This article is written by Ekta Aggarwal pursuing B.A.LL.B from KCC Institute of Legal and Higher Education (affiliated from Guru Gobind Singh Indraprastha University, Delhi) during her August, 2026 internship at LeDroit India.
Scope of the Article
- Introduction
- Facts of the case
- Issue raised in the case
- Contentions
- Statutory or Legal Framework
- Judgement and reasoning of the Court
- Legal Principles and Significance of the case
- Critical Analysis
- Conclusion
- References
Keywords
Central Inland Water Transport Corporation, Indian Contract Contact Act of 1872, Precedential, Section 23
Abstract
The case of Central Inland Water Transport Corporation Ltd v Brojo Nath Ganguly is an important Supreme Court case in the history that has extended the meaning of Section 23 of the Indian Contract Act of 1872. The case involves the annulment of an employment agreement that is against the spirit of public policy. In this case, the prime issue was whether a governmental organization can create a standard service rule for dismissing its permanent staff without providing any rationale for the same.
The case discussed also whether Section 23 of Indian Contract Act can nullify the contract. The ruling represents a change from the laissez-faire approach to the fairness-oriented principle of review. The interpretation of Section 23 was necessary when one of the parties to the contract was a government entity. Ever since the ruling had been passed in 1986, Brojo Nath Ganguly has become precedential case to decide on cases of unconscionable employment contracts in the framework of Indian Contract Act.
- Introduction
The Central Inland Water Transport Corporation was established on 22nd February 1967. Government of India and both West Bengal and Assam state governments were the owners of it. It was a Government company of Section 617 of Companies Act, 1956 which is a subsidiary of Government company. An organization called the Rivers Steam Navigation Company Limited was growing in similar business which consists of maintenance and running of inland water transport services.
The rivers steam navigation company was ordered to be liquidated on 5th May 1967, on the orders received from Calcutta High Court, and it paid back all investors before winding up. The Calcutta High Court approved all the plans and the holdings of the dissolved company were transferred to the corporation and the responsibilities of the dissolved organization and its assets were handed over by the corporation.
Brojo Nath Ganguly appears as the first respondent in Civil Appeal. He began working for the mentioned Corporation when the scheme of arrangement has become effective. He was chosen on September 8, 1967, to work as the Deputy Chief Accounts Officer. A confidential letter was sent to him with respect to the allegations against him for negligence in relation to the Provident Fund accounts by the General Manager (Finance Department) on February 16, 1983, along with instructions to respond within 24 hours with regard to the charges made against him with respect to negligence. Brojo Nath Ganguly responded adequately. After that, with a letter dated February 26, 1983, the Chairman-cum-Managing Director of the Corporation sent Ganguly a notice under clause (i) of rule 9 of the Rules of Service terminating him from the services of the Corporation with immediate effect.
- Facts of the case
- The Central Inland Water Transport Corporation has been specially incorporated by the Union Government of the country. The Central Government of India has the complete control over the corporation along with holding its complete shares.
- The worker in the case, Brojo Nath Ganguly used to work in a company which got liquidated through the business order of the court and was, therefore, provided with a position in the present company through the agreement.
- Brojo Nath Ganguly started working with the corporation as a Deputy Chief Accountant Officer and, later on, successfully became Deputy Financial Advisor and Chief Accounts Officer.
- A case was filed in the High Court of Calcutta by the respondent on the grounds that the rule 9(i) was arbitrary and irrational which posed a benefit for him through the judgement of the Hon’ble that was on his side.
- As a consequence of the case, the complainant has filed a suit against that in the apex court of the country through the grant of special leave by the Supreme Court.
- Issue raised in the case
- Whether a clause in a service agreement which enables a state corporation to terminate the service of a permanent employee by notice and without assigning any reason is an unconscionable agreement under the Indian Contract Act 1872 section 23 which makes unconscionable agreements void and against public policy and therefore void and unenforceable.
