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CITATION1986 AIR 1571, 1986 SCR (2) 278

BENCHJustice D.P. Madan, Justice A.P. Sen


The case “Central Inland Water Transport Corporation Ltd. & Anr. V/S Brojo Nath Ganguly & Anr., 1986” revolves around a critical legal dispute related to section 617 of the Companies Act, 1956, alongside Article 12 and 14 of the Constitution of India. It explores the intricate legal aspects associated with section 23 of the Indian Contract Act and Rule 9(i) of Discipline and Appeal Rules. The case delves into the legal principle that asserts courts should not enforce or validate contracts that are deemed unfair and unreasonable, especially when there exists a significant imbalance in bargaining power between the involved parties. This legal proceeding provides clarification and a clear interpretation of various terms.


 The Central Inland Water Transport Corporation, established on February 22, 1967, is a government-owned company jointly held by the Government of India and the State Governments of West Bengal and Assam. It operates under the provisions of the Companies Act, 1956, and is under the complete control of the Central Government. The company took over the assets and liabilities of the dissolved “Rivers Steam Navigation Company Limited” through a court-approved arrangement.

Employees from the dissolved company, including Brojo Nath Ganguly and Tarun Kanti Sengupta, were transferred to the Corporation. The Corporation established service rules in 1970, later replaced by the 1979 “Central Inland Water Transport Corporation Limited – Service, Discipline, and Appeal Rules.” These rules govern various aspects of employment, such as termination, retirement, suspension, penalties, disciplinary inquiries, and appeals.

Ganguly, who had been promoted to Manager (Finance), faced termination in 1983 due to alleged negligence in maintaining Provident Fund Accounts. Sengupta, serving as a General Manager, received a charge-sheet for a disciplinary inquiry. Both were terminated under Rule 9(i). The High Court, considering the Corporation as a “state” under Article 12 of the Constitution, deemed Rule 9(i) unconstitutional and nullified the termination orders on August 9, 1985. The Corporation has appealed to the Court by special leave.


  1. Whether a government company defined in section 617 of the Companies Act, 1956 comes under the definition of ‘state’ as provided under Article 12 of the constitution?
  2. Whether clause (i) of Rule 9 of The Central Inland Water Transport Corporation Limited- service, Discipline and Appeal Rules, 1979 is arbitrary and unconscionable?
  3. Whether the power granted under this rule is violative of Article 14 and unconstitutional or not?


  1. The main argument by the appellant was by emphasizing on the point that, a government company differs significantly from a statutory corporation. Unlike a statutory corporation, which is established through specific legislation, a government company is incorporated under the Companies Act, similar to any other company. As a result, a government company does not fall under the definition of “The State” according to Article 12 of the Constitution.
  1. While statutory corporations are often created to establish a monopoly in a specific state activity, a government company is not formed for such a purpose. Despite lacking a monopoly in inland water transport, the mentioned Corporation functions as a trading company, as evident from the objectives stated in its Memorandum of Association.
  1. Even if we hypothetically consider a government company as “the State” under Article 12, any employment contract it enters into is treated like any other contract between two parties. 
  1. Consequently, a provision in the contract cannot be invalidated under Article 14 of the Constitution on grounds of arbitrariness, unreasonableness, unconscionability, one-sidedness, or unfairness.


  1. The respondent argued that the definition of “the State” in Article 12 is sufficiently broad to include a Government company.
  1. A State has the authority to conduct various activities, including trading, through its instrumentalities or agencies, such as government departments, statutory corporations, statutory authorities, or Government companies formed under the Companies Act.
  1. Engaging in trading activities or having the authorization to do so does not exempt a Government company from falling within the definition of “the State” according to Article 12.
  1. As a Government company falls under “the State” in Article 12, it is obligated to act fairly and reasonably. Failure to do so allows its actions to be invalidated under Article 14 on grounds of arbitrariness.
  1. In the context of employment contracts, there is a distinction. Terms in contracts with private employers that are unfair, unreasonable, or unconscionable are legally unacceptable. Similarly, such terms in employment contracts with the State are also legally invalid and can be nullified under Article 14.


The court, in rejecting the appeal, clarified that the term ‘state’ in Article 12 has various interpretations. The presence of the word ‘includes’ in Article 12 suggests a broad and extensive scope, unlike the limiting term ‘means.’ Accordingly, ‘state’ encompasses the Government and Parliament of India, state governments and legislatures, and all local authorities within India’s borders or under the control of the Indian Government.

