas Ramgopal & Ors. offers valuable clarity on two interlinked legal issues: the continuation of partnerships after the death of a partner, and the extent to which public sector undertakings (PSUs) like Indian Oil Corporation Ltd. (IOCL) must align their internal policies with binding contractual and statutory frameworks.
The dispute arose when IOCL declined to recognise a reconstituted partnership submitted after the death of a key partner in a kerosene dealership. The judgment not only affirms contractual continuity in partnerships governed by express provisions but also reiterates that internal PSU policies cannot override private contractual arrangements.
Factual Background
M/s Shree Niwas Ramgopal was initially a sole proprietorship run by Kanhaiyalal Sonthalia. On November 24, 1989, the firm was converted into a partnership, with Kanhaiyalal holding 55%, and his sons, Ramesh and Gobinda Sonthalia, holding 35% and 10%, respectively. The firm entered into a kerosene dealership agreement with IOCL on May 11, 1990.
The dealership agreement contained a clause providing IOCL three options upon the death of any partner:
- Continue with the existing firm,
- Execute a fresh agreement with a reconstituted firm, or
- Terminate the dealership. High Court Proceedings
Kanhaiyalal passed away on November 29, 2009, triggering disputes among his surviving legal heirs over his 55% stake. One heir, Rakesh Sonthalia, submitted a purported will claiming exclusive rights to the stake, while others sought induction into the firm or raised objections.
On April 13, 2010, the surviving partners proposed a reconstituted partnership including one legal heir, Bijoy Sonthalia, and submitted requisite documentation to IOCL. Despite this, IOCL refused recognition, citing Clause 1.5 of its internal policy, and threatened to discontinue kerosene supply unless all legal heirs consented or were included.
High Court Proceedings
The firm filed a writ petition before the Calcutta High Court under Article 226 of the Constitution, challenging IOCL's decision and Clause 1.5 of its 2008 policy.
The Single Judge ruled in favour of the petitioners, noting:
- The partnership deed expressly provided for continuity post the death of any partner;
- IOCL had not exercised its contractual right to terminate the dealership;
- Surviving partners had a right to induct competent legal heirs; and
- Disputes among legal heirs were to be resolved in probate or civil proceedings.
IOCL alone appealed to the Division Bench, as no heirs contested the Single Judge's findings. The Division Bench upheld the ruling and referenced Indian Oil Corporation v. Roy & Co. (2018), where IOCL's obligations as a public authority were similarly scrutinised. The Court stressed that IOCL must exercise discretion reasonably and in public interest, especially where continuity of essential supply was at stake.
Supreme Court's Ruling
IOCL preferred a Special Leave Petition, relying heavily on Clause 1.5 of its 2008 guidelines which, according to it, mandated the inclusion or consent of all legal heirs for reconstitution of a partnership after a partner's death.
The Supreme Court addressed the following key issues:
- Applicability of Section 42(c), Indian Partnership Act, 1932: The Court clarified that dissolution of a partnership upon a partner's death under Section 42(c) does not apply where the partnership deed contains a contrary intention. Since Clause 18 of the deed expressly provided for continuity, the partnership was not dissolved.
- Interpretation of IOCL's Clause 1.5: The Court held that Clause 1.5 of IOCL's internal policy does not mandate the inclusion of all legal heirs or require No Objection Certificates (NOCs) from each of them. The clause permits continuation with surviving partners and willing heirs, and any interpretation to the contrary would be unreasonable.
- Primacy of Contract over Internal Policy: The Court underscored that IOCL's internal policy cannot override the dealership agreement or the valid partnership deed. IOCL's insistence on compliance with its policy, despite the contractually agreed terms, was held to be arbitrary and ultra vires its authority.
The Court found IOCL's conduct to be legally unsustainable and held that its refusal to recognise the reconstituted firm and continuation of the dealership was unjustified. The SLP was dismissed with a cautionary note to avoid unwarranted litigation in future.
Judicial Precedents Cited
The judgment draws upon several earlier authorities, including:
- M/s Wazid Ali Abid Ali v. CIT, where it was held that a partnership can continue with surviving partners or selected legal heirs.
- Sandersons & Morgans v. ITO (Calcutta High Court), and
- Noor Mohammad & Co. v. CIT (Allahabad High Court), both affirming that a change in constitution upon a partner's death does not imply dissolution if the deed states otherwise.
Anhad Law's Perspective
This decision reinforces the fundamental legal position that internal administrative guidelines of a public sector entity cannot supersede the express terms of a valid contract. IOCL's rigid reliance on its internal policy, to the exclusion of the dealership agreement and partnership deed, was a clear overreach.
From an administrative law standpoint, the ruling underscores the principle that State instrumentalities must act fairly, non-arbitrarily, and in alignment with legal and contractual obligations. The insistence on unanimous consent from all heirs despite no such requirement in the underlying agreements was legally untenable.
The judgment also highlights the judiciary's commitment to preserving commercial continuity in the face of administrative inflexibility. In our view, the Supreme Court has rightly applied a purposive and contextual interpretation to protect contractual relationships and ensure that public entities do not obstruct legitimate commercial operations under the guise of internal policies.
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