- What was the scope and meaning of the expression against public policy in Section 23 ICA. Does it go beyond the agreements that were traditionally against the public policy, example, agreements in restraint of trade, agreements to commit crime and agreement that are prejudicial or interfere with the administration of justice. Can it also be used to declare void agreements containing unconscionable terms arrived at by a party taking advantage of his superior bargaining position?
- What was the relationship between the contractual challenge under Section 23 ICA and the constitutional challenge under Articles 14 and 16 of the Constitution. Since the employer was State instrumentality, the arbitrary termination of a permanent employee without any reason also raised questions of equality and fairness in accordance with the Constitution.
- Contentions
- Contentions by Appellant
The main assertion by the individual appealing was that there is a substantial difference between a government company and a statutory corporation. A statutory corporation is established with a specific statute, which gives the statutory corporation a particular legal status. Since a government corporation is incorporated under the Companies Act, just like any private company, the definition of “The State” in Article 12 of the Constitution does not apply to a government corporation in this case. A statutory corporation is often established to ensure a monopoly in a certain activity by the government.
The government corporation does not have any monopoly in the field of inland water transport, but it operates as a commercial corporation as the aims of the corporation prove. Even if we assume that a government corporation is equal to “the State” as stated in Article 12, the employment contract will be treated no differently than any other contract between normal parties. As a result, any provision in the contract will not be declared invalid in relation to Article 14 because of being arbitrary, unreasonable, unconscionable, one-sided or unfair.
- Contentions by Respondent
The respondent claimed that the phrase “the State” as stated in Article 12 has a broad definition which encompasses a Government company. A State is empowered to carry out certain actions and carry on trading operation, using its agencies or instruments like government departments, statutory authorities, statutory corporations, and Government companies established under the Companies Act. Being involved in trading activities or having permission to do so does not take Government company out of the definition of “the State” under Article 12.
Since Government company is included under “the State” in Article 12, it is required to act justly and in a fair manner. If it acts arbitrarily and unreasonably, its actions may be struck down under Article 14. With regard to employment contracts, there is a difference. Unfair, unreasonable and unconscionable terms in contracts with a private employer have no validity in law. Likewise, unjust terms in employment contracts with the State remain having no legality in their essence and can be set aside under Article 14.
- Statutory or Legal Framework
- Article 12 of Indian Constitution
In this Part, unless the context otherwise requires, “the State’’ includes the Government and Parliament of India and the Government and the Legislature of each of the States and all local or other authorities within the territory of India or under the control of the Government of India.
The State shall not deny to any person equality before the law or the equal protection of the laws within the territory of India.
For the purposes of [this Act], Government company means any company in which not less than fifty-one per cent of the [paid-up share capital] is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments [and includes a company which is a subsidiary of a Government company as thus defined.]
According to Section 23 of the Indian Contract Act of 1872, the consideration or object of the agreement is lawful unless it is not prohibited by any law, goes against the provisions of any law, is fraudulent, harms somebody or is considered to be immoral or contrary to public policy.
- Judgement and reasoning of the court
The court while dismissing the appeal observed that the word ‘state’ as used in Article 12 has different shades of meaning and hence the word ‘includes’ used in Article 12 gives a wide coverage as compared to the word ‘means’. Thus, ‘state’ would include the Government and Parliament of India, the governments and legislatures of each state, and all local authorities within the territory of India and under the control of the government of India.
In this regard, the observations of Justice Mathew in Sukhdev Singh v. Bhagatram Sardar Singh Raghuvanshi case and Justice Bhagwati in Ajay Hasia’s and International Airport Authority Case are relevant where it was held that for the purpose of Article 12, the corporate veil has to be torn to determine whether the government or its agency is the real party in interest. Consequently, the court held that the corporation falls under the definition of ‘state’ as per Article 12. Furthermore, the court held that the company was performing governmental duties of public importance.