Particularly noteworthy are observation of Justice Mathew in the Sukhdev Singh v. Bhagatram Sardar Singh Raghuvanshi case and Justice Bhagwati in Ajay Hasia’s and International Airport Authority Case, the court emphasized that for Article 12, the corporate veil must be lifted to determine if the agency or instrumentality of the State is behind it. The judgment established a test to identify such entities, and in this case, the corporation was found to fall within this definition.

It was acknowledged that the corporation performed government functions crucial for public welfare, and its exclusion from being considered an agency due to the lack of a monopoly in inland water transportation was deemed unreasonable.

Addressing the next issue, the court rejected the argument that contracts between the corporation and employees were comparable to ordinary business transactions. It emphasized the distinction between employees and goods and declared Rule 9(i) of the Corporation’s Service, Discipline, and Appeal Rules void under Section 23 of the Indian Contract Act, 1872. The court deemed these rules unjust, unreasonable, and against public policy as per Article 14 of the Constitution.

Additionally, Rule 9(i) was found to be discriminatory, allowing the corporation to discriminate between employees and employers. This was considered unacceptable due to the significant inequality in bargaining power. The clause could impact the public negatively and create insecurity. The court modified the High Court’s order to reinstate the statement but noted that Rule 9(i) also includes the right of a permanent employee to resign, which is a crucial part of the clause.


  1. The court in this particular case interpreted the term, “The State” as mentioned in Part III or IV of the Indian Constitution encompasses not only the Union of India but also extends to entities under extensive governmental control, where decision-making authority lies with the government. This includes bodies substantially funded by the government, as evidenced by all three governments fully financing the entity in question. Moreover, the Central Government exercised control and authorization over it, with the Chairman and Board of Directors being appointed and removable by the Central Government. Given the Corporation’s vital national importance in its functions and operations, it qualifies as a government body in the public sector, falling under the definition of the State according to Article 12 of the Indian Constitution.
  1. The term “unconscionable” signifies something unreasonable or morally wrong. An unconscionable bargain, therefore, would be one that contradicts principles of what is right or reasonable. If a contract is deemed unconscionable at the time of its formation, the court has the authority to refuse enforcement. Economic pressure can lead to an unconscionable bargain, even between parties who may not be economically disparate.
  1. In the context of Rule 9, Clause (i) is deemed contrary to public policy and void under Section 23 of the Indian Contract Act, as it grants absolute and arbitrary power to the corporation. The clause lacks specification regarding who, on behalf of the Corporation, is authorized to exercise that power. Moreover, there are no laid-down guidelines indicating the circumstances under which the power conferred by Rule 9(i) is to be utilized by the Corporation. In cases where there is no legal protection underpinning a situation, the court must, in alignment with public morality and in consideration of the public good and interest, declare such practices contrary to public policy.
  1. The new approach was taken to asserts that the provisions within the employment contract should undergo an initial assessment through the lens of contract law principles. This marks a groundbreaking development in constitutional jurisprudence, implying that objections under Article 14 should initially demonstrate the arbitrary or unreasonable nature of the contested action by relying on the principles of the ordinary legal framework pertinent to that action.


The decision in case of “Central Inland Water Transport Corporation Ltd. & Anr. V/S Brojo Nath Ganguly & Anr., 1986″ establishes a significant legal precedent in constitutional law. This case played a significant role in interpreting the term “state” under Article 12. It also focuses on the concept that if a contract or agreement is deemed immoral or unconscionable at its inception the court has authority to limit its enforcement. Focusing on Rule 9(i), this case highlights its contradiction with government policies and its alleged invalidity under section 23 of the Indian Contract Act, 1872. This is due to the arbitrary powers it confers upon the corporation. The corporation was also ordered to pay the expense of this appeal to the Respondent.


  1. https://indiankanoon.org/doc/477313/
  2. https://theamikusqriae.com/the-central-inland-water-transport-corporation-limited-vs-brojo-nath-ganguly/
  3. https://www.ebc-india.com/lawyer/articles/87v2a1.htm

This Article is written by Saumya Raj student of ILS Law College, Pune; Intern at Legal Vidhiya.

Disclaimer: The materials provided herein are intended solely for informational purposes. Accessing or using the site or the materials does not establish an attorney-client relationship. The information presented on this site is not to be construed as legal or professional advice, and it should not be relied upon for such purposes or used as a substitute for advice from a licensed attorney in your state. Additionally, the viewpoint presented by the author is of a personal nature.


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