Thus, the exclusion of the company from the definition of the ‘state’ on the ground that it enjoyed a duopoly over inland water carriage was unwarranted.
In this regard, in response to the second issue, the court rejected the submission of the respondents that the contract of employment between the company and employees was analogous to a commercial contract. The court held that there was a clear discrimination between goods and employees. Furthermore, it was also held that Rule 9(i) of the Corporation’s Service, Discipline, and Appeal Rules is void as per Section 23 of the Indian Contract Act, 1872 and is unjust, unreasonable, and against public policy as per Article 14 of the Constitution.
Moreover, Rule 9(i) of the Corporation’s Service, Discipline, and Appeal Rules was discriminatory against the employees as it gave absolute discretion to the Corporation to choose between being an employee or a contractor which is against public policy. The court found that the inequality between the employer and employee was at the highest level and, therefore, the rule was unreasonable. The rule would have detrimental effects on the employees and create apprehension. The court modified the order of the High Court by restoring the statement in question. However, the observations of the court were restricted to the proposition that the termination of a permanent employee shall also be governed by Rule 9(i).
- Legal Principles and Significance of the case
Government owned undertakings are enterprises that are subject to the government’s strong management and thus fall under the definition of “the State.” As such their actions are governed by fundamental rights. An employer cannot be given total and unconstrained power to dismiss a worker at will because such an act would be irrational, discriminatory, and against Section 14. Additionally, an agreement that is unconscionable is against public policy and thus unenforceable. Finally, when it comes to employment contracts the courts will always step in to protect the weaker party when the stronger one takes advantage of the other to obtain favourable terms.
It stopped government agencies and government-owned corporations from taking advantage of their employees in a way that only a profit-driven boss can. It mandated that commercial or corporate government agencies must follow constitutional justice. Also widened the application of Indian law on contracts by allowing the cancellation of any unfair terms even when both parties willingly signed the contract.
- Critical Analysis
The Supreme Court delivered a landmark judgment that added substantially to the law relating to the doctrine of public policy and void agreements by interpreting that the agreements which contain an unconscionable bargain taking advantage of the inequality of positions of the parties fall under the category of agreements “of a public policy” as contemplated by the Sec 23 of the Indian Contract Act. The court first analyzed the categories of agreement which are void as against public policy. The Indian contract Act 1872, section 23 contains the categories of agreement against public policy which includes: the agreements of the restraint of trade, agreements of the restraint of marriage,
agreements interfering with administration of justice, and agreement to do illegal or immoral acts. The apex court held that there are no agreements per se which figure as the agreements against public policy; as such, the agreement against the public policy is a fluctuating category, as it develops from time to time according to social and economic needs and as the courts of law deem fit.
While analyzing the agreement, the court took a step back and gave the most significant contribution by the court which is in interpreting that the agreements containing unconscionable bargain taking advantage of the superior position of one party over the other fall under the agreement against public policy and are void as per Sec 23 of the ICA.
The court held this to be true as the very foundation of the law of contract which is that contract is a voluntary bargain of the parties, completely free from coercion of any kind fails completely in case of one party having a free choice and the other having no choice whatsoever and thus, the agreement in such cases is not a voluntary meeting of minds but rather a contract of an agreement of an obligation which would not have arisen but for the extreme pressure of one of the parties.
- Conclusion
The decision reached in the case of “Central Inland Water Transport Corporation Ltd. & Anr. V/S Brojo Nath Ganguly & Anr., 1986” provides an important precedent for constitutional law in general and the interpretation of the term “contract” in particular. The case dealt with the issue of applicability of Rule 9(i) which was found to be in contradiction with government’s policy, and hence, void under Section 23 Indian Contract Act, 1872.
It also sheds light on the question whether a contract or agreement which is immoral or unconscionable at the time of its formation can be partially voided by the court of law. The case was also instrumental in highlighting the unreasonableness of the powers granted to the corporation. The Corporation was directed to bear the cost of the present Appeal to the Respondent.
